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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2017

or

 

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

For the Transition period from                      to                     

Commission File Number: 000-51904

 

 

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Arkansas   71-0682831

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(501) 339-2929

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

    Yes  ☑    No  ☐

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

    Yes  ☑    No  ☐

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

 

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

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

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

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

Common Stock Issued and Outstanding: 173,643,671 shares as of November 1, 2017.

 

 

 

 


Table of Contents

HOME BANCSHARES, INC.

FORM 10-Q

September  30, 2017

INDEX

         Page No.  
Part I:   Financial Information   

Item 1:

  Financial Statements   
 

Consolidated Balance Sheets –
September  30, 2017 (Unaudited) and December 31, 2016

     4  
 

Consolidated Statements of Income (Unaudited) –
Three and nine months ended September 30, 2017 and 2016

     5  
 

Consolidated Statements of Comprehensive Income (Unaudited) –
Three and nine months ended September 30, 2017 and 2016

     6  
 

Consolidated Statements of Stockholders’ Equity (Unaudited) –
Nine months ended September 30, 2017 and 2016

     6  
 

Consolidated Statements of Cash Flows (Unaudited) –
Nine months ended September 30, 2017 and 2016

     7  
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

     8-52  
 

Report of Independent Registered Public Accounting Firm

     53  

Item 2:

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      54-92  

Item 3:

  Quantitative and Qualitative Disclosures About Market Risk      93-95  

Item 4:

  Controls and Procedures      95  
Part II:   Other Information   

Item 1:

  Legal Proceedings      96  

Item 1A:

  Risk Factors      96-97  

Item 2:

  Unregistered Sales of Equity Securities and Use of Proceeds      98  

Item 3:

  Defaults Upon Senior Securities      98  

Item 4:

  Mine Safety Disclosures      98  

Item 5:

  Other Information      98  

Item 6:

  Exhibits      99-100  

Signatures

       101  


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    diversion of management time on acquisition-related issues;

 

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

 

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

 

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

 

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

 

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

 

    the effects of terrorism and efforts to combat it;

 

    political instability;

 

    risks associated with our customer relationship with the Cuban government and our correspondent banking relationship with Banco Internacional de Comercio, S.A. (BICSA), a Cuban commercial bank, through our recently completed acquisition of Stonegate Bank;


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

 

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

 

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

 

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

 

    higher defaults on our loan portfolio than we expect; and

 

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

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” sections of our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2017 and this Form 10-Q.


Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets

 

(In thousands, except share data)

   September 30, 2017     December 31, 2016  
     (Unaudited)        
Assets     

Cash and due from banks

   $ 197,953     $ 123,758  

Interest-bearing deposits with other banks

     354,367       92,891  
  

 

 

   

 

 

 

Cash and cash equivalents

     552,320       216,649  

Federal funds sold

     4,545       1,550  

Investment securities – available-for-sale

     1,575,685       1,072,920  

Investment securities – held-to-maturity

     234,945       284,176  

Loans receivable

     10,286,193       7,387,699  

Allowance for loan losses

     (111,620     (80,002
  

 

 

   

 

 

 

Loans receivable, net

     10,174,573       7,307,697  

Bank premises and equipment, net

     239,990       205,301  

Foreclosed assets held for sale

     21,701       15,951  

Cash value of life insurance

     146,158       86,491  

Accrued interest receivable

     41,071       30,838  

Deferred tax asset, net

     121,787       61,298  

Goodwill

     929,129       377,983  

Core deposit and other intangibles

     50,982       18,311  

Other assets

     163,081       129,300  
  

 

 

   

 

 

 

Total assets

   $ 14,255,967     $ 9,808,465  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits:

    

Demand and non-interest-bearing

   $ 2,555,465     $ 1,695,184  

Savings and interest-bearing transaction accounts

     6,341,883       3,963,241  

Time deposits

     1,551,422       1,284,002  
  

 

 

   

 

 

 

Total deposits

     10,448,770       6,942,427  

Securities sold under agreements to repurchase

     149,531       121,290  

FHLB and other borrowed funds

     1,044,333       1,305,198  

Accrued interest payable and other liabilities

     38,782       51,234  

Subordinated debentures

     367,835       60,826  
  

 

 

   

 

 

 

Total liabilities

     12,049,251       8,480,975  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, par value $0.01; shares authorized 200,000,000 in 2017 and 2016; shares issued and outstanding 173,665,904 in 2017 and 140,472,205 in 2016

     1,737       1,405  

Capital surplus

     1,674,642       869,737  

Retained earnings

     526,448       455,948  

Accumulated other comprehensive income

     3,889       400  
  

 

 

   

 

 

 

Total stockholders’ equity

     2,206,716       1,327,490  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 14,255,967     $ 9,808,465  
  

 

 

   

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

4


Table of Contents

Home BancShares, Inc.

Consolidated Statements of Income

 

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

(In thousands, except per share data)

   2017     2016     2017     2016  
     (Unaudited)  

Interest income:

        

Loans

   $ 113,269     $ 102,953     $ 331,763     $ 300,281  

Investment securities

        

Taxable

     7,071       5,583       18,983       16,178  

Tax-exempt

     3,032       2,720       8,942       8,358  

Deposits – other banks

     538       117       1,573       325  

Federal funds sold

     3       2       9       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     123,913       111,375       361,270       325,149  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest on deposits

     8,535       4,040       20,831       11,528  

Federal funds purchased

     —         —         —         2  

FHLB and other borrowed funds

     3,408       3,139       10,707       9,283  

Securities sold under agreements to repurchase

     232       142       593       421  

Subordinated debentures

     4,969       401       10,203       1,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     17,144       7,722       42,334       22,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     106,769       103,653       318,936       302,751  

Provision for loan losses

     35,023       5,536       39,324       16,905  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     71,746       98,117       279,612       285,846  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     6,408       6,527       18,356       18,607  

Other service charges and fees

     8,490       7,504       25,983       22,589  

Trust fees

     365       365       1,130       1,128  

Mortgage lending income

     3,172       3,932       9,713       10,276  

Insurance commissions

     472       534       1,482       1,808  

Increase in cash value of life insurance

     478       344       1,251       1,092  

Dividends from FHLB, FRB, Bankers’ bank & other

     834       808       2,455       2,147  

Gain on acquisitions

     —         —         3,807       —    

Gain on sale of SBA loans

     163       364       738       443  

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

     (1,337     (86     (962     701  

Gain (loss) on OREO, net

     335       132       849       (713

Gain (loss) on securities, net

     136       —         939       25  

FDIC indemnification accretion/(amortization), net

     —         —         —         (772

Other income

     1,941       1,590       6,603       5,892  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     21,457       22,014       72,344       63,223  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     28,510       25,623       83,965       75,018  

Occupancy and equipment

     7,887       6,668       21,602       19,848  

Data processing expense

     2,853       2,791       8,439       8,221  

Other operating expenses

     31,596       15,944       62,984       41,174  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     70,846       51,026       176,990       144,261  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22,357       69,105       174,966       204,808  

Income tax expense

     7,536       25,485       63,192       76,252  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 14,821     $ 43,620     $ 111,774     $ 128,556  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.10     $ 0.31     $ 0.78     $ 0.92  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.10     $ 0.31     $ 0.78     $ 0.91  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

5


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Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

 

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

(In thousands)

   2017     2016     2017     2016  
     (Unaudited)  

Net income

   $ 14,821     $ 43,620     $ 111,774     $ 128,556  

Net unrealized gain (loss) on available-for-sale securities

     (4,065     (4,334     6,681       6,816  

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

     (136     —         (939     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, before tax effect

     (4,201     (4,334     5,742       6,791  

Tax effect

     1,648       1,701       (2,253     (2,664
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (2,553     (2,633     3,489       4,127  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 12,268     $ 40,987     $ 115,263     $ 132,683  
  

 

 

   

 

 

   

 

 

   

 

 

 

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2017 and 2016

 

(In thousands, except share data)

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

Balance at January 1, 2016

   $ 701     $ 867,981     $ 326,898     $ 4,177     $ 1,199,757  

Comprehensive income:

          

Net income

     —         —         128,556       —         128,556  

Other comprehensive income (loss)

     —         —         —         4,127       4,127  

Net issuance of 461,737 shares of common stock from exercise of stock options plus issuance of 10,000 bonus shares of unrestricted common stock

     2       1,351       —         —         1,353  

Issuance of common stock – 2-for-1 stock split

     702       (702     —         —         —    

Repurchase of 461,800 shares of common stock

     (2     (8,840     —         —         (8,842

Tax benefit from stock options exercised

     —         1,264       —         —         1,264  

Share-based compensation net issuance of 239,070 shares of restricted common stock

     2       5,256       —         —         5,258  

Cash dividends – Common Stock, $0.2525 per share

     —         —         (35,455     —         (35,455
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2016 (unaudited)

     1,405       866,310       419,999       8,304       1,296,018  

Comprehensive income:

          

Net income

     —         —         48,590       —         48,590  

Other comprehensive income (loss)

     —         —         —         (7,904     (7,904

Net issuance of 31,002 shares of common stock from exercise of stock options

     1       141       —         —         142  

Repurchase of 48,808 shares of common stock

     (1     (974     —         —         (975

Tax benefit from stock options exercised

     —         2,890       —         —         2,890  

Share-based compensation net issuance of 4,664 shares of restricted common stock

     —         1,370       —         —         1,370  

Cash dividends – Common Stock, $0.09 per share

     —         —         (12,641     —         (12,641
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2016

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

Comprehensive income:

          

Net income

     —         —         111,774       —         111,774  

Other comprehensive income (loss)

     —         —         —         3,489       3,489  

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

     2       847       —         —         849  

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

     27       77,290       —         —         77,317  

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

     309       741,324       —         —         741,633  

Repurchase of 800,000 shares of common stock

     (8     (19,530     —         —         (19,538

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

     2       4,974       —         —         4,976  

Cash dividends – Common Stock, $0.29 per share

     —         —         (41,274     —         (41,274
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2017 (unaudited)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

6


Table of Contents

Home BancShares, Inc.

Consolidated Statements of Cash Flows

 

     Nine Months Ended
September 30,
 

(In thousands)

   2017     2016  
     (Unaudited)  

Operating Activities

    

Net income

   $ 111,774     $ 128,556  

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

    

Depreciation

     8,634       8,082  

Amortization/(accretion)

     12,087       11,461  

Share-based compensation

     4,976       5,258  

Tax benefits from stock options exercised

     —         (1,264

Gain on acquisitions

     (3,807     —    

(Gain) loss on assets

     (1,720     3,425  

Provision for loan losses

     39,324       16,905  

Deferred income tax effect

     (15,867     12,466  

Increase in cash value of life insurance

     (1,251     (1,092

Originations of mortgage loans held for sale

     (243,948     (261,964

Proceeds from sales of mortgage loans held for sale

     250,784       257,666  

Changes in assets and liabilities:

    

Accrued interest receivable

     (1,814     (266

Indemnification and other assets

     (22,642     (9,407

Accrued interest payable and other liabilities

     (35,436     (5,757
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     101,094       164,069  
  

 

 

   

 

 

 

Investing Activities

    

Net (increase) decrease in federal funds sold

     (1,480     (300

Net (increase) decrease in loans, excluding purchased loans

     (115,334     (492,795

Purchases of investment securities – available-for-sale

     (522,329     (246,983

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

     120,785       217,774  

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

     28,368       2,221  

Purchases of investment securities – held-to-maturity

     (219     (123

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

     48,144       32,417  

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

     491       —    

Proceeds from foreclosed assets held for sale

     13,315       11,124  

Proceeds from sale of SBA Loans

     13,630       7,412  

Purchases of premises and equipment, net

     (4,383     (3,355

Return of investment on cash value of life insurance

     592       —    

Net cash proceeds (paid) received – market acquisitions

     227,845       —    

Cash (paid) on FDIC loss share buy-out

     —         (6,613
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (190,575     (479,221
  

 

 

   

 

 

 

Financing Activities

    

Net increase (decrease) in deposits, excluding deposits acquired

     536,891       401,784  

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

     2,078       (19,039

Net increase (decrease) in FHLB and other borrowed funds

     (350,230     14,424  

Proceeds from exercise of stock options

     849       1,353  

Proceeds from issuance of subordinated notes

     297,201       —    

Repurchase of common stock

     (19,538     (8,842

Common stock issuance costs – market acquisitions

     (825     —    

Tax benefits from stock options exercised

     —         1,264  

Dividends paid on common stock

     (41,274     (35,455
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     425,152       355,489  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     335,671       40,337  

Cash and cash equivalents – beginning of year

     216,649       255,823  
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 552,320     $ 296,160  
  

 

 

   

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

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Table of Contents

Home BancShares, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

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

Operating Segments

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

Use of Estimates

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

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

Principles of Consolidation

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

Reclassifications

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

Interim financial information

The accompanying unaudited consolidated financial statements as of September 30, 2017 and 2016 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

8


Table of Contents

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2016 Form 10-K, filed with the Securities and Exchange Commission.

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,
 
     2017      2016      2017      2016  
     (In thousands)  

Net income

   $ 14,821      $ 43,620      $ 111,774      $ 128,556  

Average shares outstanding

     144,238        140,436        143,111        140,403  

Effect of common stock options

     749        267        728        282  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding

     144,987        140,703        143,839        140,685  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.10      $ 0.31      $ 0.78      $ 0.92  

Diluted earnings per share

   $ 0.10      $ 0.31      $ 0.78      $ 0.91  

2. Business Combinations

Acquisition of Stonegate Bank

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

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

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

 

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Table of Contents

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

 

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

Cash and due from banks

   $ 100,958      $ —        $ 100,958  

Interest-bearing deposits with other banks

     135,631        —          135,631  

Federal funds sold

     1,515        —          1,515  

Investment securities

     103,041        477        103,518  

Loans receivable

     2,446,149        (73,990      2,372,159  

Allowance for loan losses

     (21,507      21,507        —    
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

     2,424,642        (52,483      2,372,159  

Bank premises and equipment, net

     38,868        (3,572      35,296  

Foreclosed assets held for sale

     4,187        (801      3,386  

Cash value of life insurance

     48,000        —          48,000  

Accrued interest receivable

     7,088        —          7,088  

Deferred tax asset, net

     27,340        11,244        38,584  

Goodwill

     81,452        (81,452      —    

Core deposit and other intangibles

     10,505        20,364        30,869  

Other assets

     9,598        231        9,829  
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 2,992,825      $ (105,992    $ 2,886,833  
  

 

 

    

 

 

    

 

 

 
Liabilities         

Deposits

        

Demand and non-interest-bearing

   $ 585,959      $ —        $ 585,959  

Savings and interest-bearing transaction accounts

     1,776,256        —          1,776,256  

Time deposits

     163,567        (85      163,482  
  

 

 

    

 

 

    

 

 

 

Total deposits

     2,525,782        (85      2,525,697  

FHLB borrowed funds

     32,667        184        32,851  

Securities sold under agreements to repurchase

     26,163        —          26,163  

Accrued interest payable and other liabilities

     8,100        5        8,105  

Subordinated debentures

     8,345        1,490        9,835  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     2,601,057        1,594        2,602,651  
  

 

 

    

 

 

    

 

 

 
Equity         

Total equity assumed

     391,768        (391,768      —    
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity assumed

   $ 2,992,825      $ (390,174      2,602,651  
  

 

 

    

 

 

    

 

 

 

Net assets acquired

           284,182  

Purchase price

           792,370  
        

 

 

 

Goodwill

         $ 508,188  
        

 

 

 

 

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Table of Contents

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

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

Investment securities – Investment securities were acquired from Stonegate with an approximately $477,000 adjustment to market value based upon quoted market prices.

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

The Company evaluated $2.37 billion of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, which were recorded with a $73.3 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $74.3 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $23.3 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. The acquired Stonegate loan balance and the fair value adjustment on loans receivable includes $22.6 million of discount on purchased loans, respectively.

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

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

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

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

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

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

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

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

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

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

 

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Table of Contents

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

The unaudited pro-forma combined consolidated financial information presents how the combined financial information of HBI and Stonegate might have appeared had the businesses actually been combined. The following schedule represents the unaudited pro forma combined financial information as of the three and nine-month periods ended September 30, 2017 and 2016, assuming the acquisition was completed as of January 1, 2017 and 2016, respectively:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
     (In thousands, except per share data)  

Total interest income

   $ 154,425      $ 136,063      $ 451,716      $ 396,952  

Total non-interest income

     24,072        24,081        79,887        69,302  

Net income available to all shareholders

     7,399        50,176        120,670        148,495  

Basic earnings per common share

   $ 0.04      $ 0.29      $ 0.69      $ 0.87  

Diluted earnings per common share

     0.04        0.29        0.69        0.87  

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

Acquisition of Giant Holdings, Inc.

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

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

 

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Table of Contents

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

 

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

Cash and due from banks

   $ 41,019      $ —        $ 41,019  

Interest-bearing deposits with other banks

     4,057        1        4,058  

Investment securities

     1,961        (5      1,956  

Loans receivable

     335,886        (6,517      329,369  

Allowance for loan losses

     (4,568      4,568        —    
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

     331,318        (1,949      329,369  

Bank premises and equipment, net

     2,111        608        2,719  

Cash value of life insurance

     10,861        —          10,861  

Accrued interest receivable

     850        —          850  

Deferred tax asset, net

     2,286        1,807        4,093  

Core deposit and other intangibles

     172        3,238        3,410  

Other assets

     254        (489      (235
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 394,889      $ 3,211      $ 398,100  
  

 

 

    

 

 

    

 

 

 
Liabilities         

Deposits

        

Demand and non-interest-bearing

   $ 75,993      $ —        $ 75,993  

Savings and interest-bearing transaction accounts

     139,459        —          139,459  

Time deposits

     88,219        324        88,543  
  

 

 

    

 

 

    

 

 

 

Total deposits

     303,671        324        303,995  

FHLB borrowed funds

     26,047        431        26,478  

Accrued interest payable and other liabilities

     14,552        18        14,570  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     344,270        773        345,043  
  

 

 

    

 

 

    

 

 

 
Equity         

Total equity assumed

     50,619        (50,619      —    
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity assumed

   $ 394,889      $ (49,846      345,043  
  

 

 

    

 

 

    

 

 

 

Net assets acquired

           53,057  

Purchase price

           96,015  
        

 

 

 

Goodwill

         $ 42,958  
        

 

 

 

 

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Table of Contents

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

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

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

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

The Company evaluated $315.6 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, which were recorded with a $3.6 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $20.3 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $4.5 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. The acquired GHI loan balance includes $1.6 million of discount on purchased loans.

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

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

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

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

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

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

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

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

The Company’s operating results for the period ended September 30, 2017, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Due to the fair value adjustments recorded and the fact GHI total assets acquired are less than 5% of total assets as of September 30, 2017 excluding GHI as recorded by HBI as of acquisition date, historical results are not believed to be material to the Company’s results, and thus no pro-forma information is presented.

 

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Table of Contents

Acquisition of The Bank of Commerce

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

The acquisition of BOC was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code (the “Bankruptcy Code”) pursuant to a voluntary petition for relief under Chapter 11 of the Bankruptcy Code filed by BCHI with the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”). The sale of BOC by BCHI was subject to certain bidding procedures approved by the Bankruptcy Court. On November 14, 2016, the Company submitted an initial bid to purchase the outstanding shares of BOC in accordance with the bidding procedures approved by the Bankruptcy Court. An auction was subsequently conducted on November 16, 2016, and the Company was deemed to be the successful bidder. The Bankruptcy Court entered a final order on December 9, 2016 approving the sale of BOC to the Company pursuant to and in accordance with the acquisition agreement.

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

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

 

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Table of Contents

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

 

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

Cash and due from banks

   $ 4,610      $ —        $ 4,610  

Interest-bearing deposits with other banks

     14,360        —          14,360  

Investment securities

     25,926        (113      25,813  

Loans receivable

     124,289        (5,751      118,538  

Allowance for loan losses

     (2,037      2,037        —    
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

     122,252        (3,714      118,538  

Bank premises and equipment, net

     1,887        —          1,887  

Foreclosed assets held for sale

     8,523        (3,165      5,358  

Accrued interest receivable

     481        —          481  

Deferred tax asset, net

     —          4,198        4,198  

Core deposit intangible

     —          968        968  

Other assets

     1,880        —          1,880  
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 179,919      $ (1,826    $ 178,093  
  

 

 

    

 

 

    

 

 

 
Liabilities         

Deposits

        

Demand and non-interest-bearing

   $ 27,245      $ —        $ 27,245  

Savings and interest-bearing transaction accounts

     32,300        —          32,300  

Time deposits

     79,945        270        80,215  
  

 

 

    

 

 

    

 

 

 

Total deposits

     139,490        270        139,760  

FHLB borrowed funds

     30,000        42        30,042  

Accrued interest payable and other liabilities

     564        (255      309  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

   $ 170,054      $ 57        170,111  
  

 

 

    

 

 

    

 

 

 

Net assets acquired

           7,982  

Purchase price

           4,175  
        

 

 

 

Pre-tax gain on acquisition

         $ 3,807  
        

 

 

 

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

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

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

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

 

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Table of Contents

The Company evaluated $106.8 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, which were recorded with a $3.0 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $17.5 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $2.8 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

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

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

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

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

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

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

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

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

The Company’s operating results for the period ended September 30, 2017, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Due to the fair value adjustments recorded and the fact BOC total assets acquired are less than 5% of total assets as of September 30, 2017 excluding BOC as recorded by HBI as of acquisition date, historical results are not believed to be material to the Company’s results, and thus no pro-forma information is presented.

 

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Table of Contents

3. Investment Securities

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

 

     September 30, 2017  
     Available-for-Sale  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Estimated
Fair Value
 
     (In thousands)  

U.S. government-sponsored enterprises

   $ 396,323      $ 1,527      $ (658    $ 397,192  

Residential mortgage-backed securities

     446,397        884        (1,534      445,747  

Commercial mortgage-backed securities

     446,651        1,272        (1,743      446,180  

State and political subdivisions

     244,746        4,924        (536      249,134  

Other securities

     35,168        2,642        (378      37,432  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,569,285      $ 11,249      $ (4,849    $ 1,575,685  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

U.S. government-sponsored enterprises

   $ 6,093      $ 26      $ —        $ 6,119  

Residential mortgage-backed securities

     60,755        233        (150      60,838  

Commercial mortgage-backed securities

     17,878        206        (5      18,079  

State and political subdivisions

     150,219        3,764        (2      153,981  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 234,945      $ 4,229      $ (157    $ 239,017  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     Available-for-Sale  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Estimated
Fair Value
 
     (In thousands)  

U.S. government-sponsored enterprises

   $ 237,439      $ 963      $ (1,641    $ 236,761  

Residential mortgage-backed securities

     259,037        1,226        (1,627      258,636  

Commercial mortgage-backed securities

     322,316        845        (2,342      320,819  

State and political subdivisions

     215,209        3,471        (2,181      216,499  

Other securities

     38,261        2,603        (659      40,205  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,072,262      $ 9,108      $ (8,450    $ 1,072,920  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

U.S. government-sponsored enterprises

   $ 6,637      $ 23      $ (32    $ 6,628  

Residential mortgage-backed securities

     71,956        267        (301      71,922  

Commercial mortgage-backed securities

     35,863        107        (133      35,837  

State and political subdivisions

     169,720        3,100        (169      172,651  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 284,176      $ 3,497      $ (635    $ 287,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Assets, principally investment securities, having a carrying value of approximately $1.13 billion and $1.07 billion at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. This includes, investment securities pledged as collateral for repurchase agreements which totaled approximately $149.5 million and $121.3 million at September 30, 2017 and December 31, 2016, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale and held-to-maturity at September 30, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

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

Due in one year or less

   $ 137,401      $ 139,500      $ 36,805      $ 38,016  

Due after one year through five years

     1,023,970        1,027,436        122,328        124,666  

Due after five years through ten years

     293,622        293,978        17,556        17,806  

Due after ten years

     114,292        114,771        58,256        58,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,569,285      $ 1,575,685      $ 234,945      $ 239,017  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

During the three-month period ended September 30, 2016, no available-for-sale securities were sold. During the nine-month period ended September 30, 2016, approximately $2.2 million, in available-for-sale securities were sold. The gross realized gains on the sales for the nine-month period ended September 30, 2016 totaled approximately $25,000. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

During the three-month period ended September 30, 2017, no held-to-maturity securities were sold. During the nine-month period ended September 30, 2017, one held-to-maturity security experienced its second downgrade in its credit rating. The Company made a strategic decision to sell this held-to-maturity security for approximately $483,000, which resulted in a gross realized loss on the sale for the nine-month period ended September 30, 2017 of approximately $7,000.

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

During the three and nine-month periods ended September 30, 2017, no securities were deemed to have other-than-temporary impairment.

 

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Table of Contents

For the nine months ended September 30, 2017, the Company had investment securities with approximately $2.4 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, 73.2% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

The following shows gross unrealized losses and estimated fair value of investment securities classified as available-for-sale and held-to-maturity with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
     Less Than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 
     (In thousands)  

U.S. government-sponsored enterprises

   $ 57,089      $ (263   $ 51,593      $ (395   $ 108,682      $ (658

Residential mortgage-backed securities

     214,267        (1,086     42,101        (598     256,368        (1,684

Commercial mortgage-backed securities

     154,103        (937     61,809        (811     215,912        (1,748

State and political subdivisions

     30,323        (248     13,322        (290     43,645        (538

Other securities

     1,476        (39     8,337        (339     9,813        (378
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 457,258      $ (2,573   $ 177,162      $ (2,433   $ 634,420      $ (5,006
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2016  
     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

   $ 98,180      $ (1,031   $ 75,044      $ (642   $ 173,224      $ (1,673

Residential mortgage-backed securities

     188,117        (1,742     8,902        (186     197,019        (1,928

Commercial mortgage-backed securities

     202,289        (2,220     21,020        (255     223,309        (2,475

State and political subdivisions

     94,309        (2,348     500        (2     94,809        (2,350

Other securities

     1,540        (125     12,687        (534     14,227        (659
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 584,435      $ (7,466   $ 118,153      $ (1,619   $ 702,588      $ (9,085
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Income earned on securities for the three and nine months ended September 30, 2017 and 2016, is as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
     (In thousands)  

Taxable:

  

Available-for-sale

   $ 6,527      $ 4,809      $ 17,001      $ 13,720  

Held-to-maturity

     544        774        1,982        2,458  

Non-taxable:

           

Available-for-sale

     1,627        1,528        4,757        4,667  

Held-to-maturity

     1,405        1,192        4,185        3,691  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,103      $ 8,303      $ 27,925      $ 24,536  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

 

     September 30,
2017
     December 31,
2016
 
     (In thousands)  

Real estate:

     

Commercial real estate loans

     

Non-farm/non-residential

   $ 4,532,402      $ 3,153,121  

Construction/land development

     1,648,923        1,135,843  

Agricultural

     88,295        77,736  

Residential real estate loans

     

Residential 1-4 family

     1,968,688        1,356,136  

Multifamily residential

     497,910        340,926  
  

 

 

    

 

 

 

Total real estate

     8,736,218        6,063,762  

Consumer

     51,515        41,745  

Commercial and industrial

     1,296,485        1,123,213  

Agricultural

     57,489        74,673  

Other

     144,486        84,306  
  

 

 

    

 

 

 

Total loans receivable

   $ 10,286,193      $ 7,387,699  
  

 

 

    

 

 

 

During the three and nine-month periods ended September 30, 2017, the Company sold $3.1 million and $12.9 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $163,000 and $738,000, respectively. During the three-month and nine-month periods ended September 30, 2016, the Company sold $5.8 million and $7.0 million of the guaranteed portion of certain SBA loans, respectively, which resulted in gains of approximately $364,000 and $443,000, respectively.

Mortgage loans held for sale of approximately $49.4 million and $56.2 million at September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016 were not material.

The Company had $3.65 billion of purchased loans, which includes $158.0 million of discount for credit losses on purchased loans, at September 30, 2017. The Company had $55.1 million and $102.9 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of September 30, 2017. The Company had $1.13 billion of purchased loans, which includes $100.1 million of discount for credit losses on purchased loans, at December 31, 2016. The Company had $35.3 million and $64.9 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2016.

 

21


Table of Contents

5. Allowance for Loan Losses, Credit Quality and Other

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

 

     Nine Months Ended
September 30, 2017
 
     (In thousands)  

Allowance for loan losses:

  

Beginning balance

   $ 80,002  

Loans charged off

     (10,535

Recoveries of loans previously charged off

     2,829  
  

 

 

 

Net loans recovered (charged off)

     (7,706
  

 

 

 

Provision for loan losses

     39,324  
  

 

 

 

Balance, September 30, 2017

   $ 111,620  
  

 

 

 

 

22


Table of Contents

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

 

     Three Months Ended September 30, 2017  
     Construction/
Land
Development
    Other
Commercial
Real Estate
    Residential
Real Estate
    Commercial
& Industrial
    Consumer
& Other
    Unallocated     Total  
     (In thousands)  

Allowance for loan losses:

  

Beginning balance

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

Loans charged off

     (182     (796     (309     (2,280     (857     —         (4,424

Recoveries of loans previously charged off

     85       278       226       140       154       —         883  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans recovered (charged off)

     (97     (518     (83     (2,140     (703     —         (3,541

Provision for loan losses

     6,175       18,192       8,036       3,934       1,292       (2,606     35,023  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 18,920     $ 45,517     $ 25,668     $ 14,622     $ 3,652     $ 3,241     $ 111,620  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2017  
     Construction/
Land
Development
    Other
Commercial
Real Estate
    Residential
Real Estate
    Commercial
& Industrial
    Consumer
& Other
    Unallocated     Total  
     (In thousands)  

Allowance for loan losses:

              

Beginning balance

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

Loans charged off

     (508     (2,451     (2,597     (3,059     (1,920     —         (10,535

Recoveries of loans previously charged off

     312       988       480       392       657       —         2,829  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans recovered (charged off)

     (196     (1,463     (2,117     (2,667     (1,263     —         (7,706

Provision for loan losses

     7,594       18,792       11,268       4,533       727       (3,590     39,324  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 18,920     $ 45,517     $ 25,668     $ 14,622     $ 3,652     $ 3,241     $ 111,620  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of September 30, 2017  
     Construction/
Land
Development
     Other
Commercial
Real Estate
     Residential
Real Estate
     Commercial
& Industrial
     Consumer
& Other
     Unallocated      Total  
     (In thousands)  

Allowance for loan losses:

                    

Period end amount allocated to:

                    

Loans individually evaluated for impairment

   $ 1,066      $ 995      $ 306      $ 512      $ 8      $ —        $ 2,887  

Loans collectively evaluated for impairment

     17,839        44,016        24,467        13,925        3,613        3,241        107,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans evaluated for impairment balance, September 30

     18,905        45,011        24,773        14,437        3,621        3,241        109,988  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

     15        506        895        185        31        —          1,632  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30

   $ 18,920      $ 45,517      $ 25,668      $ 14,622      $ 3,652      $ 3,241      $ 111,620  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Period end amount allocated to:

                    

Loans individually evaluated for impairment

   $ 31,130      $ 50,518      $ 22,601      $ 13,958      $ 1,009      $ —        $ 119,216  

Loans collectively evaluated for impairment

     1,601,961        4,442,747        2,392,014        1,265,189        250,074        —          9,951,985  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans evaluated for impairment balance, September 30

     1,633,091        4,493,265        2,414,615        1,279,147        251,083        —          10,071,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

     15,832        127,432        51,983        17,338        2,407        —          214,992  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30

   $ 1,648,923      $ 4,620,697      $ 2,466,598      $ 1,296,485      $ 253,490      $ —        $ 10,286,193  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

The following tables present the balances in the allowance for loan losses for the nine-month period ended September 30, 2016 and the year ended December 31, 2016, and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2016. 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, 2016  
     Construction/
Land
Development
    Other
Commercial
Real Estate
    Residential
Real Estate
    Commercial
& Industrial
    Consumer
& Other
    Unallocated      Total  
     (In thousands)  

Allowance for loan losses:

  

Beginning balance

   $ 10,782     $ 26,798     $ 14,818     $ 9,324     $ 5,016     $ 2,486      $ 69,224  

Loans charged off

     (334     (2,590     (3,810     (4,424     (1,507     —          (12,665

Recoveries of loans previously charged off

     107       608       836       656       699       —          2,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loans recovered (charged off)

     (227     (1,982     (2,974     (3,768     (808     —          (9,759

Provision for loan losses

     171       274       4,181       9,049       448       2,782        16,905  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30

     10,726       25,090       16,025       14,605       4,656       5,268        76,370  

Loans charged off

     (48     (996     (1,787     (1,354     (651     —          (4,836

Recoveries of loans previously charged off

     1,018       249       316       4,877       305       —          6,765  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loans recovered (charged off)

     970       (747     (1,471     3,523       (346     —          1,929  

Provision for loan losses

     (174     3,845       1,963       (5,372     (122     1,563        1,703  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     As of December 31, 2016  
     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

   $ 15      $ 1,416      $ 103      $ 95      $ —        $ —        $ 1,629  

Loans collectively evaluated for impairment

     11,463        25,641        15,796        12,596        4,176        6,831        76,503  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans evaluated for impairment balance, December 31

     11,478        27,057        15,899        12,691        4,176        6,831        78,132  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

     44        1,131        618        65        12        —          1,870  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Period end amount allocated to:

                    

Loans individually evaluated for impairment

   $ 12,374      $ 74,723      $ 35,187      $ 25,873      $ 1,096      $ —        $ 149,253  

Loans collectively evaluated for impairment

     1,105,921        3,080,201        1,608,805        1,085,891        198,064        —          7,078,882  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans evaluated for impairment balance, December 31

     1,118,295        3,154,924        1,643,992        1,111,764        199,160        —          7,228,135  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

     17,548        75,933        53,070        11,449        1,564        —          159,564  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31

   $ 1,135,843      $ 3,230,857      $ 1,697,062      $ 1,123,213      $ 200,724      $ —        $ 7,387,699  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

The following is an aging analysis for loans receivable as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
     Loans
Past Due
30-59 Days
     Loans
Past Due
60-89 Days
     Loans
Past Due
90 Days
or More
     Total
Past Due
     Current
Loans
     Total Loans
Receivable
     Accruing
Loans
Past Due
90 Days
or More
 
     (In thousands)  

Real estate:

                    

Commercial real estate loans

                    

Non-farm/non-residential

   $ 3,806      $ 2,684      $ 27,418      $ 33,908      $ 4,498,494      $ 4,532,402      $ 16,482  

Construction/land development

     2,267        309        8,778        11,354        1,637,569        1,648,923        3,258  

Agricultural

     152        —          34        186        88,109        88,295        —    

Residential real estate loans

                    

Residential 1-4 family

     8,768        1,659        18,441        28,868        1,939,820        1,968,688        4,624  

Multifamily residential

     595        —          1,194        1,789        496,121        497,910        1,039  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     15,588        4,652        55,865        76,105        8,660,113        8,736,218        25,403  

Consumer

     729        18        142        889        50,626        51,515        3  

Commercial and industrial

     3,275        3,229        7,792        14,296        1,282,189        1,296,485        3,771  

Agricultural and other

     363        101        178        642        201,333        201,975        6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,955      $ 8,000      $ 63,977      $ 91,932      $ 10,194,261      $ 10,286,193      $ 29,183  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     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

   $ 2,036      $ 686      $ 27,518      $ 30,240      $ 3,122,881      $ 3,153,121      $ 9,530  

Construction/land development

     685        16        7,042        7,743        1,128,100        1,135,843        3,086  

Agricultural

     —          —          435        435        77,301        77,736        —    

Residential real estate loans

                    

Residential 1-4 family

     6,972        1,287        23,307        31,566        1,324,570        1,356,136        2,996  

Multifamily residential

     —          —          262        262        340,664        340,926        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     9,693        1,989        58,564        70,246        5,993,516        6,063,762        15,612  

Consumer

     117        66        161        344        41,401        41,745        21  

Commercial and industrial

     984        582        3,464        5,030        1,118,183        1,123,213        309  

Agricultural and other

     782        10        935        1,727        157,252        158,979        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,576      $ 2,647      $ 63,124      $ 77,347      $ 7,310,352      $ 7,387,699      $ 15,942  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-accruing loans at September 30, 2017 and December 31, 2016 were $34.8 million and $47.2 million, respectively.

 

25


Table of Contents

The following is a summary of the impaired loans as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
                          Three Months Ended      Nine Months Ended  
     Unpaid
Contractual
Principal
Balance
     Total
Recorded
Investment
     Allocation
of Allowance
for Loan
Losses
     Average
Recorded
Investment
     Interest
Recognized
     Average
Recorded
Investment
     Interest
Recognized
 
     (In thousands)  

Loans without a specific valuation allowance

                    

Real estate:

  

Commercial real estate loans

                    

Non-farm/non-residential

   $ 29      $ —        $ —        $ 15      $ 1      $ 15      $ 2  

Construction/land development

     66        —          —          12        1        6        3  

Agricultural

     35        —          —          —          —          —          1  

Residential real estate loans

                    

Residential 1-4 family

     79        —          —          101        2        108        7  

Multifamily residential

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     209        —          —          128        4        129        13  

Consumer

     4        —          —          —          —          —          —    

Commercial and industrial

     101        —          —          41        2        51        6  

Agricultural and other

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans without a specific valuation allowance

     314        —          —          169        6        180        19  

Loans with a specific valuation allowance

                    

Real estate:

                    

Commercial real estate loans

                    

Non-farm/non-residential

     49,606        45,312        982        42,245        662        44,962        1,311  

Construction/land development

     13,897        12,875        1,066        11,177        58        10,173        192  

Agricultural

     281        319        13        218        4        259        7  

Residential real estate loans

                    

Residential 1-4 family

     24,833        21,042        231        20,893        116        23,294        298  

Multifamily residential

     2,812        2,681        75        2,168        32        1,358        64  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     91,429        82,229        2,367        76,701        872        80,046        1,872  

Consumer

     153        149        —          145        —          156        —    

Commercial and industrial

     18,354        14,271        512        10,308        76        8,935        84  

Agricultural and other

     312        343        8        606        3        728        5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with a specific valuation allowance

     110,248        96,992        2,887        87,760        951        89,865        1,961  

Total impaired loans

                    

Real estate:

                    

Commercial real estate loans

                    

Non-farm/non-residential

     49,635        45,312        982        42,260        663        44,977        1,313  

Construction/land development

     13,963        12,875        1,066        11,189        59        10,179        195  

Agricultural

     316        319        13        218        4        259        8  

Residential real estate loans

                    

Residential 1-4 family

     24,912        21,042        231        20,994        118        23,402        305  

Multifamily residential

     2,812        2,681        75        2,168        32        1,358        64  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     91,638        82,229        2,367        76,829        876        80,175        1,885  

Consumer

     157        149        —          145        —          156        —    

Commercial and industrial

     18,455        14,271        512        10,349        78        8,986        90  

Agricultural and other

     312        343        8        606        3        728        5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 110,562      $ 96,992      $ 2,887      $ 87,929      $ 957      $ 90,045      $ 1,980  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note: Purchased credit impaired loans are accounted for on a pooled basis under ASC 310-30. All of these pools are currently considered to be performing, resulting in none of the purchased credit impaired loans being classified as impaired loans as of September 30, 2017.

 

26


Table of Contents
     December 31, 2016  
                          Year Ended  
     Unpaid
Contractual
Principal
Balance
     Total
Recorded
Investment
     Allocation of
Allowance
for Loan
Losses
     Average
Recorded
Investment
     Interest
Recognized
 
     (In thousands)  

Loans without a specific valuation allowance

  

Real estate:

  

Commercial real estate loans

              

Non-farm/non-residential

   $ 29      $ 29      $ —        $ 23      $ 2  

Construction/land development

     —          —          —          6        —    

Agricultural

     40        —          —          —          2  

Residential real estate loans

              

Residential 1-4 family

     231        231        —          119        15  

Multifamily residential

     —          —          —          19        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     300        260        —          167        19  

Consumer

     —          —          —          —          —    

Commercial and industrial

     124        124        —          64        8  

Agricultural and other

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans without a specific valuation allowance

     424        384        —          231        27  

Loans with a specific valuation allowance

              

Real estate:

              

Commercial real estate loans

              

Non-farm/non-residential

     52,477        50,355        1,414        42,979        1,335  

Construction/land development

     8,313        7,595        15        12,878        334  

Agricultural

     395        438        2        469        —    

Residential real estate loans

              

Residential 1-4 family

     26,681        25,675        95        20,239        293  

Multifamily residential

     552        552        8        922        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     88,418        84,615        1,534        77,487        1,971  

Consumer

     165        161        —          223        3  

Commercial and industrial

     7,160        7,032        95        10,630        255  

Agricultural and other

     935        935        —          1,037        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with a specific valuation allowance

     96,678        92,743        1,629        89,377        2,229  

Total impaired loans

              

Real estate:

              

Commercial real estate loans

              

Non-farm/non-residential

     52,506        50,384        1,414        43,002        1,337  

Construction/land development

     8,313        7,595        15        12,884        334  

Agricultural

     435        438        2        469        2  

Residential real estate loans

              

Residential 1-4 family

     26,912        25,906        95        20,358        308  

Multifamily residential

     552        552        8        941        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     88,718        84,875        1,534        77,654        1,990  

Consumer

     165        161        —          223        3  

Commercial and industrial

     7,284        7,156        95        10,694        263  

Agricultural and other

     935        935        —          1,037        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 97,102      $ 93,127      $ 1,629      $ 89,608      $ 2,256  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note: Purchased credit impaired loans are accounted for on a pooled basis under ASC 310-30. All of these pools are currently considered to be performing, resulting in none of the purchased credit impaired loans being classified as impaired loans as of December 31, 2016.

Interest recognized on impaired loans during the three months ended September 30, 2017 and 2016 was approximately $957,000 and $597,000, respectively. Interest recognized on impaired loans during the nine months ended September 30, 2017 and 2016 was approximately $2.0 million and $1.7 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

 

27


Table of Contents

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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The Company’s classified loans include loans in risk ratings 6, 7 and 8. The following is a presentation of classified loans (excluding loans accounted for under ASC Topic 310-30) by class as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
     Risk Rated 6      Risk Rated 7      Risk Rated 8      Classified Total  
     (In thousands)  

Real estate:

           

Commercial real estate loans

           

Non-farm/non-residential

   $ 21,521      $ 526      $ —        $ 22,047  

Construction/land development

     24,427        114        —          24,541  

Agricultural

     341        —          —          341  

Residential real estate loans

           

Residential 1-4 family

     22,852        573        —          23,425  

Multifamily residential

     941        —          —          941  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     70,082        1,213        —          71,295  

Consumer

     184        10        —          194  

Commercial and industrial

     17,994        50        —          18,044  

Agricultural and other

     270        —          —          270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total risk rated loans

   $ 88,530      $ 1,273      $ —        $ 89,803  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     Risk Rated 6      Risk Rated 7      Risk Rated 8      Classified Total  
     (In thousands)  

Real estate:

  

Commercial real estate loans

           

Non-farm/non-residential

   $ 43,657      $ 462      $ —        $ 44,119  

Construction/land development

     8,619        33        —          8,652  

Agricultural

     759        —          —          759  

Residential real estate loans

           

Residential 1-4 family

     28,846        445        —          29,291  

Multifamily residential

     1,391        —          —          1,391  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     83,272        940        —          84,212  

Consumer

     211        2        —          213  

Commercial and industrial

     16,991        170        —          17,161  

Agricultural and other

     935        —          —          935  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total risk rated loans

   $ 101,409      $ 1,112      $ —        $ 102,521  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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The following is a presentation of loans receivable by class and risk rating as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
     Risk
Rated 1
     Risk
Rated 2
     Risk
Rated 3
     Risk
Rated 4
     Risk
Rated 5
     Classified
Total
     Total  
     (In thousands)  

Real estate:

  

Commercial real estate loans

                    

Non-farm/non-residential

   $ 1,021      $ 566      $ 2,523,273      $ 1,818,301      $ 39,968      $ 22,047      $ 4,405,176  

Construction/land development

     31        571        273,090        1,323,834        11,024        24,541        1,633,091  

Agricultural

     —          45        54,546        32,004        1,153        341        88,089  

Residential real estate loans

                    

Residential 1-4 family

     1,126        1,095        1,416,454        470,981        11,711        23,425        1,924,792  

Multifamily residential

     —          —          364,864        123,804        214        941        489,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2,178        2,277        4,632,227        3,768,924        64,070        71,295        8,540,971  

Consumer

     15,239        362        25,404        9,272        78        194        50,549  

Commercial and industrial

     17,717        9,041        622,782        601,360        10,203        18,044        1,279,147  

Agricultural and other

     2,296        4,388        145,243        48,337        —          270        200,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total risk rated loans

   $ 37,430      $ 16,068      $ 5,425,656      $ 4,427,893      $ 74,351      $ 89,803        10,071,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       214,992  
                 

 

 

 

Total loans receivable

                     $ 10,286,193  
                    

 

 

 

 

     December 31, 2016  
     Risk
Rated 1
     Risk
Rated 2
     Risk
Rated 3
     Risk
Rated 4
     Risk
Rated 5
     Classified
Total
     Total  
     (In thousands)  

Real estate:

  

Commercial real estate loans

                    

Non-farm/non-residential

   $ 1,047      $ 4,762      $ 1,568,385      $ 1,425,316      $ 33,559      $ 44,119      $ 3,077,188  

Construction/land development

     400        981        180,094        921,081        7,087        8,652        1,118,295  

Agricultural

     —          157        53,753        22,238        829        759        77,736  

Residential real estate loans

                    

Residential 1-4 family

     2,336        1,683        941,760        324,045        10,360        29,291        1,309,475  

Multifamily residential

     —          —          278,514        45,742        8,870        1,391        334,517  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3,783        7,583        3,022,506        2,738,422        60,705        84,212        5,917,211  

Consumer

     15,080        231        15,330        9,645        81        213        40,580  

Commercial and industrial

     13,117        3,644        500,220        558,413        19,209        17,161        1,111,764  

Agricultural and other

     3,379        976        82,641        70,649        —          935        158,580  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total risk rated loans

   $ 35,359      $ 12,434      $ 3,620,697      $ 3,377,129      $ 79,995      $ 102,521        7,228,135  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       159,564  
                 

 

 

 

Total loans receivable

                     $ 7,387,699  
                    

 

 

 

 

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The following is a presentation of troubled debt restructurings (“TDRs”) by class as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  
     Number
of Loans
     Pre-
Modification
Outstanding
Balance
     Rate
Modification
     Term
Modification
     Rate
& Term
Modification
     Post-
Modification
Outstanding
Balance
 
     (Dollars in thousands)  

Real estate:

  

Commercial real estate loans

                 

Non-farm/non-residential

     16      $ 18,162      $ 11,395      $ 253      $ 5,432      $ 17,080  

Construction/land development

     5        782        690        77        —          767  

Agricultural

     2        345        282        38        —          320  

Residential real estate loans

                 

Residential 1-4 family

     22        5,708        3,746        84        1,361        5,191  

Multifamily residential

     3        1,701        1,355        —          287        1,642  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     48        26,698        17,468        452        7,080        25,000  

Consumer

     2        7        —          7        —          7  

Commercial and industrial

     9        647        365        71        3        439  

Other

     1        166        166        —          —          166  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     60      $ 27,518      $ 17,999      $ 530      $ 7,083      $ 25,612  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     Number
of Loans
     Pre-
Modification
Outstanding
Balance
     Rate
Modification
     Term
Modification
     Rate
& Term
Modification
     Post-
Modification
Outstanding
Balance
 
     (Dollars in thousands)  

Real estate:

  

Commercial real estate loans

                 

Non-farm/non-residential

     17      $ 21,344      $ 14,600      $ 263      $ 5,542      $ 20,405  

Construction/land development

     1        560        556        —          —          556  

Agricultural

     2        146        —          43        80        123  

Residential real estate loans

                 

Residential 1-4 family

     21        5,179        2,639        124        1,017        3,780  

Multifamily residential

     1        295        —          —          290        290  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     42        27,524        17,795        430        6,929        25,154  

Commercial and industrial

     6        395        237        115        10        362  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     48      $ 27,919      $ 18,032      $ 545      $ 6,939      $ 25,516  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a presentation of TDRs on non-accrual status as of September 30, 2017 and December 31, 2016 because they are not in compliance with the modified terms:

 

     September 30, 2017      December 31, 2016  
     Number of Loans      Recorded Balance      Number of Loans      Recorded Balance  
     (Dollars in thousands)  

Real estate:

  

Commercial real estate loans

           

Non-farm/non-residential

     2      $ 2,284        2      $ 696  

Agricultural

     —          —          2        123  

Residential real estate loans

           

Residential 1-4 family

     4        124        13        2,240  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     6        2,408        17        3,059  

Commercial and industrial

     1        16        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7      $ 2,424        17      $ 3,059  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following is a presentation of total foreclosed assets as of September 30, 2017 and December 31, 2016:

 

     September 30,
2017
     December 31,
2016
 
     (In thousands)  

Commercial real estate loans

     

Non-farm/non-residential

   $ 10,354      $ 9,423  

Construction/land development

     6,328        4,009  

Agricultural

        —    

Residential real estate loans

     

Residential 1-4 family

     3,733        2,076  

Multifamily residential

     1,286        443  
  

 

 

    

 

 

 

Total foreclosed assets held for sale

   $ 21,701      $ 15,951  
  

 

 

    

 

 

 

The following is a summary of the purchased credit impaired loans acquired in the GHI, BOC and Stonegate acquisitions during the first nine months of 2017 as of the dates of acquisition:

 

     GHI      BOC      Stonegate  

Contractually required principal and interest at acquisition

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

Non-accretable difference (expected losses and foregone interest)

     4,462        2,811        23,297  
  

 

 

    

 

 

    

 

 

 

Cash flows expected to be collected at acquisition

     17,917        15,775        75,147  

Accretable yield

     2,071        1,043        11,761  
  

 

 

    

 

 

    

 

 

 

Basis in purchased credit impaired loans at acquisition

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

 

 

    

 

 

    

 

 

 

Changes in the carrying amount of the accretable yield for purchased credit impaired loans were as follows for the nine-month period ended September 30, 2017 for the Company’s acquisitions:

 

     Accretable Yield      Carrying
Amount of
Loans
 
     (In thousands)  

Balance at beginning of period

   $ 38,212      $ 159,564  

Reforecasted future interest payments for loan pools

     3,739        —    

Accretion recorded to interest income

     (14,955      14,955  

Acquisitions

     14,875        93,964  

Adjustment to yield

     2,210        —    

Transfers to foreclosed assets held for sale

     —          (13,407

Payments received, net

     —          (40,084
  

 

 

    

 

 

 

Balance at end of period

   $ 44,081      $ 214,992  
  

 

 

    

 

 

 

The loan pools were evaluated by the Company and are currently forecasted to have a slower run-off than originally expected. As a result, the Company has reforecast the total accretable yield expectations for those loan pools by $3.7 million. This updated forecast does not change the expected weighted average yields on the loan pools.

During the 2017 impairment tests on the estimated cash flows of loans, the Company established that several loan pools were determined to have a materially projected credit improvement. As a result of this improvement, the Company will recognize approximately $2.2 million as an additional adjustment to yield over the weighted average life of the loans.

 

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Table of Contents

6. Goodwill and Core Deposits and Other Intangibles

Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles at September 30, 2017 and December 31, 2016, were as follows:

 

     September 30,
2017
     December 31,
2016
 
     (In thousands)  

Goodwill

  

Balance, beginning of period

   $ 377,983      $ 377,983  

Acquisitions

     551,146        —    
  

 

 

    

 

 

 

Balance, end of period

   $ 929,129      $ 377,983  
  

 

 

    

 

 

 
     September 30,
2017
     December 31,
2016
 
     (In thousands)  

Core Deposit and Other Intangibles

  

Balance, beginning of period

   $ 18,311      $ 21,443  

Acquisitions

     35,247        —    

Amortization expense

     (2,576      (2,370
  

 

 

    

 

 

 

Balance, September 30

   $ 50,982        19,073  
  

 

 

    

Amortization expense

        (762
     

 

 

 

Balance, end of year

      $ 18,311  
     

 

 

 

The carrying basis and accumulated amortization of core deposits and other intangibles at September 30, 2017 and December 31, 2016 were:

 

     September 30,
2017
     December 31,
2016
 
     (In thousands)  
        

Gross carrying basis

   $ 86,625      $ 51,378  

Accumulated amortization

     (35,643      (33,067
  

 

 

    

 

 

 

Net carrying amount

   $ 50,982      $ 18,311  
  

 

 

    

 

 

 

Core deposit and other intangible amortization expense was approximately $906,000 and $762,000 for the three months ended September 30, 2017 and 2016, respectively. Core deposit and other intangible amortization expense was approximately $2.6 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively. Including all of the mergers completed as of September 30, 2017, the Company’s estimated amortization expense of core deposits and other intangibles for each of the years 2017 through 2021 is approximately: 2017 – $4.1 million; 2018 – $6.6 million; 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million.

The carrying amount of the Company’s goodwill was $929.1 million and $378.0 million at September 30, 2017 and December 31, 2016, 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.

The purchase price allocation and certain fair value measurements related to the Stonegate acquisition remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

 

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Table of Contents

7. Other Assets

Other assets consists primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of September 30, 2017 and December 31, 2016 other assets were $163.1 million and $129.3 million, respectively.

The Company has equity securities without readily determinable fair values. These equity securities are outside the scope of ASC Topic 320, Investments-Debt and Equity Securities. They include items such as stock holdings in Federal Home Loan Bank (“FHLB”), Federal Reserve Bank (“Federal Reserve”), Bankers’ Bank and other miscellaneous holdings. The equity securities without a readily determinable fair value were $134.6 million and $112.4 million at September 30, 2017 and December 31, 2016, respectively, and are accounted for at cost.

8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $628.3 million and $569.1 million at September 30, 2017 and December 31, 2016, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.02 billion and $842.9 million at September 30, 2017 and December 31, 2016, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $2.2 million and $1.1 million for the three months ended September 30, 2017 and 2016, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $5.8 million and $3.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, brokered deposits were $1.14 billion and $502.5 million, respectively.

Deposits totaling approximately $1.32 billion and $1.23 billion at September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, securities sold under agreements to repurchase totaled $149.5 million and $121.3 million, respectively. For the three-month periods ended September 30, 2017 and 2016, securities sold under agreements to repurchase daily weighted-average totaled $135.9 million and $118.2 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, securities sold under agreements to repurchase daily weighted-average totaled $129.6 million and $121.0 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2017 and December 31, 2016 is presented in the following tables:

 

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

Securities sold under agreements to repurchase:

              

U.S. government-sponsored enterprises

   $ 14,125      $ —        $ —        $ 10,000      $ 24,125  

Mortgage-backed securities

     29,677        —          —          —          29,677  

State and political subdivisions

     75,829        —          —          —          75,829  

Other securities

     19,900        —          —          —          19,900  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 139,531      $ —        $ —        $ 10,000      $ 149,531  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2016  
     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

   $ 1,918      $ —        $ —        $ —        $ 1,918  

Mortgage-backed securities

     22,691        —          —          —          22,691  

State and political subdivisions

     74,559        —          —          —          74,559  

Other securities

     22,122        —          —          —          22,122  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 121,290      $ —        $ —        $ —        $ 121,290  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

10. FHLB Borrowed Funds

The Company’s FHLB borrowed funds were $1.04 billion and $1.31 billion at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, $245.0 million and $799.3 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2016, $40.0 million and $1.27 billion of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from the current year to 2027 with fixed interest rates ranging from 0.636% to 5.960% and are secured by loans and investments securities. Maturities of borrowings as of September 30, 2017 include: 2017 – $75.3 million; 2018 – $409.5 million; 2019 – $143.1 million; 2020 – $146.4 million; 2021 – zero; after 2021 – $25.0 million. Expected maturities will differ from contractual maturities because FHLB may have the right to call or HBI may have the right to prepay certain obligations.

Additionally, the Company had $691.3 million and $516.2 million at September 30, 2017 and December 31, 2016, respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at September 30, 2017 and December 31, 2016, respectively.

11. Other Borrowings

The Company had zero other borrowings at September 30, 2017. The Company took out a $20.0 million line of credit for general corporate purposes during 2015, but the balance on this line of credit at September 30, 2017 and December 31, 2016 was zero.

12. Subordinated Debentures

Subordinated debentures consists of subordinated debt securities and guaranteed payments on trust preferred securities. As of September 30, 2017 and December 31, 2016, subordinated debentures were $367.8 million and $60.8 million, respectively.

 

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Subordinated debentures at September 30, 2017 and December 31, 2016 contained the following components:

 

     As of
September 30,
2017
     As of
December 31,
2016
 
     (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

     4,292        —    

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

     5,545        —    

Subordinated debt securities

     

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

     297,172        —    
  

 

 

    

 

 

 

Total

   $ 367,835      $ 60,826  
  

 

 

    

 

 

 

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, will be amortized into interest expense over the remaining life of the debentures. The associated subordinated debentures are redeemable, in whole or in part, prior to maturity at our option on a quarterly basis when interest is due and payable and in whole at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the debentures.

 

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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.

13. Income Taxes

The following is a summary of the components of the provision (benefit) for income taxes for the three and nine-month periods ended September 30, 2017 and 2016:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
     (In thousands)  

Current:

           

Federal

   $ 17,289      $ 15,523      $ 65,958      $ 53,216  

State

     3,434        3,083        13,101        10,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current

     20,723        18,606        79,059        63,786  
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred:

           

Federal

     (11,002      5,739        (13,238      10,400  

State

     (2,185      1,140        (2,629      2,066  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred

     (13,187      6,879        (15,867      12,466  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax expense

   $ 7,536      $ 25,485      $ 63,192      $ 76,252  
  

 

 

    

 

 

    

 

 

    

 

 

 

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and nine-month periods ended September 30, 2017 and 2016:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  

Statutory federal income tax rate

     35.00     35.00     35.00     35.00

Effect of non-taxable interest income

     (4.48     (1.47     (1.82     (1.54

Effect of gain on acquisitions

     —         —         (0.76     —    

Stock compensation

     (0.09     —         (0.49     —    

State income taxes, net of federal benefit

     3.91       4.07       4.01       4.07  

Other

     (0.63     (0.72     0.18       (0.30
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     33.71     36.88     36.12     37.23
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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,
2017
     December 31,
2016
 
     (In thousands)  

Deferred tax assets:

     

Allowance for loan losses

   $ 52,181      $ 31,381  

Deferred compensation

     3,430        3,925  

Stock compensation

     1,605        669  

Real estate owned

     3,697        2,296  

Loan discounts

     16,634        9,157  

Tax basis premium/discount on acquisitions

     32,833        14,757  

Investments

     1,368        1,957  

Other

     21,597        8,361  
  

 

 

    

 

 

 

Gross deferred tax assets

     133,345        72,503  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Accelerated depreciation on premises and equipment

     (1,200      2,154  

Unrealized gain on securities available-for-sale

     2,018        258  

Core deposit intangibles

     5,352        4,950  

FHLB dividends

     1,926        1,926  

Other

     3,462        1,917  
  

 

 

    

 

 

 

Gross deferred tax liabilities

     11,558        11,205  
  

 

 

    

 

 

 

Net deferred tax assets

   $ 121,787      $ 61,298  
  

 

 

    

 

 

 

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

The purchase price allocation and certain fair value measurements related to the Stonegate acquisition remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

14. Common Stock, Compensation Plans and Other

Common Stock

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

Stock Repurchases

On January 20, 2017, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the total amount of authorized shares to repurchase to 9,752,000 shares. During the first nine months of 2017, the Company utilized a portion of this stock repurchase program.

 

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The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

 

Period

   Number of
Shares
Purchased
     Average Price
Paid Per Share
Purchased
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans

or Programs
     Maximum
Number of
Shares That

May Yet Be
Purchased

Under the Plans
or Programs
 

July 1 through July 31, 2017

     —        $ —          —          5,664,936  

August 1 through August 31, 2017

     380,000        24.36        380,000        5,284,936  

September 1 through September 30, 2017

     —          —          —          5,284,936  
  

 

 

       

 

 

    

Total

     380,000           380,000     
  

 

 

       

 

 

    

During first nine months of 2017, the Company repurchased a total of 800,000 shares with a weighted-average stock price of $24.44 per share. The 2017 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of September 30, 2017 total 4,467,064 shares. The remaining balance available for repurchase is 5,284,936 shares at September 30, 2017.

Stock Compensation Plans

The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. On April 21, 2016 at the Annual Meeting of Shareholders of the Company, the shareholders approved, as proposed in the Proxy Statement, an amendment to the Plan to increase the number of shares of the Company’s common stock available for issuance under the Plan by 2,000,000 shares to 11,288,000 shares. The Plan provides for the granting of incentive and non-qualified stock options to and other equity awards, including the issuance of restricted shares. As of September 30, 2017, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 11,288,000. At September 30, 2017, the Company had approximately 2,405,000 shares of common stock remaining available for future grants and approximately 4,729,000 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, 2017 was $20.9 million and $12.1 million, respectively. Total unrecognized compensation cost, net of income tax benefit, related to non-vested stock option awards, which are expected to be recognized over the vesting periods, was approximately $5.7 million as of September 30, 2017. For the first nine months of 2017, the Company has expensed approximately $1.2 million for the non-vested awards.

The table below summarizes the stock option transactions under the Plan at September 30, 2017 and December 31, 2016 and changes during the nine-month period and year then ended:

 

     For the Nine Months
Ended September 30, 2017
     For the Year Ended
December 31, 2016
 
     Shares (000)      Weighted-
Average
Exercisable
Price
     Shares (000)      Weighted-
Average
Exercisable
Price
 

Outstanding, beginning of year

     2,397      $ 15.19        2,794      $ 12.71  

Granted

     80        25.96        140        21.25  

Forfeited/Expired

     —          —          (14      17.28  

Exercised

     (178      7.60        (523      3.50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period

     2,299        16.15        2,397        15.19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, end of period

     1,017      $ 13.32        639      $ 8.88  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options. The weighted-average fair value of options granted during the nine months ended September 30, 2017 was $7.10 per share. The weighted-average fair value of options granted during the year ended December 31, 2016 was $5.08 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, 2017
    For the Year Ended
December 31, 2016
 

Expected dividend yield

     1.39     1.65

Expected stock price volatility

     28.47     26.66

Risk-free interest rate

     2.06     1.65

Expected life of options

     6.5 years       6.5 years  

The following is a summary of currently outstanding and exercisable options at September 30, 2017:

 

     Options Outstanding      Options Exercisable  

Exercise Prices

   Options
Outstanding
Shares

(000)
     Weighted-
Average
Remaining
Contractual
Life (in years)
     Weighted-
Average
Exercise
Price
     Options
Exercisable
Shares (000)
     Weighted-
Average
Exercise
Price
 

$    2.10 to $2.66

     18        1.49      $ 2.56        18      $ 2.56  

$    4.27 to $4.30

     91        0.29        4.28        91        4.28  

$    5.68 to $6.56

     103        3.81        6.43        103        6.43  

$    8.62 to $9.54

     284        5.43        9.09        224        9.08  

$14.71 to $16.86

     262        7.01        16.00        124        16.12  

$17.12 to $17.40

     211        7.18        17.19        90        17.22  

$18.46 to $18.46

     1,050        7.90        18.46        329        18.46  

$20.16 to $20.58

     80        8.02        20.37        14        20.34  

$21.25 to $21.25

     120        8.56        21.25        24        21.25  

$25.96 to $25.96

     80        9.56        25.96        —          —    
  

 

 

          

 

 

    
     2,299              1,017     
  

 

 

          

 

 

    

The table below summarized the activity for the Company’s restricted stock issued and outstanding at September 30, 2017 and December 31, 2016 and changes during the period and year then ended:

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands)  

Beginning of year

     958        975  

Issued

     232        244  

Vested

     (45      (256

Forfeited

     —          (5
  

 

 

    

 

 

 

End of period

     1,145        958  
  

 

 

    

 

 

 

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

   $ 3,815      $ 4,049  
  

 

 

    

 

 

 

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 $14.3 million as of September 30, 2017.

 

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15. Non-Interest Expense

The table below shows the components of non-interest expense for the three and nine months ended September 30, 2017 and 2016:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
     (In thousands)  

Salaries and employee benefits

   $ 28,510      $ 25,623      $ 83,965      $ 75,018  

Occupancy and equipment

     7,887        6,668        21,602        19,848  

Data processing expense

     2,853        2,791        8,439        8,221  

Other operating expenses:

           

Advertising

     795        866        2,305        2,422  

Merger and acquisition expenses

     18,227        —          25,743        —    

FDIC loss share buy-out expense

     —          3,849        —          3,849  

Amortization of intangibles

     906        762        2,576        2,370  

Electronic banking expense

     1,712        1,428        4,885        4,121  

Directors’ fees

     309        292        946        856  

Due from bank service charges

     472        319        1,348        961  

FDIC and state assessment

     1,293        1,502        3,763        4,394  

Insurance

     577        553        1,698        1,630  

Legal and accounting

     698        583        1,799        1,764  

Other professional fees

     1,436        1,137        3,822        3,106  

Operating supplies

     432        437        1,376        1,292  

Postage

     280        269        861        815  

Telephone

     305        449        1,027        1,391  

Other expense

     4,154        3,498        10,835        12,203  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

     31,596        15,944        62,984        41,174  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 70,846      $ 51,026      $ 176,990      $ 144,261  
  

 

 

    

 

 

    

 

 

    

 

 

 

16. Significant Estimates and Concentrations of Credit Risks

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

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

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

Although the Company has a diversified loan portfolio, at September 30, 2017 and December 31, 2016, commercial real estate loans represented 61.0% and 59.1% of total loans receivable, respectively, and 284.1% and 328.9% of total stockholders’ equity, respectively. Residential real estate loans represented 24.0% and 23.0% of total loans receivable and 111.8% and 127.8% of total stockholders’ equity at September 30, 2017 and December 31, 2016, respectively.

Approximately 91.0% of the Company’s total loans and 91.9% of the Company’s real estate loans as of September 30, 2017, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

 

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

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

17. Commitments and Contingencies

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

At September 30, 2017 and December 31, 2016, commitments to extend credit of $2.31 billion and $1.82 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, 2017 and December 31, 2016, is $76.8 million and $41.1 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 2017, the Company requested approximately $64.5 million in regular dividends from its banking subsidiary. This dividend is equal to approximately 52.7% of the Company’s banking subsidiary’s year-to-date 2017 earnings.

 

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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, 2017, the Company meets all capital adequacy requirements to which it is subject.

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, 2017, 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 10.86%, 13.17%, 11.46%, and 15.06%, respectively, as of September 30, 2017.

19. Additional Cash Flow Information

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

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

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

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

 

     September 30,  
     2017      2016  
     (In thousands)  

Interest paid

   $ 34,573      $ 22,295  

Income taxes paid

     117,025        66,450  

Assets acquired by foreclosure

     9,255        9,448  

 

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20. Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

    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

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, 2017 and December 31, 2016, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2017 and 2016.

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.

Impaired loans that are collateral dependent are the only material financial assets valued on a non-recurring basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. The fair value of loans with specific allocated losses was $94.1 million and $91.5 million as of September 30, 2017 and December 31, 2016, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $314,000 and $156,000 of accrued interest receivable when non-covered impaired loans were put on non-accrual status during the three months ended September 30, 2017 and 2016, respectively. The Company reversed approximately $523,000 and $457,000 of accrued interest receivable when non-covered impaired loans were put on non-accrual status during the nine months ended September 30, 2017 and 2016, respectively.

Foreclosed assets held for sale are the only material non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral. As of September 30, 2017 and December 31, 2016, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $21.7 million and $16.0 million, respectively.

Foreclosed assets held for sale with a carrying value of approximately $394,000 were remeasured during the nine months ended September 30, 2017, resulting in a write-down of approximately $306,000.

Regulatory guidelines require us 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.

 

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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 methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed in these notes:

Cash and cash equivalents and federal funds sold — For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities – held-to-maturity — These securities consist primarily of 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.

Loans receivable, net of impaired loans and allowance — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are assumed to approximate the carrying amounts. The fair values for fixed-rate loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for acquired loans are based on a discounted cash flow methodology that considers factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, current discount rates and whether or not the loan is amortizing. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.

Accrued interest receivable — The carrying amount of accrued interest receivable approximates its fair value.

Deposits and securities sold under agreements to repurchase — The fair values of demand deposits, savings deposits and securities sold under agreements to repurchase are, by definition, equal to the amount payable on demand and, therefore, approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.

FHLB and other borrowed funds — For short-term instruments, the carrying amount is a reasonable estimate of fair value. The fair value of long-term debt is estimated based on the current rates available to the Company for debt with similar terms and remaining maturities.

Accrued interest payable — The carrying amount of accrued interest payable approximates its fair value.

Subordinated debentures — The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities.

Commitments to extend credit, letters of credit and lines of credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of these commitments is not material.

 

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The following table presents the estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

     September 30, 2017  
     Carrying
Amount
     Fair Value      Level  
     (In thousands)         

Financial assets:

        

Cash and cash equivalents

   $ 552,320      $ 552,320        1  

Federal funds sold

     4,545        4,545        1  

Investment securities – held-to-maturity

     234,945        239,017        2  

Loans receivable, net of impaired loans and allowance

     10,080,468        9,966,022        3  

Accrued interest receivable

     41,071        41,071        1  

Financial liabilities:

        

Deposits:

        

Demand and non-interest bearing

   $ 2,555,465      $ 2,555,465        1  

Savings and interest-bearing transaction accounts

     6,341,883        6,341,883        1  

Time deposits

     1,551,422        1,571,618        3  

Federal funds purchased

     —          —          N/A  

Securities sold under agreements to repurchase

     149,531        149,531        1  

FHLB and other borrowed funds

     1,044,333        1,044,936        2  

Accrued interest payable

     10,964        10,964        1  

Subordinated debentures

     367,835        384,485        3  

 

     December 31, 2016  
     Carrying
Amount
     Fair Value      Level  
     (In thousands)         

Financial assets:

        

Cash and cash equivalents

   $ 216,649      $ 216,649        1  

Federal funds sold

     1,550        1,550        1  

Investment securities – held-to-maturity

     284,176        287,038        2  

Loans receivable, net of impaired loans and allowance

     7,216,199        7,131,199        3  

Accrued interest receivable

     30,838        30,838        1  

Financial liabilities:

        

Deposits:

        

Demand and non-interest bearing

   $ 1,695,184      $ 1,695,184        1  

Savings and interest-bearing transaction accounts

     3,963,241        3,963,241        1  

Time deposits

     1,284,002        1,275,634        3  

Securities sold under agreements to repurchase

     121,290        121,290        1  

FHLB and other borrowed funds

     1,305,198        1,311,280        2  

Accrued interest payable

     1,920        1,920        1  

Subordinated debentures

     60,826        60,826        3  

 

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21. Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which defers the effective date of this standard to annual and interim periods beginning after December 15, 2017; however, early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance in ASU 2014-09 (FASB’s new revenue standard) on (1) identifying performance obligations and (2) licensing. ASU 2014-10’s effective date and transition provisions are aligned with the requirements in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09. ASU 2016-12’s effective date and transition provisions are aligned with the requirements in ASU 2014-09

The guidance issued in ASU 2014-09, ASU 2015-14, ASU 2016-10 and ASU 2016-12 permit two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company plans to adopt the new standard effective January 1, 2018 and apply it prospectively. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements. Only a portion of the Company’s revenues are impacted by this guidance because the guidance does not apply to revenue on contracts accounted for under the financial instruments or insurance contracts standards. The Company’s evaluation process includes, but is not limited to, identifying contracts within the scope of the guidance, reviewing and documenting its accounting for these contracts, and identifying and determining the accounting for any related contract costs. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale securities. The new guidance is effective for annual reporting period and interim reporting periods within those annual periods, beginning after December 15, 2017. Management is currently evaluating the impact of the adoption of this guidance to the Company’s financial statements, but does not anticipate the guidance to have a material effect on the Company’s financial position or results of operations as the Company’s equity investments are immaterial. However, the amendments will have an impact on certain items that are disclosed at fair value that are not currently utilizing the exit price notion when measuring fair value. At this time, the Company cannot quantify the change in the fair value of such disclosures since the Company is currently evaluating the full impact of the standards and is in the planning stages of developing appropriate procedures and processes to comply with the disclosure requirements of such amendments. The current accounting policies and procedures will be adjusted after the Company has fully evaluated the standard to comply with the accounting changes mentioned above. For additional information on fair value of assets and liabilities, see Note 20.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in ASU 2016-02 address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in ASU 2016-02 is permitted for all entities. The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability to make lease payments and a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and doesn’t expect to early adopt. The impact is not expected to have a material effect on the Company’s financial position or results of operations as the Company does not have a material amount of lease agreements. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above. For additional information on the Company’s leases, see Note 18 “Leases” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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In March 2016, the FASB issued ASU 2016-09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the amendments effective January 1, 2017. The Company has a stock-based compensation plan for which the ASU 2016-09 guidance results in the associated excess tax benefits or deficiencies being recognized as tax expense or benefit in the income statement instead of the previous accounting treatment, which requires excess tax benefits to be recognized as an adjustment to additional paid-in capital and excess tax deficiencies to be recognized as either an offset to accumulated excess tax benefits, if any, or to the income statement. In addition, such amounts are now classified as an operating activity in the statement of cash flows instead of the current accounting treatment, which required it to be classified as both an operating and a financing activity. The Company’s stock-based compensation plan has not historically generated material amounts of excess tax benefits or deficiencies and, therefore, the Company has not experienced a material change in the Company’s financial position or results of operation as a result of the adoption and implementation of ASU 2016-09. For additional information on the stock-based compensation plan, see Note 14.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update), which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the Emerging Issues Task Force’s (“EITF”) March 3, 2016, meeting. ASU 2016-11 is effective at the same time as ASU 2014-09 and ASU 2014-16. The Company is currently evaluating the impact, if any, ASU 2016-11 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

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

 

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In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15’s amendments add or clarify guidance on eight cash flow issues including debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and the guidance must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company is currently evaluating the impact, if any, ASU 2016-15 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company is currently evaluating the impact, if any, ASU 2016-16 will have on its financial position, results of operations, and its financial statement disclosure. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, and, as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the new guidance must be applied retrospectively to all periods presented. The Company is currently evaluating the impact, if any, ASU 2016-18 will have on its financial position, results of operations, and its financial statement disclosure. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

 

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In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the “set”) is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The Company is currently evaluating the impact, if any, ASU 2017-01 will have on its financial position, results of operations, and its financial statement disclosure. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). The amendments in the update relate to SEC paragraphs pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF meetings related to disclosure of the impact of recently issued accounting standards. The SEC staff’s view that a registrant should evaluate ASC updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASC amendments to ASU 2016-02, Leases, and ASU 2014-09, Revenue from Contracts with Customers, although, the amendments apply to any subsequent amendments to guidance in the ASC. The Company adopted the amendments in this update during the fourth quarter of 2016 and appropriate disclosures have been included in this Note for each recently issued accounting standard.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2016, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

 

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In February 2017, the FASB issued ASU 2017-05, Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary under ASC 810 and (2) control of the asset is transferred in accordance with ASC 606. The entity therefore has to consider repurchase agreements (e.g., a call option to repurchase the ownership interest in a subsidiary) in its assessment and may not be able to derecognize the nonfinancial assets, even though it no longer has a controlling financial interest in a subsidiary in accordance with ASC 810. The ASU illustrates the application of this guidance in ASC 610-20-55-15 and 55-16. The effective date of the new guidance is aligned with the requirements in the new revenue standard, which is effective for public entities for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. If the entity decides to early adopt the ASU’s guidance, it must also early adopt ASC 606 (and vice versa). The Company is currently evaluating the impact, if any, ASU 2017-05 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU will shorten the amortization period for the premium to be amortized to the earliest call date. This ASU does not apply to securities held at a discount, which will continue to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact, if any, ASU 2017-08 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2018.

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

 

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

 

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Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

We have reviewed the accompanying condensed consolidated balance sheet of Home BancShares, Inc. (the Company) as of September 30, 2017, and the related condensed consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 2017 and 2016, and the related statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2017 and 2016. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data 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 Public Company Accounting Oversight Board, 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.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated 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), the consolidated balance sheet as of December 31, 2016, 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 28, 2017, 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, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

                                                                              /s/ BKD, LLP

Little Rock, Arkansas

November 7, 2017

 

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

The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 28, 2017, which includes the audited financial statements for the year ended December 31, 2016. 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, 2017, we had, on a consolidated basis, total assets of $14.26 billion, loans receivable, net of $10.17 billion, total deposits of $10.45 billion, and stockholders’ equity of $2.21 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.

Table 1: Key Financial Measures

 

     As of or for the Three Months
Ended September 30,
    As of or for the Nine Months
Ended September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands, except per share data)  

Total assets

   $ 14,255,967     $ 9,764,238     $ 14,255,967     $ 9,764,238  

Loans receivable

     10,286,193       7,112,291       10,286,193       7,112,291  

Allowance for loan losses

     111,620       76,370       111,620       76,370  

Total deposits

     10,448,770       6,840,293       10,448,770       6,840,293  

Total stockholders’ equity

     2,206,716       1,296,018       2,206,716       1,296,018  

Net income

     14,821       43,620       111,774       128,556  

Basic earnings per share

     0.10       0.31       0.78       0.92  

Diluted earnings per share

     0.10       0.31       0.78       0.91  

Annualized net interest margin – FTE

     4.40     4.86     4.53     4.83

Efficiency ratio

     53.77       39.41       43.92       38.16  

Annualized return on average assets

     0.54       1.81       1.41       1.81  

Annualized return on average common equity

     3.88       13.62       10.33       13.83  

 

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Overview

The Company’s third quarter earnings were significantly impacted by Hurricane Irma which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10, 2017. While the total impact of this hurricane on Home BancShares’ financial condition and results of operation may not be known for some time, the Company has included in third quarter earnings, certain charges, including the establishment of reserves, related to the hurricane. Based on initial assessments of the potential credit impact and damage to the approximately $2.41 billion in loans receivable we have in the disaster area, the Company has accrued $33.4 million of pre-tax hurricane expenses. The $33.4 million of hurricane expenses include the following items: $32.9 million to establish a storm-related provision for loan losses and a $556,000 charge related to direct damage expenses incurred through September 30, 2017.

Results of Operations for Three Months Ended September 30, 2017 and 2016

Our net income decreased $28.8 million, or 66.0%, to $14.8 million for the three-month period ended September 30, 2017, from $43.6 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.10 per share and $0.31 per share for the three-month periods ended September 30, 2017 and 2016, respectively. Excluding the $51.7 million of merger expenses and hurricane expenses, net income was $46.4 million, and diluted earnings per share was $0.32 per share for the three months ended September 30, 2017. Excluding the $3.8 million of FDIC loss share buy-out expense, net income was $46.0 million, and diluted earnings per share for the three months ended September 30, 2016 was $0.33 per share. Net income excluding merger expenses, hurricane expenses and FDIC loss share buy-out expense for the third quarter of 2017 increased $489,000 when compared to the third quarter of 2016. This increase is primarily associated with additional net interest income largely resulting from our acquisitions and our organic loan growth plus a decrease in the non-hurricane related provision for loan losses in third quarter of 2017 when compared to the same period in 2016. These improvements were partially offset by an increase in the costs associated with the asset growth plus an increase in interest expense related to the issuance of $300 million of subordinated notes during the second quarter of 2017 when compared to the same period in 2016.

Our GAAP net interest margin decreased from 4.86% for the three-month period ended September 30, 2016 to 4.40% for the three-month period ended September 30, 2017. The yield on loans was 5.66% and 5.84% for the three months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017 and 2016, we recognized $7.2 million and $11.9 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was 4.07% and 4.25% for the three months ended September 30, 2017 and 2016, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was 5.24% and 5.10% for the three months ended September 30, 2017 and 2016, respectively. Other than the previously mentioned reduction in net accretion income for acquired loans and deposits, the net interest margin was negatively impacted by our April 2017 issuance of $300 million of 5.625% fixed-to-floating rate subordinated notes, which added approximately $4.3 million of interest expense when compared to the same quarter in 2016.

Our efficiency ratio was 53.77% for the three months ended September 30, 2017, compared to 39.41% for the same period in 2016. For the third quarter of 2017, our core efficiency ratio was 39.12%, which increased from the 36.51% reported for third quarter of 2016. The core efficiency ratio 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 non-core items such as merger expenses, FDIC loss share buy-out expense and/or gains and losses.

Our annualized return on average assets was 0.54% for the three months ended September 30, 2017, compared to 1.81% for the same period in 2016. Excluding merger expenses, hurricane expenses and FDIC loss share buy-out expense, our annualized return on average assets was 1.70% for the three months ended September 30, 2017, compared to 1.90% for the same period in 2016. Our annualized return on average common equity was 3.88% for the three months ended September 30, 2017, compared to 13.62% for the same period in 2016. Excluding merger expenses, hurricane expenses and FDIC loss share buy-out expense, our annualized return on average common equity was 12.17% for the three months ended September 30, 2017, compared to 14.35% for the same period in 2016.

 

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Results of Operations for Nine Months Ended September 30, 2017 and 2016

Our net income decreased $16.8 million, or 13.1%, to $111.8 million for the nine-month period ended September 30, 2017, from $128.6 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.78 per share and $0.91 per share for the nine-month periods ended September 30, 2017 and 2016, respectively. Excluding the $3.8 million of gain on acquisition, $25.7 million of merger expenses, and $33.4 million of hurricane expenses, net income was $144.5 million and diluted earnings per share was $1.00 per share for the nine months ended September 30, 2017. Excluding the $3.8 million of FDIC loss share buy-out expense, net income was $130.9 million and diluted earnings per share for the nine months ended September 30, 2016 was $0.93 per share. The $13.6 million increase in net income, excluding gain on acquisitions, merger expenses, hurricane expenses and FDIC loss share buy-out expense, is primarily associated with additional net interest income largely resulting from our acquisitions and our organic loan growth plus a decrease in the non-hurricane related provision for loan losses in first nine months of 2017, growth in non-interest income and the reduced amortization of the indemnification asset when compared to the same period in 2016. These improvements were partially offset by an increase in the costs associated with the asset growth plus an increase in interest expense related to the issuance of $300 million of subordinated notes during the second quarter of 2017 when compared to the same period in 2016.

Our GAAP net interest margin decreased from 4.83% for the nine-month period ended September 30, 2016 to 4.53% for the nine-month period ended September 30, 2017. The yield on loans was 5.70% and 5.82% for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we recognized $23.3 million and $33.7 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was 4.16% and 4.24% for the nine months ended September 30, 2017 and 2016, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was 5.24% and 5.09% for the nine months ended September 30, 2017 and 2016, respectively. Other than the previously mentioned reduction in net accretion income for acquired loans and deposits, the net interest margin was negatively impacted by our April 2017 issuance of $300 million of 5.625% fixed-to-floating rate subordinated notes, which added approximately $8.5 million of interest expense when compared to the same period in 2016, and by our strategic decision to keep excess cash liquidity on the books during the first nine months of 2017.

Our efficiency ratio was 43.92% for the nine months ended September 30, 2017, compared to 38.16% for the same period in 2016. For the first nine months of 2017, our core efficiency ratio was 37.79%, which increased from the 36.75% reported for first nine months of 2016. The core efficiency ratio 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 non-core items such as merger expenses, hurricane damage expense, FDIC loss share buy-out expense and/or gains and losses.

Our annualized return on average assets was 1.41% for the nine months ended September 30, 2017, compared to 1.81% for the same period in 2016. Excluding gain on acquisitions, merger expenses, hurricane expenses and FDIC loss share buy-out expense, our annualized return on average assets was 1.82% for the nine months ended September 30, 2017, compared to 1.84% for the same period in 2016. Our annualized return on average common equity was 10.33% for the nine months ended September 30, 2017, compared to 13.83% for the same period in 2016. Excluding gain on acquisitions, merger expenses, hurricane expenses and FDIC loss share buy-out expense, our annualized return on average common equity was 13.36% for the nine months ended September 30, 2017, compared to 14.08% for the same period in 2016.

Financial Condition as of and for the Period Ended September 30, 2017 and December 31, 2016

Our total assets as of September 30, 2017 increased $4.45 billion to $14.26 billion from the $9.81 billion reported as of December 31, 2016. Our loan portfolio increased $2.90 billion to $10.29 billion as of September 30, 2017, from $7.39 billion as of December 31, 2016. This increase is primarily a result of our acquisitions since December 31, 2016. Stockholders’ equity increased $879.2 million to $2.21 billion as of September 30, 2017, compared to $1.33 billion as of December 31, 2016. The increase in stockholders’ equity is primarily associated with the $77.5 million and $742.3 million of common stock issued to the GHI and Stonegate shareholders, respectively, plus the $70.5 million increase in retained earnings combined with $3.5 million of comprehensive income and $5.0 million of share-based compensation offset by the repurchase of $19.5 million of our common stock during the first nine months of 2017. The annualized improvement in stockholders’ equity for the first nine months of 2017, excluding the $742.3 million and $77.5 million of common stock issued to the Stonegate and GHI shareholders, respectively, was 6.0%.

 

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As of September 30, 2017, our non-performing loans increased to $64.0 million, or 0.62%, of total loans from $63.1 million, or 0.85%, of total loans as of December 31, 2016. The allowance for loan losses as a percentage of non-performing loans increased to 174.47% as of September 30, 2017, compared to 126.74% as of December 31, 2016. Non-performing loans from our Arkansas franchise were $24.3 million at September 30, 2017 compared to $28.5 million as of December 31, 2016. Non-performing loans from our Florida franchise were $39.6 million at September 30, 2017 compared to $34.0 million as of December 31, 2016. Non-performing loans from our Alabama franchise were $83,000 at September 30, 2017 compared to $656,000 as of December 31, 2016. There were no non-performing loans from our Centennial CFG franchise.

As of September 30, 2017, our non-performing assets increased to $85.7 million, or 0.60%, of total assets from $79.1 million, or 0.81%, of total assets as of December 31, 2016. Non-performing assets from our Arkansas franchise were $36.4 million at September 30, 2017 compared to $41.0 million as of December 31, 2016. Non-performing assets from our Florida franchise were $48.6 million at September 30, 2017 compared to $36.8 million as of December 31, 2016. Non-performing assets from our Alabama franchise were $724,000 at September 30, 2017 compared to $1.2 million as of December 31, 2016. There were no non-performing assets from our Centennial CFG franchise.

Critical Accounting Policies

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

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

Investments – Available-for-sale. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale.

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

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

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

 

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The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Loans considered impaired, under FASB ASC 310-10-35, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful, or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

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

Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the purchased loans incorporates assumptions regarding credit risk. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

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

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

 

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

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

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

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

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

 

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

Acquisition of Giant Holdings, Inc.

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

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

Acquisition of The Bank of Commerce

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

The acquisition of BOC was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code (the “Bankruptcy Code”) pursuant to a voluntary petition for relief under Chapter 11 of the Bankruptcy Code filed by BCHI with the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”). The sale of BOC by BCHI was subject to certain bidding procedures approved by the Bankruptcy Court. On November 14, 2016, the Company submitted an initial bid to purchase the outstanding shares of BOC in accordance with the bidding procedures approved by the Bankruptcy Court. An auction was subsequently conducted on November 16, 2016, and the Company was deemed to be the successful bidder. The Bankruptcy Court entered a final order on December 9, 2016 approving the sale of BOC to the Company pursuant to and in accordance with the acquisition agreement.

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

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

 

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Termination of Remaining Loss-Share Agreements

Effective July 27, 2016, we reached an agreement terminating our remaining loss-share agreements with the FDIC. Under the terms of the agreement, Centennial made a net payment of $6.6 million to the FDIC as consideration for the early termination of the loss share agreements, and all rights and obligations of Centennial and the FDIC under the loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated. This transaction with the FDIC created a one-time acceleration of the indemnification asset plus the negotiated settlement for the true-up liability, and resulted in a negative $3.8 million pre-tax financial impact to the third quarter of 2016. It has and will create a positive financial impact to earnings of approximately $1.5 million annually on a pre-tax basis through the year 2020 as a result of the one-time acceleration of the indemnification asset amortization.

Future Acquisitions

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

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

Branches

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

As a result of our continued focus on efficiency, during the fourth quarter of 2017, we plan to close a branch location in Daphne, Alabama. As a result of Hurricane Irma, our Naples, Florida branch location will remain closed until further notice.

During the third quarter of 2017, the Company acquired a total of 24 branches through the acquisition of Stonegate. In an effort to achieve efficiencies primarily from the Stonegate acquisition, the Company plans to close or merge several Florida locations during 2018. During the remainder of 2017, we may announce additional strategic consolidations where it improves efficiency in certain markets.

As of September 30, 2017, we had 76 branches in Arkansas, 89 branches in Florida, 6 branches in Alabama and one branch in New York City.

 

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Results of Operations

For the Three and Nine Months Ended September 30, 2017 and 2016

Our net income decreased $28.8 million, or 66.0%, to $14.8 million for the three-month period ended September 30, 2017, from $43.6 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.10 per share and $0.31 per share for the three-month periods ended September 30, 2017 and 2016, respectively. Excluding the $51.7 million of merger expenses and hurricane expenses, net income was $46.4 million, and diluted earnings per share was $0.32 per share for the three months ended September 30, 2017. Excluding the $3.8 million of FDIC loss share buy-out expense, net income was $46.0 million, and diluted earnings per share for the three months ended September 30, 2016 was $0.33 per share. Net income excluding merger expenses, hurricane expenses and FDIC loss share buy-out expense for the third quarter of 2017 increased $489,000 when compared to the third quarter of 2016. This increase is primarily associated with additional net interest income largely resulting from our acquisitions and our organic loan growth plus a decrease in the non-hurricane related provision for loan losses in third quarter of 2017 when compared to the same period in 2016. These improvements were partially offset by an increase in the costs associated with the asset growth plus an increase in interest expense related to the issuance of $300 million of subordinated notes during the second quarter of 2017 when compared to the same period in 2016.

Our net income decreased $16.8 million, or 13.1%, to $111.8 million for the nine-month period ended September 30, 2017, from $128.6 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.78 per share and $0.91 per share for the nine-month periods ended September 30, 2017 and 2016, respectively. Excluding the $3.8 million of gain on acquisition, $25.7 million of merger expenses, and $33.4 million of hurricane expenses, net income was $144.5 million and diluted earnings per share was $1.00 per share for the nine months ended September 30, 2017. Excluding the $3.8 million of FDIC loss share buy-out expense, net income was $130.9 million and diluted earnings per share for the nine months ended September 30, 2016 was $0.93 per share. The $13.6 million increase in net income, excluding gain on acquisitions, merger expenses, hurricane expenses and FDIC loss share buy-out expense, is primarily associated with additional net interest income largely resulting from our acquisitions and our organic loan growth plus a decrease in the non-hurricane related provision for loan losses in first nine months of 2017, growth in non-interest income and the reduced amortization of the indemnification asset when compared to the same period in 2016. These improvements were partially offset by an increase in the costs associated with the asset growth plus an increase in interest expense related to the issuance of $300 million of subordinated notes during the second quarter of 2017 when compared to the same period in 2016.

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 (39.225% for the three and nine-month periods ended September 30, 2017 and 2016).

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds target rate, which is the cost to banks of immediately available overnight funds, was lowered on December 16, 2008 to a historic low of 0.25% to 0%, where it remained until December 16, 2015, when the target rate was increased slightly to 0.50% to 0.25%. Since December 31, 2016, the Federal Funds target rate has increased 75 basis points and is currently at 1.25% to 1.00%.

 

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Our GAAP net interest margin decreased from 4.86% for the three-month period ended September 30, 2016 to 4.40% for the three-month period ended September 30, 2017. The yield on loans was 5.66% and 5.84% for the three months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017 and 2016, we recognized $7.2 million and $11.9 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was 4.07% and 4.25% for the three months ended September 30, 2017 and 2016, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was 5.24% and 5.10% for the three months ended September 30, 2017 and 2016, respectively. Other than the previously mentioned reduction in net accretion income for acquired loans and deposits, the net interest margin was negatively impacted by our April 2017 issuance of $300 million of 5.625% fixed-to-floating rate subordinated notes, which added approximately $4.3 million of interest expense when compared to the same quarter in 2016.

Our GAAP net interest margin decreased from 4.83% for the nine-month period ended September 30, 2016 to 4.53% for the nine-month period ended September 30, 2017. The yield on loans was 5.70% and 5.82% for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we recognized $23.3 million and $33.7 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was 4.16% and 4.24% for the nine months ended September 30, 2017 and 2016, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was 5.24% and 5.09% for the nine months ended September 30, 2017 and 2016, respectively. Other than the previously mentioned reduction in net accretion income for acquired loans and deposits, the net interest margin was negatively impacted by our April 2017 issuance of $300 million of 5.625% fixed-to-floating rate subordinated notes, which added approximately $8.5 million of interest expense when compared to the same period in 2016, and by our strategic decision to keep excess cash liquidity on the books during the first nine months of 2017.

Net interest income on a fully taxable equivalent basis increased $3.1 million, or 2.93%, to $108.6 million for the three-month period ended September 30, 2017, from $105.5 million for the same period in 2016. This increase in net interest income for the three-month period ended September 30, 2017 was the result of a $12.5 million increase in interest income on a fully taxable equivalent basis offset by a $9.4 million increase in interest expense. The $12.5 million increase in interest income was primarily the result of a higher level of earning assets offset by lower yields on our interest earning assets, specifically on our loans. The higher level of earning assets resulted in an increase in interest income of approximately $14.2 million. The lower yield, primarily caused by a $4.5 million reduction in loan accretion income, resulted in an approximately $1.7 million decrease in interest income. The $9.4 million increase in interest expense for the three-month period ended September 30, 2017, is primarily the result of an increase in interest bearing liabilities repricing in a rising interest rate environment combined with a higher level of our interest bearing liabilities. The repricing of our interest bearing liabilities in a rising interest rate environment resulted in an approximately $6.2 million increase in interest expense. The higher level of our interest bearing liabilities, primarily subordinated debentures, resulted in an increase in interest expense of approximately $3.2 million.

Net interest income on a fully taxable equivalent basis increased $16.3 million, or 5.26%, to $324.8 million for the nine-month period ended September 30, 2017, from $308.6 million for the same period in 2016. This increase in net interest income on a fully taxable equivalent basis for the nine-month period ended September 30, 2017 was the result of a $36.2 million increase in interest income offset by a $19.9 million increase in interest expense. The $36.2 million increase in interest income was primarily the result of a higher level of earning assets offset by lower yields on our interest earning assets, specifically on our loans. The higher level of earning assets resulted in an increase in interest income of approximately $39.4 million. The lower yield, primarily caused by a $9.6 million reduction in loan accretion income, resulted in an approximately $3.2 million decrease in interest income. The $19.9 million increase in interest expense for the nine-month period ended September 30, 2017, is primarily the result of an increase in interest bearing liabilities repricing in a rising interest rate environment combined with a higher level of our interest bearing liabilities. The repricing of our interest bearing liabilities in a rising interest rate environment resulted in an approximately $13.3 million increase in interest expense. The higher level of our interest bearing liabilities, primarily subordinated debentures, resulted in an increase in interest expense of approximately $6.6 million.

Additional information and analysis for our net interest margin can be found in Tables 18 through 20 of our Non-GAAP Financial Measurements section of the Management Discussion and Analysis.

 

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Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine-month periods ended September 30, 2017 and 2016, as well as changes in fully taxable equivalent net interest margin for the three and nine-month periods ended September 30, 2017 compared to the same periods in 2016.

Table 2: Analysis of Net Interest Income

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Interest income

   $ 123,913     $ 111,375     $ 361,270     $ 325,149  

Fully taxable equivalent adjustment

     1,846       1,869       5,873       5,816  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income – fully taxable equivalent

     125,759       113,244       367,143       330,965  

Interest expense

     17,144       7,722       42,334       22,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income – fully taxable equivalent

   $ 108,615     $ 105,522     $ 324,809     $ 308,567  
  

 

 

   

 

 

   

 

 

   

 

 

 

Yield on earning assets – fully taxable equivalent

     5.09     5.21     5.12     5.18

Cost of interest-bearing liabilities

     0.92       0.46       0.78       0.45  

Net interest spread – fully taxable equivalent

     4.17       4.75       4.34       4.73  

Net interest margin – fully taxable equivalent

     4.40       4.86       4.53       4.83  

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

 

     Three Months Ended
September 30,

2017 vs. 2016
     Nine Months Ended
September 30,

2017 vs. 2016
 
     (In thousands)  

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

   $ 14,194      $ 39,390  

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

     (1,679      (3,212

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

     (3,212      (6,610

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

     (6,210      (13,326
  

 

 

    

 

 

 

Increase (decrease) in net interest income

   $ 3,093      $ 16,242  
  

 

 

    

 

 

 

 

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Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and nine-month periods ended September 30, 2017 and 2016, 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,  
     2017     2016  
     Average
Balance
     Income /
Expense
     Yield /
Rate
    Average
Balance
     Income /
Expense
     Yield /
Rate
 
     (Dollars in thousands)  

ASSETS

                

Earnings assets

                

Interest-bearing balances due from banks

   $ 180,368      $ 538        1.18   $ 110,993      $ 117        0.42

Federal funds sold

     878        3        1.36       1,136        2        0.70  

Investment securities – taxable

     1,326,117        7,071        2.12       1,177,284        5,583        1.89  

Investment securities – non-taxable

     348,920        4,908        5.58       328,979        4,407        5.33  

Loans receivable

     7,938,716        113,239        5.66       7,027,634        103,135        5.84  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     9,794,999      $ 125,759        5.09       8,646,026        113,244        5.21  
     

 

 

         

 

 

    

Non-earning assets

     1,058,560             956,337        
  

 

 

         

 

 

       

Total assets

   $ 10,853,559           $ 9,602,363        
  

 

 

         

 

 

       

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

          

Liabilities

                

Interest-bearing liabilities

                

Savings and interest-bearing transaction accounts

   $ 4,512,785      $ 5,755        0.51   $ 3,721,019      $ 2,268        0.24

Time deposits

     1,444,662        2,780        0.76       1,361,589        1,772        0.52  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     5,957,447        8,535        0.57       5,082,608        4,040        0.32  
  

 

 

    

 

 

      

 

 

    

 

 

    

Federal funds purchased

     —          —          —         —          —          —    

Securities sold under agreement to repurchase

     135,855        232        0.68       118,183        142        0.48  

FHLB and other borrowed funds

     920,754        3,408        1.47       1,357,716        3,139        0.92  

Subordinated debentures

     358,347        4,969        5.50       60,826        401        2.62  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     7,372,403        17,144        0.92       6,619,333        7,722        0.46  
     

 

 

         

 

 

    

Non-interest bearing liabilities

                

Non-interest bearing deposits

     1,924,933             1,663,621        

Other liabilities

     42,394             45,332        
  

 

 

         

 

 

       

Total liabilities

     9,339,730             8,328,286        

Stockholders’ equity

     1,513,829             1,274,077        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 10,853,559           $ 9,602,363        
  

 

 

         

 

 

       

Net interest spread

           4.17           4.75

Net interest income and margin

      $ 108,615        4.40      $ 105,522        4.86
     

 

 

         

 

 

    

 

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Table 4: Average Balance Sheets and Net Interest Income Analysis

 

     Nine Months Ended September 30,  
     2017     2016  
     Average
Balance
     Income /
Expense
     Yield /
Rate
    Average
Balance
     Income /
Expense
     Yield /
Rate
 
     (Dollars in thousands)  

ASSETS

                

Earnings assets

                

Interest-bearing balances due from banks

   $ 218,324      $ 1,573        0.96   $ 110,893      $ 325        0.39

Federal funds sold

     1,161        9        1.04       1,895        7        0.49  

Investment securities – taxable

     1,231,619        18,983        2.06       1,174,998        16,178        1.84  

Investment securities – non-taxable

     347,578        14,506        5.58       333,336        13,616        5.46  

Loans receivable

     7,785,925        332,072        5.70       6,909,240        300,839        5.82  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     9,584,607      $ 367,143        5.12       8,530,362        330,965        5.18  
     

 

 

         

 

 

    

Non-earning assets

     1,033,310             968,553        
  

 

 

         

 

 

       

Total assets

   $ 10,617,917           $ 9,498,915        
  

 

 

         

 

 

       

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

          

Liabilities

                

Interest-bearing liabilities

                

Savings and interest-bearing transaction accounts

   $ 4,316,032      $ 13,445        0.42   $ 3,664,401      $ 6,426        0.23

Time deposits

     1,415,383        7,386        0.70       1,382,657        5,102        0.49  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     5,731,415        20,831        0.49       5,047,058        11,528        0.31  
  

 

 

    

 

 

      

 

 

    

 

 

    

Federal funds purchased

     —          —          —         312        2        0.86  

Securities sold under agreement to repurchase

     129,580        593        0.61       120,966        421        0.46  

FHLB and other borrowed funds

     1,155,503        10,707        1.24       1,376,145        9,283        0.90  

Subordinated debentures

     258,032        10,203        5.29       60,826        1,164        2.56  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     7,274,530        42,334        0.78       6,605,307        22,398        0.45  
     

 

 

         

 

 

    

Non-interest bearing liabilities

                

Non-interest bearing deposits

     1,847,843             1,596,603        

Other liabilities

     48,804             55,411        
  

 

 

         

 

 

       

Total liabilities

     9,171,177             8,257,321        

Stockholders’ equity

     1,446,740             1,241,594        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 10,617,917           $ 9,498,915        
  

 

 

         

 

 

       

Net interest spread

           4.34           4.73

Net interest income and margin

      $ 324,809        4.53      $ 308,567        4.83
     

 

 

         

 

 

    

 

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Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine-month periods ended September 30, 2017 compared to the same periods in 2016, 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,
2017 over 2016
     Nine Months Ended September 30,
2017 over 2016
 
     Volume     Yield/Rate     Total      Volume     Yield/Rate     Total  
     (In thousands)  

Increase (decrease) in:

             

Interest income:

             

Interest-bearing balances due from banks

   $ 107     $ 314     $ 421      $ 498     $ 750     $ 1,248  

Federal funds sold

     —         1       1        (4     6       2  

Investment securities – taxable

     750       738       1,488        807       1,998       2,805  

Investment securities – non-taxable

     274       227       501        590       300       890  

Loans receivable

     13,063       (2,959     10,104        37,499       (6,266     31,233  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     14,194       (1,679     12,515        39,390       (3,212     36,178  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense:

             

Interest-bearing transaction and

savings deposits

     569       2,918       3,487        1,308       5,711       7,019  

Time deposits

     114       894       1,008        124       2,160       2,284  

Federal funds purchased

     —         —         —          (1     (1     (2

Securities sold under agreement to

repurchase

     23       67       90        32       140       172  

FHLB borrowed funds

     (1,222     1,491       269        (1,655     3,079       1,424  

Subordinated debentures

     3,728       840       4,568        6,802       2,237       9,039  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     3,212       6,210       9,422        6,610       13,326       19,936  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 10,982     $ (7,889   $ 3,093      $ 32,780     $ (16,538   $ 16,242  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

Our management assesses the adequacy of the allowance for loan losses by applying the provisions of FASB ASC 310-10-35. Specific allocations are determined for loans considered to be impaired and loss factors are assigned to the remainder of the loan portfolio to determine an appropriate level in the allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on an internal net loss experience, as well as management’s review of trends within the portfolio and related industries.

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

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

 

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

Our Company is primarily a real estate lender in the markets we serve. As such, we are subject to declines in asset quality when real estate prices fall. The recession in the latter years of the last decade harshly impacted the real estate market in Florida. The economic conditions particularly in our Florida markets have improved recently, although not to pre-recession levels. Our Arkansas markets’ economies have been fairly stable over the past several years with no boom or bust. As a result, the Arkansas economy fared better with its real estate values during this time period.

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

The Company’s third quarter earnings were significantly impacted by Hurricane Irma which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10, 2017. While the total impact of this hurricane on Home BancShares’s financial condition and results of operation may not be known for some time, the Company has included in third quarter earnings, certain charges, including the establishment of reserves, related to the hurricane. Based on initial assessments of the potential credit impact and damage to the approximately $2.41 billion in legacy loans receivable we have in the disaster area, the Company has accrued $33.4 million of pre-tax hurricane expenses. The $33.4 million of hurricane expenses include the following items: $32.9 million to establish a storm-related provision for loan losses and a $556,000 charge related to direct damage expenses incurred through September 30, 2017. The $32.9 million of storm-related provision for loan losses was calculated by taking a 5.0% allocation on the loans in the Florida Key loans receivable balances, a 5.0% allocation on specific large loans located in the path of the hurricane on the mainland of Florida, and a 0.75% allocation on balances in the remaining counties within the FEMA-designated disaster areas. Additionally, as a result of Hurricane Irma, the Company offered customers located in the disaster area a 90-day deferment on outstanding loans. As of November 1, 2017, customers with loan balances totaling approximately $205.8 million have accepted the 90-day deferment.

There was $35.0 million and $5.5 million of provision for loan losses for the three months ended September 30, 2017 and 2016, respectively. Excluding $32.9 million of additional provision for loan losses related to Hurricane Irma, we experienced a $3.4 million decrease in the provision for loan losses during the third quarter of 2017 versus the third quarter of 2016. The $3.4 million decrease in provision for loan losses was primarily due to the Company not needing to take any additional provision related to charge-offs during the third quarter of 2017 because of a $2.0 million loan charge-off having a specific allocation that did not need to be replenished in the general allowance allocation plus lower organic loan growth during the third quarter of 2017 versus the third quarter of 2016.

There was $39.3 million and $16.9 million of provision for loan losses for the nine months ended September 30, 2017 and 2016, respectively. Excluding $32.9 million of additional provision for loan losses related to Hurricane Irma, we experienced a $10.5 million decrease in the provision for loan losses during the first nine months of 2017 versus the first nine months of 2016. This $10.5 million decrease is primarily a result of reduced provisioning from lower net charge-offs and lower organic loan growth versus the first nine months of 2016.

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

 

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Non-Interest Income

Total non-interest income was $21.5 million and $72.3 million for the three and nine-month periods ended September 30, 2017, compared to $22.0 million and $63.2 million for the same periods in 2016, respectively. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, insurance, increase in cash value of life insurance and dividends.

Table 6 measures the various components of our non-interest income for the three and nine-month periods ended September 30, 2017 and 2016, respectively, as well as changes for the three and nine-month periods ended September 30, 2017 compared to the same period in 2016.

Table 6: Non-Interest Income

 

     Three Months Ended
September 30,
    2017 Change     Nine Months Ended
September 30,
    2017 Change  
     2017     2016     from 2016     2017     2016     from 2016  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 6,408     $ 6,527     $ (119     (1.8 )%    $ 18,356     $ 18,607     $ (251     (1.3 )% 

Other service charges and fees

     8,490       7,504       986       13.1       25,983       22,589       3,394       15.0  

Trust fees

     365       365       —         —         1,130       1,128       2       0.2  

Mortgage lending income

     3,172       3,932       (760     (19.3     9,713       10,276       (563     (5.5

Insurance commissions

     472       534       (62     (11.6     1,482       1,808       (326     (18.0

Increase in cash value of life insurance

     478       344       134       39.0       1,251       1,092       159       14.6  

Dividends from FHLB, FRB, Bankers’ Bank & other

     834       808       26       3.2       2,455       2,147       308       14.3  

Gain on acquisitions

     —         —         —         —         3,807       —         3,807       100.0  

Gain (loss) on SBA loans

     163       364       (201     (55.2     738       443       295       66.6  

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

     (1,337     (86     (1,251     1,454.7       (962     701       (1,663     (237.2

Gain (loss) on OREO, net

     335       132       203       153.8       849       (713     1,562       219.1  

Gain (loss) on securities, net

     136       —         136       100.0       939       25       914       3,656.0  

FDIC indemnification accretion/(amortization), net

     —         —         —         —         —         (772     772       (100.0

Other income

     1,941       1,590       351       22.1       6,603       5,892       711       12.1  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total non-interest income

   $ 21,457     $ 22,014     $ (557     (2.5 )%    $ 72,344     $ 63,223     $ 9,121       14.4
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Non-interest income decreased $557,000, or 2.5%, to $21.5 million for the three-month period ended September 30, 2017 from $22.0 million for the same period in 2016. Non-interest income increased $9.1 million, or 14.4%, to $72.3 million for the nine-month period ended September 30, 2017 from $63.2 million for the same period in 2016. Non-interest income excluding gain on acquisitions increased $5.3 million, or 8.4%, to $68.5 million for the nine months ended September 30, 2017 from $63.2 million for the same period in 2016.

The primary factors that resulted in the increase for the three month period ended September 30, 2017 when compared to the same period in 2016 were changes related to other service charges and fees, mortgage lending income, and net loss on branches, equipment and other assets.

Additional details for the three months ended September 30, 2017 on some of the more significant changes are as follows:

 

    The $986,000 increase in other service charges and fees is primarily from our first quarter 2017 acquisitions plus additional loan payoff fees generated by Centennial CFG.

 

    The $760,000 decrease in mortgage lending income is primarily the result of Hurricane Irma during September 2017 when compared to the same period in 2016. The disruption from the hurricane resulted in very little mortgage processing for nearly a two week period during the third quarter of 2017.

 

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    The $1.3 million decrease in gain (loss) on branches, equipment and other assets, net, is primarily related to losses on three vacant properties during the third quarter of 2017.

Excluding gain on acquisitions, the primary factors that resulted in the increase for the nine month period ended September 30, 2017 when compared to the same period in 2016 were changes related to other service charges and fees, net loss on branches, equipment and other assets, net gain on OREO, net gain on securities, and amortization on our former FDIC indemnification asset.

Additional details for the nine months ended September 30, 2017 on some of the more significant changes are as follows:

 

    The $3.4 million increase in other service charges and fees is primarily from our first quarter 2017 acquisitions plus additional loan payoff fees generated by Centennial CFG and approximately $615,000 of MasterCard incentive income received in the first quarter of 2017.

 

    The $1.7 million decrease in gain (loss) on branches, equipment and other assets, net, is primarily related to net losses on eleven vacant properties from closed branches during the first nine months of 2017 combined with net gains on four vacant properties during the first nine months of 2016 plus a gain on the sale of a piece of software during the second quarter of 2016.

 

    The $1.6 million increase in gain (loss) on OREO is primarily related to realizing gains on sale from OREO properties during the first nine months of 2017 versus the revaluation of seven OREO properties during the first nine months of 2016.

 

    The $914,000 increase in gain (loss) on securities, net, is a result of a strategic decision to recognize the long-term capital gains on sales of investment securities when compared to the same period in 2016.

 

    The $772,000 increase in FDIC indemnification accretion/amortization, net, is a result of the buy-out of the FDIC loss share portfolio during the third quarter of 2016.

 

    The $563,000 decrease in mortgage lending income is primarily the result of Hurricane Irma during September 2017 when compared to the same period in 2016. The disruption from the hurricane resulted in very little mortgage processing for nearly a two week period during the third quarter of 2017.

 

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Non-Interest Expense

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

Table 7 below sets forth a summary of non-interest expense for the three and nine-month periods ended September 30, 2017 and 2016, as well as changes for the three and nine-month periods ended September 30, 2017 compared to the same period in 2016.

Table 7: Non-Interest Expense

 

     Three Months Ended
September 30,
     2017 Change     Nine Months Ended
September 30,
     2017 Change  
     2017      2016      from 2016     2017      2016      from 2016  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 28,510      $ 25,623      $ 2,887       11.3   $ 83,965      $ 75,018      $ 8,947       11.9

Occupancy and equipment

     7,887        6,668        1,219       18.3       21,602        19,848        1,754       8.8  

Data processing expense

     2,853        2,791        62       2.2       8,439        8,221        218       2.7  

Other operating expenses:

                    

Advertising

     795        866        (71     (8.2     2,305        2,422        (117     (4.8

Merger and acquisition expenses

     18,227        —          18,227       100.0       25,743        —          25,743       100.0  

FDIC loss share buy-out expense

     —          3,849        (3,849     (100.0     —          3,849        (3,849     (100.0

Amortization of intangibles

     906        762        144       18.9       2,576        2,370        206       8.7  

Electronic banking expense

     1,712        1,428        284       19.9       4,885        4,121        764       18.5  

Directors’ fees

     309        292        17       5.8       946        856        90       10.5  

Due from bank service charges

     472        319        153       48.0       1,348        961        387       40.3  

FDIC and state assessment

     1,293        1,502        (209     (13.9     3,763        4,394        (631     (14.4

Insurance

     577        553        24       4.3       1,698        1,630        68       4.2  

Legal and accounting

     698        583        115       19.7       1,799        1,764        35       2.0  

Other professional fees

     1,436        1,137        299       26.3       3,822        3,106        716       23.1  

Operating supplies

     432        437        (5     (1.1     1,376        1,292        84       6.5  

Postage

     280        269        11       4.1       861        815        46       5.6  

Telephone

     305        449        (144     (32.1     1,027        1,391        (364     (26.2

Other expense

     4,154        3,498        656       18.8       10,835        12,203        (1,368     (11.2
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 70,846      $ 51,026      $ 19,820       38.8   $ 176,990      $ 144,261      $ 32,729       22.7
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Non-interest expense increased $19.8 million, or 38.8%, to $70.8 million for the three months ended September 30, 2017 from $51.0 million for the same period in 2016. Non-interest expense increased $32.7 million, or 22.7%, to $177.0 million for the nine months ended September 30, 2017 from $144.3 million for the same period in 2016. Non-interest expense, excluding merger expenses and FDIC loss share buy-out expense, was $52.6 million and $151.2 million for the three and nine months ended September 30, 2017, respectively, compared to $47.2 million and $140.4 million for the same periods in 2016, respectively.

The change in non-interest expense for 2017 excluding merger expenses and FDIC loss share buy-out expense when compared to 2016 is primarily related to the completion of our acquisitions, the normal increased cost of doing business and Centennial CFG.

Centennial CFG incurred $4.8 million and $13.8 million of non-interest expense during the three and nine months ended September 30, 2017, respectively, compared to $3.7 million and $10.5 million of non-interest expense during the three and nine months ended September 30, 2016, respectively. While the cost of doing business in New York City and Los Angeles is significantly higher than our Arkansas, Florida and Alabama markets, we are still committed to cost-saving measures while achieving our goals of growing the Company.

During the third quarter of 2017 and 2016, the Company had no write-downs on vacant properties.

During the first nine months of 2017 and 2016, the Company had write-downs on vacant property from closed branches of approximately $47,000 and $1.9 million, respectively. These write-downs are included in other expense.

 

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Income Taxes

The income tax expense decreased $17.9 million, or 70.4%, to $7.5 million for the three-month period ended September 30, 2017, from $25.5 million for the same period in 2016. The income tax expense decreased $13.1 million, or 17.1%, to $63.2 million for the nine-month period ended September 30, 2017, from $76.3 million for the same period in 2016. The effective income tax rate was 33.71% and 36.12% for the three and nine-month periods ended September 30, 2017, compared to 36.88% and 37.23% for the same periods in 2016.

The primary cause of the decrease in taxes for the three months ended September 30, 2017 when compared to the same period in 2016 is our lower quarterly pre-tax earnings at our marginal tax rate of 39.225% adjusted for the $570,000 of non-deductible merger expenses during the third quarter of 2017.

The primary cause of the decrease in taxes for the nine months ended September 30, 2017 when compared to the same period in 2016 is our lower pre-tax earnings at our marginal tax rate of 39.225% adjusted for the $3.8 million of non-taxable gain on acquisitions offset by approximately $1.5 million of non-deductible merger expenses during the first nine months of 2017.

Financial Condition as of and for the Period Ended September 30, 2017 and December 31, 2016

Our total assets as of September 30, 2017 increased $4.45 billion to $14.26 billion from the $9.81 billion reported as of December 31, 2016. Our loan portfolio increased $2.90 million to $10.29 billion as of September 30, 2017, from $7.39 billion as of December 31, 2016. This increase is primarily a result of our acquisitions since December 31, 2016. Stockholders’ equity increased $879.2 million to $2.21 billion as of September 30, 2017, compared to $1.33 billion as of December 31, 2016. The increase in stockholders’ equity is primarily associated with the $77.5 million and $742.3 million of common stock issued to the GHI and Stonegate shareholders, respectively, plus the $70.5 million increase in retained earnings combined with $3.5 million of comprehensive income and $5.0 million of share-based compensation offset by the repurchase of $19.5 million of our common stock during the first nine months of 2017. The annualized improvement in stockholders’ equity for the first nine months of 2017, excluding the $742.3 million and $77.5 million of common stock issued to the Stonegate and GHI shareholders, respectively, was 6.0%.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $7.94 billion and $7.03 billion during the three-month periods ended September 30, 2017 and 2016, respectively. Our loan portfolio averaged $7.79 billion and $6.91 billion during the nine-month periods ended September 30, 2017 and 2016, respectively. Loans receivable were $10.29 billion as of September 30, 2017 compared to $7.39 billion as of December 31, 2016.

During the first nine months of 2017, the Company acquired $2.82 billion of loans, net of purchase accounting discounts. Excluding the $2.82 billion of acquired loans during 2017, loans receivable were $7.47 billion as of September 30, 2017 compared to $7.39 billion as of December 31, 2016, which is $73.8 million of organic loan growth, or 1.33% annualized increase. Centennial CFG produced $113.7 million of net organic loan growth during the first nine months of 2017 while the legacy footprint experienced significant net payoffs during the first nine months of 2017, resulting in a decline of $39.9 million.

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 $3.50 billion, $5.34 billion, $224.4 million and $1.22 billion as of September 30, 2017 in Arkansas, Florida, Alabama and Centennial CFG, respectively.

 

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As of September 30, 2017, we had approximately $502.8 million of construction land development loans which were collateralized by land. This consisted of approximately $257.9 million for raw land and approximately $244.8 million for land with commercial and or residential lots.

Table 8 presents our loans receivable balances by category as of September 30, 2017 and December 31, 2016.

Table 8: Loans Receivable

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands)  

Real estate:

     

Commercial real estate loans:

     

Non-farm/non-residential

   $ 4,532,402      $ 3,153,121  

Construction/land development

     1,648,923        1,135,843  

Agricultural

     88,295        77,736  

Residential real estate loans:

     

Residential 1-4 family

     1,968,688        1,356,136  

Multifamily residential

     497,910        340,926  
  

 

 

    

 

 

 

Total real estate

     8,736,218        6,063,762  

Consumer

     51,515        41,745  

Commercial and industrial

     1,296,485        1,123,213  

Agricultural

     57,489        74,673  

Other

     144,486        84,306  
  

 

 

    

 

 

 

Total loans receivable

   $ 10,286,193      $ 7,387,699  
  

 

 

    

 

 

 

Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized over a 15 to 25 year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.

As of September 30, 2017, commercial real estate loans totaled $6.27 billion, or 61.0% of loans receivable, as compared to $4.37 billion, or 59.1% of loans receivable, as of December 31, 2016. Commercial real estate loans originated in our Arkansas, Florida, Alabama and Centennial CFG franchises were $1.96 billion, $3.32 billion, $120.4 million and $866.4 million at September 30, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $1.41 billion of commercial real estate loans, as of acquisition date from Stonegate.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 49.71% and 37.59% 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, 2017. 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, 2017, residential real estate loans totaled $2.47 billion, or 24.0%, of loans receivable, compared to $1.70 billion, or 23.0% of loans receivable, as of December 31, 2016. Residential real estate loans originated in our Arkansas, Florida, Alabama and Centennial CFG franchises were $870.1 million, $1.36 billion, $74.9 million and $162.7 million at September 30, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $551.3 million of residential real estate loans, as of acquisition date from Stonegate.

 

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Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank. 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, 2017, consumer loans totaled $51.5 million, or 0.5% of loans receivable, compared to $41.8 million, or 0.6% of loans receivable, as of December 31, 2016. Consumer loans originated in our Arkansas, Florida, Alabama and Centennial CFG franchises were $24.1 million, $26.5 million, $1.0 million and zero at September 30, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $11.7 million of consumer loans, as of acquisition date from Stonegate.

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

As of September 30, 2017, commercial and industrial loans totaled $1.30 billion, or 12.6% of loans receivable, which is comparable to $1.12 billion, or 15.2% of loans receivable, as of December 31, 2016. Commercial and industrial loans originated in our Arkansas, Florida, Alabama and Centennial CFG franchises were $573.7 million, $503.7 million, $26.2 million and $193.0 million at September 30, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $301.0 million of commercial and industrial loans, as of acquisition date from Stonegate.

Non-Performing Assets

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

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

We have purchased loans with deteriorated credit quality in our September 30, 2017 financial statements as a result of our historical acquisitions. The credit metrics most heavily impacted by our acquisitions of acquired loans with deteriorated credit quality were the following credit quality indicators listed in Table 9 below:

 

    Allowance for loan losses to non-performing loans;

 

    Non-performing loans to total loans; and

 

    Non-performing assets to total assets.

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

 

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Table 9 sets forth information with respect to our non-performing assets as of September 30, 2017 and December 31, 2016. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 9: Non-performing Assets

 

     As of
September 30,
2017
    As of
December 31,
2016
 
     (Dollars in thousands)  

Non-accrual loans

   $ 34,794     $ 47,182  

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

     29,183       15,942  
  

 

 

   

 

 

 

Total non-performing loans

     63,977       63,124  
  

 

 

   

 

 

 

Other non-performing assets

    

Foreclosed assets held for sale, net

     21,701       15,951  

Other non-performing assets

     3       3  
  

 

 

   

 

 

 

Total other non-performing assets

     21,704       15,954  
  

 

 

   

 

 

 

Total non-performing assets

   $ 85,681     $ 79,078  
  

 

 

   

 

 

 

Allowance for loan losses to non-performing loans

     174.47     126.74

Non-performing loans to total loans

     0.62       0.85  

Non-performing assets to total assets

     0.60       0.81  

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

Total non-performing loans were $64.0 million as of September 30, 2017, compared to $63.1 million as of December 31, 2016, for an increase of $853,000. The $853,000 increase in non-performing loans is the result of a $4.2 million decrease in non-performing loans in our Arkansas franchise, a $5.6 million increase in non-performing loans in our Florida franchise and a $573,000 decrease in non-performing loans in our Alabama franchise. Non-performing loans at September 30, 2017 are $24.3 million, $39.6 million, $83,000 and zero in the Arkansas, Florida, Alabama and Centennial CFG franchises, respectively. During the third quarter of 2017, we completed our acquisition of Stonegate which increased our non-performing loans accruing past due 90 days or more by $6.3 million as of September 30, 2017.

Although the current state of the real estate market has improved, uncertainties still present in the economy may continue to increase our level of non-performing loans. While we believe our allowance for loan losses is adequate and our purchased loans are adequately discounted at September 30, 2017, as additional facts become known about relevant internal and external factors that affect loan collectability and our assumptions, it may result in us making additions to the provision for loan losses during 2017. Our current or historical provision levels should not be relied upon as a predictor or indicator of future levels going forward.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, the Bank 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, 2017, we had $23.2 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 franchise contains $17.0 million and our Arkansas franchise contains $6.2 million of these restructured loans.

 

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

The majority of the Bank’s loan modifications relate to commercial lending and involve reducing the interest rate, changing from a principal and interest payment to interest-only, a lengthening of the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At September 30, 2017, the amount of TDRs was $25.6 million, an increase of 0.4% from $25.5 million at December 31, 2016. As of September 30, 2017 and December 31, 2016, 90.5% and 88.0%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $21.7 million as of September 30, 2017, compared to $16.0 million as of December 31, 2016 for an increase of $5.7 million. The foreclosed assets held for sale as of September 30, 2017 are comprised of $12.1 million of assets located in Arkansas, $9.0 million of assets located in Florida, $641,000 located in Alabama and zero from Centennial CFG. During the third quarter of 2017, we completed our acquisition of Stonegate which increased our foreclosed assets held for sale by $3.4 million as of September 30, 2017.

During the first nine months of 2017, we had four foreclosed properties with a carrying value greater than $1.0 million. The first property is a development loan in Northwest Arkansas which was foreclosed in the first quarter of 2011. The carrying value was $2.0 million at September 30, 2017. The second property was a non-farm, non-residential property in Central Arkansas which was foreclosed in the third quarter of 2017. The carrying value was $1.5 million at September 30, 2017. The third property was a development property in Florida acquired from BOC with a carrying value of $2.1 million at September 30, 2017. The last property was a non-farm, non-residential property in Florida acquired from Stonegate with a carrying value of $1.8 million at September 30, 2017. The Company does not currently anticipate any additional losses on these properties. As of September 30, 2017, 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, 2017 and December 31, 2016.

Table 10: Foreclosed Assets Held For Sale

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands)  

Real estate:

  

Commercial real estate loans

     

Non-farm/non-residential

   $ 10,354      $ 9,423  

Construction/land development

     6,328        4,009  

Agricultural

     —          —    

Residential real estate loans

     

Residential 1-4 family

     3,733        2,076  

Multifamily residential

     1,286        443  
  

 

 

    

 

 

 

Total foreclosed assets held for sale

   $ 21,701      $ 15,951  
  

 

 

    

 

 

 

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, 2017, average impaired loans were $90.0 million compared to $89.6 million as of December 31, 2016. As of September 30, 2017, impaired loans were $97.0 million compared to $93.1 million as of December 31, 2016, for an increase of $3.9 million. This increase is primarily associated with an increase in loan balances with a specific allocation. As of September 30, 2017, our Arkansas, Florida, Alabama and Centennial CFG franchises accounted for approximately $42.8 million, $54.1 million, $83,000 and zero of the impaired loans, respectively.

 

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

All purchased loans with deteriorated credit quality are considered impaired loans at the date of acquisition. Since the loans are accounted for on a pooled basis under ASC 310-30, individual loans are not classified as impaired. Since the loans are accounted for on a pooled basis under ASC 310-30, individual loans subsequently restructured within the pools are not classified as TDRs in accordance with ASC 310-30-40. For purchased loans with deteriorated credit quality that were deemed TDRs prior to our acquisition of them, these loans are also not considered TDRs as they are accounted for under ASC 310-30.

As of September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016:

Table 11: Total Non-Accrual Loans

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands)  

Real estate:

  

Commercial real estate loans

     

Non-farm/non-residential

   $ 10,936      $ 17,988  

Construction/land development

     5,520        3,956  

Agricultural

     34        435  

Residential real estate loans

     

Residential 1-4 family

     13,817        20,311  

Multifamily residential

     155        262  
  

 

 

    

 

 

 

Total real estate

     30,462        42,952  

Consumer

     139        140  

Commercial and industrial

     4,021        3,155  

Agricultural

     171        —    

Other

     1        935  
  

 

 

    

 

 

 

Total non-accrual loans

   $ 34,794      $ 47,182  
  

 

 

    

 

 

 

If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $479,000 and $558,000, respectively, would have been recorded for the three-month periods ended September 30, 2017 and 2016. If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.7 million would have been recorded for each of the nine-month periods ended September 30, 2017 and 2016, respectively. The interest income recognized on the non-accrual loans for the three and nine-month periods ended September 30, 2017 and 2016 was considered immaterial.

 

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Table 12 shows the summary of accruing past due loans 90 days or more as of September 30, 2017 and December 31, 2016:

Table 12: Loans Accruing Past Due 90 Days or More

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands)  

Real estate:

  

Commercial real estate loans

     

Non-farm/non-residential

   $ 16,482      $ 9,530  

Construction/land development

     3,258        3,086  

Agricultural

     —          —    

Residential real estate loans

     

Residential 1-4 family

     4,624        2,996  

Multifamily residential

     1,039        —    
  

 

 

    

 

 

 

Total real estate

     25,403        15,612  

Consumer

     3        21  

Commercial and industrial

     3,771        309  

Agricultural

     6        —    

Other

     —          —    
  

 

 

    

 

 

 

Total loans accruing past due 90 days or more

   $ 29,183      $ 15,942  
  

 

 

    

 

 

 

Our total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.62% and 0.85% as of September 30, 2017 and December 31, 2016, respectively. During the third quarter of 2017, we completed our acquisition of Stonegate which increased our loans accruing past due 90 days or more by $6.3 million as of September 30, 2017.

Allowance for Loan Losses

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

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

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

 

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

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

Between the receipt of the original appraisal and the updated appraisal, we monitor the loan’s repayment history. If the loan is $1.0 million or greater or the total loan relationship is $2.0 million or greater, our policy requires an annual credit review. Our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually.

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

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

Allocations for Criticized and Classified Assets not Individually Evaluated for Impairment. We establish allocations for loans rated “special mention” through “loss” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each loan category to determine the level of dollar allocation.

General Allocations. We establish general allocations for each major loan category. This section also includes allocations to loans, which are collectively evaluated for loss such as residential real estate, commercial real estate, consumer loans and commercial and industrial loans that fall below $2.0 million. The allocations in this section are based on a historical review of loan loss experience and past due accounts. We give consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.

Miscellaneous Allocations. Allowance allocations other than specific, classified, and general are included in our miscellaneous section.

Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment increased by approximately $2.87 billion from $7.08 billion at December 31, 2016 to $9.95 billion at September 30, 2017. During the third quarter of 2017, we completed our acquisition of Stonegate which increased our loans collectively evaluated by $2.37 billion as of September 30, 2017. The percentage of the allowance for loan losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment remained unchanged at 1.08% from December 31, 2016 to September 30, 2017.

 

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Charge-offs and Recoveries. Total charge-offs were $4.4 million for both the three months ended September 30, 2017 and 2016. Total charge-offs decreased to $10.5 million for the nine months ended September 30, 2017, compared to $12.7 million for the same period in 2016. Total recoveries increased to $883,000 for the three months ended September 30, 2017, compared to $844,000 for the same period in 2016. Total recoveries decreased to $2.8 million for the nine months ended September 30, 2017, compared to $2.9 million for the same period in 2016. For the three months ended September 30, 2017, net charge-offs were $3.5 million for Arkansas, $16,000 for Alabama and zero for Centennial CFG, and net recoveries were $16,000 for Florida, equaling a net charge-off position of $3.5 million. For the nine months ended September 30, 2017, net charge-offs were $7.3 million for Arkansas, $201,000 for Florida, $236,000 for Alabama and zero for Centennial CFG, equaling a net charge-off position of $7.7 million. While the 2017 charge-offs and recoveries consisted of many relationships, there was only one individual relationship consisting of a charge-off greater than $1.0 million. This charge-off held a balance of $2.0 million at September 30, 2017.

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.

 

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Table 13 shows the allowance for loan losses, charge-offs and recoveries as of and for the three and nine-month periods ended September 30, 2017 and 2016.

Table 13: Analysis of Allowance for Loan Losses

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Balance, beginning of period

   $ 80,138     $ 74,341     $ 80,002     $ 69,224  

Loans charged off

        

Real estate:

        

Commercial real estate loans:

        

Non-farm/non-residential

     796       741       2,324       2,590  

Construction/land development

     182       181       508       334  

Agricultural

     —         —         127       —    

Residential real estate loans:

        

Residential 1-4 family

     309       1,069       2,512       3,345  

Multifamily residential

     —         435       85       465  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,287       2,426       5,556       6,734  

Consumer

     14       23       158       131  

Commercial and industrial

     2,280       1,388       3,059       4,424  

Agricultural

     —         —         —         —    

Other

     843       514       1,762       1,376  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged off

     4,424       4,351       10,535       12,665  
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged off

        

Real estate:

        

Commercial real estate loans:

        

Non-farm/non-residential

     278       380       988       608  

Construction/land development

     85       74       312       107  

Agricultural

     —         —         —         —    

Residential real estate loans:

        

Residential 1-4 family

     188       140       430       814  

Multifamily residential

     38       8       50       22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     589       602       1,780       1,551  

Consumer

     25       19       91       55  

Commercial and industrial

     140       42       392       656  

Agricultural

     —         —         —         —    

Other

     129       181       566       644  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     883       844       2,829       2,906  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans charged off (recovered)

     3,541       3,507       7,706       9,759  

Provision for loan losses

     35,023       5,536       39,324       16,905  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 111,620     $ 76,370     $ 111,620     $ 76,370  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs (recoveries) to average loans receivable

     0.18     0.20     0.13     0.19

Allowance for loan losses to total loans

     1.09       1.07       1.09       1.07  

Allowance for loan losses to net charge-offs (recoveries)

     795       547       1,083       586  

Allocated Allowance for Loan Losses. We use a risk rating and specific reserve methodology in the calculation and allocation of our allowance for loan losses. While the allowance is allocated to various loan categories in assessing and evaluating the level of the allowance, the allowance is available to cover charge-offs incurred in all loan categories. Because a portion of our portfolio has not matured to the degree necessary to obtain reliable loss data from which to calculate estimated future losses, the unallocated portion of the allowance is an integral component of the total allowance. Although unassigned to a particular credit relationship or product segment, this portion of the allowance is vital to safeguard against the imprecision inherent in estimating credit losses.

 

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The Company’s third quarter earnings were significantly impacted by Hurricane Irma which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10, 2017. While the total impact of this hurricane on Home BancShares’s financial condition and results of operation may not be known for some time, the Company has included in third quarter earnings, certain charges, including the establishment of reserves, related to the hurricane. Based on initial assessments of the potential credit impact and damage to the approximately $2.41 billion in loans receivable we have in the disaster area, the Company has accrued $33.4 million of pre-tax hurricane expenses. The $33.4 million of hurricane expenses include the following items: $32.9 million to establish a storm-related provision for loan losses and a $556,000 charge related to direct damage expenses incurred through September 30, 2017.

The changes for the period ended September 30, 2017 and the year ended December 31, 2016 in the allocation of the allowance for loan losses for the individual types of loans are primarily associated with changes in the ASC 310 calculations, both individual and aggregate, and changes in the ASC 450 calculations. These calculations are affected by changes in individual loan impairments, changes in asset quality, net charge-offs during the period and normal changes in the outstanding loan portfolio, as well any changes to the general allocation factors due to changes within the actual characteristics of the loan portfolio.

Table 14 presents the allocation of allowance for loan losses as of September 30, 2017 and December 31, 2016.

Table 14: Allocation of Allowance for Loan Losses

 

   
     As of September 30, 2017     As of December 31, 2016  
     Allowance
Amount
     % of
loans(1)
    Allowance
Amount
     % of
loans(1)
 
     (Dollars in thousands)  

Real estate:

          

Commercial real estate loans:

          

Non-farm/non-residential

   $ 44,414        44.1   $ 27,695        42.7

Construction/land development

     18,920        16.0       11,522        15.4  

Agricultural

     1,103        0.9       493        1.1  

Residential real estate loans:

          

Residential 1-4 family

     22,156        19.1       14,397        18.3  

Multifamily residential

     3,512        4.8       2,120        4.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     90,105        84.9       56,227        82.1  

Consumer

     467        0.5       398        0.6  

Commercial and industrial

     14,622        12.6       12,756        15.2  

Agricultural

     2,998        0.6       3,790        1.0  

Other

     187        1.4       —          1.1  

Unallocated

     3,241        —         6,831        —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan losses

   $ 111,620        100.0   $ 80,002        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 2.7 years as of September 30, 2017.

As of September 30, 2017 and December 31, 2016, we had $234.9 million and $284.2 million of held-to-maturity securities, respectively. Of the $234.9 million of held-to-maturity securities as of September 30, 2017, $6.1 million were invested in U.S. Government-sponsored enterprises, $78.6 million were invested in mortgage-backed securities and $150.2 million were invested in state and political subdivisions. Of the $284.2 million of held-to-maturity securities as of December 31, 2016, $6.6 million were invested in U.S. Government-sponsored enterprises, $107.8 million were invested in mortgage-backed securities and $169.7 million were invested in state and political subdivisions.

 

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Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were $1.58 billion and $1.07 billion as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017, $891.9 million, or 56.6%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $579.5 million, or 54.0%, of our available-for-sale securities as of December 31, 2016. To reduce our income tax burden, $249.1 million, or 15.8%, of our available-for-sale securities portfolio as of September 30, 2017, was primarily invested in tax-exempt obligations of state and political subdivisions, compared to $216.5 million, or 20.2%, of our available-for-sale securities as of December 31, 2016. Also, we had approximately $397.2 million, or 25.2%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2017, compared to $236.8 million, or 22.1%, of our available-for-sale securities as of December 31, 2016.

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

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

Deposits

Our deposits averaged $7.88 billion and $7.58 billion for the three and nine-month periods ended September 30, 2017. Total deposits as of September 30, 2017 were $10.45 billion. Excluding $2.97 billion of deposits acquired through the 2017 acquisitions, total deposits as of September 30, 2017 were $7.48 billion, for an annualized increase of 10.3% from December 31, 2016. 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. Additionally, we participate in the Certificates of Deposit Account Registry Service (“CDARS”), which provides for reciprocal (“two-way”) transactions among banks for the purpose of giving our customers the potential for multi-million-dollar FDIC insurance coverage. Although classified as brokered deposits for regulatory purposes, funds placed through the CDARS program are our customer relationships that management views as core funding. We also participate in the One-Way Buy Insured Cash Sweep (“ICS”) service, which provides 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.

 

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Table 15 reflects the classification of the brokered deposits as of September 30, 2017 and December 31, 2016.

Table 15: Brokered Deposits

 

     September 30, 2017      December 31, 2016  
     (In thousands)  

Time Deposits

   $ 60,022      $ 70,028  

CDARS

     46,959        26,389  

Insured Cash Sweep and Other Transaction Accounts

     1,023,363        406,120  
  

 

 

    

 

 

 

Total Brokered Deposits

   $ 1,130,344      $ 502,537  
  

 

 

    

 

 

 

During the third quarter of 2017, we completed our acquisition of Stonegate which increased our brokered deposits by $488.2 million as of September 30, 2017.

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.

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds target rate, which is the cost to banks of immediately available overnight funds, was lowered on December 16, 2008 to a historic low of 0.25% to 0%, where it remained until December 16, 2015, when the target rate was increased slightly to 0.50% to 0.25%. Since December 31, 2016, the Federal Funds target rate has increased 75 basis points and is currently at 1.25% to 1.00%.

Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and nine-month periods ended September 30, 2017 and 2016.

Table 16: Average Deposit Balances and Rates

 

     Three Months Ended September 30,  
     2017     2016  
     Average
Amount
     Average
Rate Paid
    Average
Amount
     Average
Rate Paid
 
     (Dollars in thousands)  

Non-interest-bearing transaction accounts

   $ 1,924,933        —     $ 1,663,621        —  

Interest-bearing transaction accounts

     3,973,270        0.56       3,243,984        0.27  

Savings deposits

     539,515        0.10       477,035        0.06  

Time deposits:

          

$100,000 or more

     989,697        0.89       880,098        0.60  

Other time deposits

     454,965        0.48       481,491        0.37  
  

 

 

      

 

 

    

Total

   $ 7,882,380        0.43   $ 6,746,229        0.24
  

 

 

      

 

 

    

 

     Nine Months Ended September 30,  
     2017     2016  
     Average
Amount
     Average
Rate Paid
    Average
Amount
     Average
Rate Paid
 
     (Dollars in thousands)  

Non-interest-bearing transaction accounts

   $ 1,847,843        —     $ 1,596,603        —  

Interest-bearing transaction accounts

     3,792,388        0.46       3,202,095        0.26  

Savings deposits

     523,644        0.09       462,306        0.06  

Time deposits:

          

$100,000 or more

     949,493        0.82       874,648        0.55  

Other time deposits

     465,890        0.44       508,009        0.39  
  

 

 

      

 

 

    

Total

   $ 7,579,258        0.37   $ 6,643,661        0.23
  

 

 

      

 

 

    

 

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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 $28.2 million, or 23.3%, from $121.3 million as of December 31, 2016 to $149.5 million as of September 30, 2017.

FHLB Borrowed Funds

Our FHLB borrowed funds were $1.04 billion and $1.31 billion at September 30, 2017 and December 31, 2016, respectively. During the third quarter of 2017, approximately $300.2 million of FHLB advances matured. Due to the issuance of the $300 million of subordinated notes during the second quarter of 2017, we made the strategic decision to not renew all of the matured advances. At September 30, 2017, $245.0 million and $799.3 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2016, $40.0 million and $1.27 billion of the outstanding balance were issued as short-term and long-term advances, respectively. Our remaining FHLB borrowing capacity was $1.23 billion and $718.2 million as of September 30, 2017 and December 31, 2016, respectively. Maturities of borrowings as of September 30, 2017 include: 2017 – $75.3 million; 2018 – $409.5 million; 2019 – $143.1 million; 2020 – $146.4 million; 2021 – zero; after 2021 – $25.0 million. Expected maturities will 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 $367.8 million as of September 30, 2017. As of December 31, 2016, subordinated debentures consisted only of $60.8 million of guaranteed payments on trust preferred securities.

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 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 $2.21 billion at September 30, 2017 compared to $1.33 billion at December 31, 2016. The increase in stockholders’ equity is primarily associated with the $77.5 million and $742.3 million of common stock issued to the GHI and Stonegate shareholders, respectively, plus the $70.5 million increase in retained earnings combined with $3.5 million of comprehensive income and $5.0 million of share-based compensation offset by the repurchase of $19.5 million of our common stock during the first nine months of 2017. The annualized improvement in stockholders’ equity for the first nine months of 2017 excluding the $819.8 million of common stock issued to both the GHI and Stonegate shareholders was 6.0%. As of September 30, 2017 and December 31, 2016, our equity to asset ratio was 15.48% and 13.53%, respectively. Book value per common share was $12.71 at September 30, 2017 compared to $9.45 at December 31, 2016. The acquisition of Stonegate added $2.45 per share to book value per common share as of September 30, 2017.

 

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Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.11 per share and $0.09 per share for the three-month periods ended September 30, 2017 and 2016, respectively. The common stock dividend payout ratio for the three months ended September 30, 2017 and 2016 was 106.03% and 28.97%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2017 and 2016 was 36.93% and 27.58%, respectively. For the fourth quarter of 2017, the Board of Directors declared a regular $0.11 per share quarterly cash dividend payable December 6, 2017, to shareholders of record November 15, 2017.

Stock Repurchase Program. On January 20, 2017, our Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of our common stock under our previously approved stock repurchase program, which brought the total amount of authorized shares to repurchase to 9,752,000 shares. During the first nine months of 2017, we utilized a portion of this stock repurchase program. We repurchased a total of 800,000 shares with a weighted-average stock price of $24.44 per share during the first nine months of 2017. Shares repurchased to date under the program total 4,467,064 shares. The remaining balance available for repurchase is 5,284,936 shares at September 30, 2017.

Liquidity and Capital Adequacy Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of September 30, 2017 and December 31, 2016, we met all regulatory capital adequacy requirements to which we were subject.

On April 3, 2017, the Company completed an underwritten public offering of $300 million in aggregate principal amount of its Notes which 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.

Due to the timing of the closing of our acquisition of Stonegate, our reported leverage ratio is artificially inflated as of September 30, 2017 since Stonegate’s assets are included in the average asset balance for only four days during the quarter. Had the acquisition closed at the beginning of the third quarter, our leverage ratio would have been approximately 9.89% on a pro-forma basis as of September 30, 2017.

 

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Table 17 presents our risk-based capital ratios on a consolidated basis as of September 30, 2017 and December 31, 2016.

Table 17: Risk-Based Capital

 

     As of
September 30,
2017
    As of
December 31,
2016
 
     (Dollars in thousands)  

Tier 1 capital

    

Stockholders’ equity

   $ 2,206,716     $ 1,327,490  

Goodwill and core deposit intangibles, net

     (969,258     (388,336

Unrealized (gain) loss on available-for-sale securities

     (3,889     (400

Deferred tax assets

     —         —    
  

 

 

   

 

 

 

Total common equity Tier 1 capital

     1,233,569       938,754  

Qualifying trust preferred securities

     68,461       59,000  
  

 

 

   

 

 

 

Total Tier 1 capital

     1,302,030       997,754  
  

 

 

   

 

 

 

Tier 2 capital

    

Qualifying subordinated notes

     297,172       —    

Qualifying allowance for loan losses

     111,620       80,002  
  

 

 

   

 

 

 

Total Tier 2 capital

     408,792       80,002  
  

 

 

   

 

 

 

Total risk-based capital

   $ 1,710,822     $ 1,077,756  
  

 

 

   

 

 

 

Average total assets for leverage ratio

   $ 9,884,301     $ 9,388,812  
  

 

 

   

 

 

 

Risk weighted assets

   $ 11,361,791     $ 8,308,468  
  

 

 

   

 

 

 

Ratios at end of period

    

Common equity Tier 1 capital

     10.86     11.30

Leverage ratio

     13.17       10.63  

Tier 1 risk-based capital

     11.46       12.01  

Total risk-based capital

     15.06       12.97  

Minimum guidelines – Basel III phase-in schedule

    

Common equity Tier 1 capital

     5.75     5.125

Leverage ratio

     4.00       4.000  

Tier 1 risk-based capital

     7.25       6.625  

Total risk-based capital

     9.25       8.625  

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.

 

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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, due to the application of purchase accounting from our significant number of historical acquisitions (especially Liberty and Stonegate), we believe certain non-GAAP measures and ratios that exclude the impact of these items are useful to the investors and users of our financial statements to evaluate our performance, including net interest margin and efficiency ratio.

Because of our significant number of historical acquisitions, our net interest margin was impacted by accretion and amortization of the fair value adjustments recorded in purchase accounting. The accretion and amortization affect certain operating ratios as we accrete loan discounts to interest income and amortize premiums and discounts on time deposits to interest expense.

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. In Tables 18 through 20 below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated:

Table 18: Average Yield on Loans

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Interest income on loans receivable – FTE

   $ 113,239     $ 103,135     $ 332,072     $ 300,839  

Purchase accounting accretion

     7,068       11,576       23,019       32,590  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP interest income on loans receivable – FTE

   $ 106,171     $ 91,559     $ 309,053     $ 268,249  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average loans

   $ 7,938,716     $ 7,027,634     $ 7,785,925     $ 6,909,240  

Average purchase accounting loan discounts (1)

     97,978       115,766       97,158       131,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average loans (non-GAAP)

   $ 8,036,694     $ 7,143,400     $ 7,883,083     $ 7,040,746  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average yield on loans (reported)

     5.66     5.84     5.70     5.82

Average contractual yield on loans (non-GAAP)

     5.24       5.10       5.24       5.09  

 

(1) Balance includes $158.0 million and $108.0 million of discount for credit losses on purchased loans as of September 30, 2017 and 2016, respectively.

Table 19: Average Cost of Deposits

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Interest expense on interest-bearing deposits

   $ 8,535     $ 4,040     $ 20,831     $ 11,528  

Amortization of time deposit (premiums)/discounts, net

     106       361       300       1,094  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP interest expense on interest-bearing deposits

   $ 8,641     $ 4,401     $ 21,131     $ 12,622  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average interest-bearing deposits

   $ 5,957,447     $ 5,082,608     $ 5,731,415     $ 5,047,058  

Average unamortized CD (premium)/discount, net

     (733     (732     (721     (1,096
  

 

 

   

 

 

   

 

 

   

 

 

 

Average interest-bearing deposits (non-GAAP)

   $ 5,956,714     $ 5,081,876     $ 5,730,694     $ 5,045,962  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average cost of deposits (reported)

     0.57     0.32     0.49     0.31

Average contractual cost of deposits (non-GAAP)

     0.58       0.34       0.49       0.33  

 

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Table 20: Net Interest Margin

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Net interest income – FTE

   $ 108,615     $ 105,522     $ 324,809     $ 308,567  

Total purchase accounting accretion

     7,174       11,937       23,319       33,684  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net interest income – FTE

   $ 101,441     $ 93,585     $ 301,490     $ 274,883  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average interest-earning assets

   $ 9,794,999     $ 8,646,026     $ 9,584,607     $ 8,530,362  

Average purchase accounting loan discounts (1)

     97,978       115,766       97,158       131,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average interest-earning assets (non-GAAP)

   $ 9,892,977     $ 8,761,792     $ 9,681,765     $ 8,661,868  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (reported)

     4.40     4.86     4.53     4.83

Net interest margin (non-GAAP)

     4.07       4.25       4.16       4.24  

 

(1) Balance includes $158.0 million and $108.0 million of discount for credit losses on purchased loans as of September 30, 2017 and 2016, respectively.

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

Earnings excluding non-fundamental items is a meaningful non-GAAP financial measure for management, as it excludes non-fundamental items such as merger expenses and/or gains and losses. Management believes the exclusion of these non-fundamental 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 fundamental financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these non-fundamental items to be relevant to ongoing financial performance.

 

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In Table 21 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 21: Earnings Excluding Non-Fundamental Items

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
     (Dollars in thousands)  

GAAP net income available to common shareholders (A)

   $ 14,821      $ 43,620      $ 111,774      $ 128,556  

Non-fundamental items:

           

Gain on acquisitions

     —          —          (3,807      —    

Merger expenses

     18,227        —          25,743        —    

FDIC loss share buy-out

     —          3,849        —          3,849  

Hurricane expenses (1)

     33,445        —          33,445        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-fundamental items

     51,672        3,849        55,381        3,849  

Tax-effect of non-fundamental items (2)

     20,045        1,510        22,626        1,510  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-fundamental items after-tax (B)

     31,627        2,339        32,755        2,339  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings excluding non-fundamental items (C)

   $ 46,448      $ 45,959      $ 144,529      $ 130,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding (D)

     144,987        140,703        143,839        140,685  

GAAP diluted earnings per share: A/D

   $ 0.10      $ 0.31      $ 0.78      $ 0.91  

Non-fundamental items after-tax: B/D

     0.22        0.02        0.22        0.02  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share excluding non-

fundamental items: C/D

   $ 0.32      $ 0.33      $ 1.00      $ 0.93  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Hurricane expenses includes $32,889 of provision for loan losses and $556 of damage expense related to Hurricane Irma.
(2) Effective tax rate of 39.225%, adjusted for non-taxable gain on acquisition and non-deductible merger-related costs.

We had $980.1 million, $396.3 million, and $397.1 million total goodwill, core deposit intangibles and other intangible assets as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity excluding intangible amortization and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings per share, tangible book value, return on average assets, return on average equity, and equity to assets, are presented in Tables 22 through 25, respectively.

Table 22: Tangible Book Value Per Share

 

     As of
September 30, 2017
     As of
December 31, 2016
 
     (In thousands, except per share data)  

Book value per share: A/B

   $ 12.71      $ 9.45  

Tangible book value per share: (A-C-D)/B

     7.06        6.63  

(A) Total equity

   $ 2,206,716      $ 1,327,490  

(B) Shares outstanding

     173,666        140,472  

(C) Goodwill

   $ 929,129      $ 377,983  

(D) Core deposit and other intangibles

     50,982        18,311  

 

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Table 23: Return on Average Assets Excluding Intangible Amortization

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Return on average assets: A/D

     0.54     1.81     1.41     1.81

Return on average assets excluding intangible amortization: B/(D-E)

     0.59       1.91       1.49       1.91  

Return on average assets excluding gain on acquisitions, merger expenses, FDIC loss share buy-out expense and hurricane expenses: (A+C)/D

     1.70       1.90       1.82       1.84  

(A) Net income

   $ 14,821     $ 43,620     $ 111,774     $ 128,556  

Intangible amortization after-tax

     551       463       1,566       1,440  
  

 

 

   

 

 

   

 

 

   

 

 

 

(B) Earnings excluding intangible amortization

   $ 15,372     $ 44,083     $ 113,340     $ 129,996  
  

 

 

   

 

 

   

 

 

   

 

 

 

(C) Non-fundamental items after-tax

   $ 31,627     $ 2,339     $ 32,755     $ 2,339  

(D) Average assets

     10,853,559       9,602,363       10,617,917       9,498,915  

(E) Average goodwill, core deposits and other intangible assets

     462,799       397,429       440,465       398,195  

Table 24: Return on Average Tangible Equity Excluding Intangible Amortization

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Return on average equity: A/D

     3.88     13.62     10.33     13.83

Return on average tangible equity excluding intangible amortization: B/(D-E)

     5.80       20.01       15.06       20.59  

Return on average equity excluding gain on acquisitions, merger expenses, FDIC loss share buy-out expense and hurricane expenses: (A+C)/D

     12.17       14.35       13.36       14.08  

(A) Net income

   $ 14,821     $ 43,620     $ 111,774     $ 128,556  

(B) Earnings excluding intangible amortization

     15,372       44,083       113,340       129,996  

(C) Non-fundamental items after-tax

     31,627       2,339       32,755       2,339  

(D) Average equity

     1,513,829       1,274,077       1,446,740       1,241,594  

(E) Average goodwill, core deposits and other intangible assets

     462,799       397,429       440,465       398,195  

Table 25: Tangible Equity to Tangible Assets

 

     As of
September 30,
2017
    As of
December 31,
2016
 
     (Dollars in thousands)  

Equity to assets: B/A

     15.48     13.53

Tangible equity to tangible assets: (B-C-D)/(A-C-D)

     9.24       9.89  

(A) Total assets

   $ 14,255,967     $ 9,808,465  

(B) Total equity

     2,206,716       1,327,490  

(C) Goodwill

     929,129       377,983  

(D) Core deposit and other intangibles

     50,982       18,311  

 

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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 core efficiency ratio is a meaningful non-GAAP measure for management, as it excludes non-core 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 non-core items such as merger expenses and/or gains and losses. In Table 26 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 26: Core Efficiency Ratio

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
     (Dollars in thousands)  

Net interest income (A)

   $ 106,769     $ 103,653     $ 318,936     $ 302,751  

Non-interest income (B)

     21,457       22,014       72,344       63,223  

Non-interest expense (C)

     70,846       51,026       176,990       144,261  

FTE Adjustment (D)

     1,846       1,869       5,873       5,816  

Amortization of intangibles (E)

     906       762       2,576       2,370  

Non-core items:

        

Non-interest income:

        

Gain on acquisitions

   $ —       $ —       $ 3,807     $ —    

Gain (loss) on OREO, net

     335       132       849       (713

Gain (loss) on SBA loans

     163       364       738       443  

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

     (1,337     (86     (962     701  

Gain (loss) on securities, net

     136       —         939       25  

Other income(1)

     —         —         —         925  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-core non-interest income (F)

   $ (703   $ 410     $ 5,371     $ 1,381  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Merger expenses

   $ 18,227     $ —       $ 25,743     $ —    

FDIC loss share buy-out

     —         3,849       —         3,849  

Hurricane damage expense

     556       —         556       —    

Other expense(2)

     —         —         47       1,914  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-core non-interest expense (G)

   $ 18,783     $ 3,849     $ 26,346     $ 5,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio (reported): ((C-E)/(A+B+D))

     53.77     39.41     43.92     38.16

Core efficiency ratio (non-GAAP): ((C-E-G)/(A+B+D-F))

     39.12       36.51       37.79       36.75  

 

(3) Amount includes recoveries on historical losses.
(4) Amount includes vacant properties write-downs.

Recently Issued Accounting Pronouncements

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

 

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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Liquidity and Market Risk Management

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

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

Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold, available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs. As of September 30, 2017, our cash and cash equivalents were $552.3 million, or 3.9% of total assets, compared to $216.6 million, or 2.2% of total assets, as of December 31, 2016. Our available-for-sale investment securities and federal funds sold were $1.58 billion and $1.07 billion as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017, our investment portfolio was comprised of approximately 73.2% or $1.32 billion of securities which mature in less than five years. As of September 30, 2017 and December 31, 2016, $1.13 billion and $1.07 billion, respectively, of securities were pledged as collateral for various public fund deposits and securities sold under agreements to repurchase.

On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of September 30, 2017, our total deposits were $10.45 billion, or 73.3% of total assets, compared to $6.94 billion, or 70.8% of total assets, as of December 31, 2016. 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 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, 2017 and December 31, 2016, we could have borrowed up to $105.9 million and $104.6 million, respectively, on a secured basis from the Federal Reserve, up to $50.0 million from Bankers’ Bank on an unsecured basis, and up to $45.0 million in the aggregate from other financial institutions on an unsecured basis. The unsecured lines may be terminated by the respective institutions at any time.

The lines of credit we maintain with the FHLB can provide us with both short-term and long-term forms of liquidity on a secured basis. FHLB borrowed funds were $1.04 billion and $1.31 billion at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, $245.0 million and $799.3 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2016, $40.0 million and $1.27 billion of the outstanding balance were issued as short-term and long-term advances, respectively. Our FHLB borrowing capacity was $1.23 billion and $718.2 million as of September 30, 2017 and December 31, 2016, respectively.

On April 3, 2017, the Company completed an underwritten public offering of $300 million in aggregate principal amount of its Notes which 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.

 

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For purposes of determining our liquidity position, we use the primary liquidity ratio; a measure of liquidity calculated as the excess Federal Reserve Bank balances plus federal funds sold plus unpledged securities divided by total liabilities. We also use the alternative liquidity ratio which is calculated as cash and due from banks plus federal funds sold plus unpledged securities divided by total liabilities. Our primary liquidity ratio and alternative liquidity ratio were 7.76% and 10.38%, respectively, as of September 30, 2017. Management believes our current liquidity position is adequate to meet foreseeable liquidity requirements.

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 proportional 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.

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

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

Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of September 30, 2017, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 8.8%.

During this period, the amount of change our asset base realizes in relation to the total change in market interest rates is higher than that of the liability base. As a result, our net interest income will have a positive effect in an environment of modestly rising rates.

We have a portion of our securities portfolio invested in mortgage-backed securities. Mortgage-backed securities are included based on their final maturity date. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

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Table 26 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of September 30, 2017.

Table 26: 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

   $ 354,367     $ —       $ —       $ —       $ —       $ —       $ —       $ 354,367  

Federal funds sold

     4,545       —         —         —         —         —         —         4,545  

Investment securities

     313,284       65,991       92,746       122,662       232,241       383,048       600,658       1,810,630  

Loans receivable

     4,022,711       579,056       629,589       1,120,816       1,389,219       2,150,212       394,590       10,286,193  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     4,694,907       645,047       722,335       1,243,478       1,621,460       2,533,260       995,248       12,455,735  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

                

Interest-bearing transaction and savings deposits

     1,209,692       519,106       778,659       1,557,318       781,773       560,261       935,074       6,341,883  

Time deposits

     253,409       213,728       272,149       458,790       223,177       129,251       918       1,551,422  

Securities sold under repurchase agreements

     149,531       —         —         —         —         —         —         149,531  

FHLB and other borrowed funds

     570,021       41       34,048       120,337       173,079       146,807       —         1,044,333  

Subordinated debentures

     70,662       —         —         —         —         297,173       —         367,835  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,253,315       732,875       1,084,856       2,136,445       1,178,029       1,133,492       935,992       9,455,004  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate sensitivity gap

   $ 2,441,592     $ (87,828   $ (362,521   $ (892,967   $ 443,431     $ 1,399,768     $ 59,256     $ 3,000,731  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest rate sensitivity gap

   $ 2,441,592     $ 2,353,764     $ 1,991,243     $ 1,098,276     $ 1,541,707     $ 2,941,475     $ 3,000,731    

Cumulative rate sensitive assets to rate sensitive liabilities

     208.4     178.8     148.9     117.7     120.9     134.5     131.7  

Cumulative gap as a % of total earning assets

     19.6     18.9     16.0     8.8     12.4     23.6     24.1  

 

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.

As permitted by SEC guidance, management excluded from its assessment the operations of the Stonegate Bank acquisition made during 2017, which is described in Note 2 of the Consolidated Financial Statements. The total assets of the entity acquired in this acquisition represented approximately 20% of the Company’s total consolidated assets as of September 30, 2017.

Changes in Internal Control Over Financial Reporting

On September 26, 2017, we completed our acquisition of Stonegate Bank, and as a result, we extended our oversight and monitoring processes that support our internal control over financial reporting during the third quarter of 2017, to include the operations of Stonegate. Otherwise, there were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2017, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 factors 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, 2016. 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.

Risks Related to Our Industry

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.

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 and certain provisions of the Dodd-Frank Act. The final rule applies to all banking organizations. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum Tier 1 risk-based capital requirement (6% of risk-weighted assets) and assigns higher risk weightings (150%) to exposures that are more than 90 days past due or are on non-accrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also 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 final rule became effective for our bank subsidiary and us on January 1, 2015. The capital conservation buffer requirement began being phased in on January 1, 2016, and the full capital conservation buffer requirement will be effective January 1, 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. In addition, if the banking organization grows above $15 billion as a result of an acquisition, or organically grows above $15 billion and then makes an acquisition, its trust preferred securities will be included as Tier 2 capital rather than Tier 1 capital.

While our current capital levels well exceed the revised capital requirements and we are currently under the $15 billion threshold, our capital levels could decrease in the future as a result of factors such as acquisitions, faster than anticipated growth, reduced earnings levels, operating losses, exceeding the $15 billion threshold and other factors. The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in our inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.

Risks Related to Our Business

The total impact of Hurricane Irma on our financial condition and results of operation may not be known for some time and may negatively impact our future earnings.

Hurricane Irma caused significant property damage in our South Florida market areas, particularly in the Florida Keys and southwestern Florida, and resulted in widespread disruptions in power, transportation and the local economies of these areas, as well as less extensive damage throughout other parts of the state of Florida. A substantial amount of our loans are secured by real estate located in the market areas affected by this powerful storm. On most collateral dependent loans, our exposure is limited due to the existence of flood and property insurance. We monitor our borrower’s insurance coverage on a regular basis and force place insurance, as necessary.

 

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We are continuing to evaluate Hurricane Irma’s impact on our customers and our business, including our properties, assets and loan portfolios. However, we expect to experience increased loan delinquencies and loan restructurings as a result of the storm, particularly in the short term as customers undertake recovery and clean-up efforts, including the submission of insurance claims. Based on our initial assessments of the potential credit impact and damage, we accrued $33.4 million of pre-tax hurricane expenses during the third quarter of 2017. The $33.4 million of hurricane expenses includes $32.9 million to establish a storm-related provision for loan losses and a $556,000 charge related to direct damage expenses incurred through September 30, 2017. In addition, in order to assist our customers during this crisis, we are waiving various deposit and loan fees that would have otherwise been assessed.

Because the total impact of the storm may not be known for some time, it is impossible to know at this time whether our current accrual for hurricane-related expenses will be sufficient to cover our actual losses. We may experience more extensive loan delinquencies and restructurings than we currently expect, which could negatively impact our cash flow and, if not timely cured, increase our non-performing assets and reduce our net interest income. Such increases could require us to further increase our provision for loan losses and result in higher loan charge-offs, either of which could have a material adverse impact on our results of operations and financial condition in future periods.

Risks Related to Our Acquisition of Stonegate Bank

Our financial results and condition could be adversely affected if we fail to realize the expected benefits of the Stonegate acquisition or it takes longer than expected to realize those benefits.

Following our acquisition of Stonegate Bank (“Stonegate”), on September 26, 2017, we began the process of integrating the businesses of Stonegate. We have plans to complete the overall integration of the two businesses during the first quarter of 2018. This integration process could result in the loss of key employees, the disruption of ongoing businesses and the loss of customers and their business and deposits. It may also divert management attention and resources from other operations and limit the Company’s ability to pursue other acquisitions. There is no assurance that we will realize the cost savings and other financial benefits of the acquisition when and in the amounts expected.

We may incur losses on loans, securities and other acquired assets of Stonegate that are materially greater than reflected in our preliminary fair value adjustments.

We accounted for the Stonegate acquisition under the purchase method of accounting, recording the acquired assets and liabilities of Stonegate at fair value based on preliminary purchase accounting adjustments. Under purchase accounting, we have until one year after the acquisition to finalize the fair value adjustments, meaning we could materially adjust until then the preliminary fair value estimates of Stonegate’s assets and liabilities based on new or updated information. As of September 30, 2017, the purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. We will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

As of September 30, 2017, we recorded at fair value all credit-impaired loans acquired in the merger of Stonegate Bank into Centennial Bank based on the present value of their expected cash flows. We estimated cash flows using internal credit, interest rate and prepayment risk models using assumptions about matters that are inherently uncertain. We may not realize the estimated cash flows or fair value of these loans. In addition, although the difference between the pre-merger carrying value of the credit-impaired loans and their expected cash flows—the “non-accretable difference”—is available to absorb future charge-offs, we may be required to increase our allowance for credit losses and related provision expense because of subsequent additional credit deterioration in these loans.

 

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

During the three months ended September 30, 2017, the Company utilized a portion of its stock repurchase program last amended and approved by the Board of Directors on January 20, 2017. This program authorized the repurchase of 9,752,000 shares of the Company’s common stock. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

 

Period

   Number of
Shares
Purchased
     Average Price
Paid Per Share
Purchased
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans

or Programs
     Maximum
Number of
Shares That

May Yet Be
Purchased

Under the Plans
or Programs(1)
 

July 1 through July 31, 2017

     —        $ —          —          5,664,936  

August 1 through August 31, 2017

     380,000        24.36        380,000        5,284,936  

September 1 through September 30, 2017

     —          —          —          5,284,936  
  

 

 

       

 

 

    

Total

     380,000           380,000     
  

 

 

       

 

 

    

 

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

 

Item 3: Defaults Upon Senior Securities

Not applicable.

 

Item 4: Mine Safety Disclosures

Not applicable.

 

Item 5: Other Information

Not applicable.

 

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Item 6: Exhibits

 

Exhibit No.

    
  2.1    Agreement and Plan of Merger by and among Home BancShares, Inc., Centennial Bank, Giant Holdings, Inc., and Landmark Bank, N.A., dated November 7, 2016. (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K/A filed on November 10, 2016)
  2.2    Amendment to Agreement and Plan of Merger by and among Home BancShares, Inc., Centennial Bank, Giant Holdings, Inc., and Landmark Bank, N.A., dated December 7, 2016. (incorporated by reference to Appendix A of Home BancShares’s Registration Statement on Form S-4 (File No. 333-214957), as amended)
  2.3    Acquisition Agreement By and Between Home BancShares, Inc. and Bank of Commerce Holdings, Inc., dated December  1, 2016 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on December 7, 2016)
  2.4    Agreement and Plan of Merger by and among Home BancShares, Inc., Centennial Bank and Stonegate Bank, dated March  27, 2017 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on March 27, 2017)
  3.1    Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit  3.1 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  3.2    Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit  3.2 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  3.3    Second Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit  3.3 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  3.4    Third Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit  3.4 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  3.5    Fourth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit  3.1 of Home BancShares’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 8, 2007)
  3.6    Fifth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement on Form S-3 (File No. 333-157165))
  3.7    Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series  A, filed with the Secretary of State of the State of Arkansas on January 14, 2009 (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K, filed on January  21, 2009)
  3.8    Seventh Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K, filed on April 19, 2013)
  3.9    Eighth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares Current Report on Form 8-K filed on April 22, 2016)
  3.10    Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit  3.5 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  4.1    Specimen Stock Certificate representing Home BancShares, Inc. Common Stock (incorporated by reference to Exhibit  4.6 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
  4.2    Instruments defining the rights of security holders including indentures. Home BancShares hereby agrees to furnish to the SEC upon request copies of instruments defining the rights of holders of long-term debt of Home BancShares and its consolidated subsidiaries. No issuance of debt exceeds ten percent of the assets of Home BancShares and its subsidiaries on a consolidated basis.
12.1    Computation of Ratios of Earnings to Fixed Charges*
15    Awareness of Independent Registered Public Accounting Firm*

 

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  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    XBRL Instance Document*
101.SCH    XBRL Taxonomy Extension Schema Document*
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB    XBRL Taxonomy Extension Label Linkbase Document*
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document*

 

* Filed herewith

 

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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 7, 2017     /s/ C. Randall Sims
    C. Randall Sims, Chief Executive Officer

 

Date: November 7, 2017     /s/ Brian S. Davis
    Brian S. Davis, Chief Financial Officer

 

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