HOME BANCSHARES INC - FORM 10-K

HOME BANCSHARES INC - FORM 10-K - February 27, 2018

Attached files

Attached files

file	filename
EX-32.2 - EX-32.2 - HOME BANCSHARES INC	d523621dex322.htm
EX-32.1 - EX-32.1 - HOME BANCSHARES INC	d523621dex321.htm
EX-31.2 - EX-31.2 - HOME BANCSHARES INC	d523621dex312.htm
EX-31.1 - EX-31.1 - HOME BANCSHARES INC	d523621dex311.htm
EX-23.1 - EX-23.1 - HOME BANCSHARES INC	d523621dex231.htm
EX-12.1 - EX-12.1 - HOME BANCSHARES INC	d523621dex121.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2017

☐	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)

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


None		N/A
Title of each class		Name of each exchange on which registered

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

Common Stock, par value $0.01 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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):

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 ☒

The aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates on June 30, 2017, was $3.16 billion based upon the last trade price as reported on the NASDAQ Global Select Market of $24.90.

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: 173,784,964 shares as of February 21, 2018.

Documents incorporated by reference: Part III is incorporated by reference from the registrant’s Proxy Statement relating to its 2018 Annual Meeting to be held on April 19, 2018.

HOME BANCSHARES, INC.

FORM 10-K

December 31, 2017

INDEX


		Page No.

PART I:

Item 1.	Business		5-27

Item 1A.	Risk Factors		27-41

Item 1B.	Unresolved Staff Comments		41

Item 2.	Properties		42

Item 3.	Legal Proceedings		42

Item 4.	Mine Safety Disclosure		42

PART II:

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		43-45

Item 6.	Selected Financial Data		46-47

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		48-97

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		98-101

Item 8.	Consolidated Financial Statements and Supplementary Data		102-169

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		170

Item 9A.	Controls and Procedures		170

Item 9B.	Other Information		170

PART III:

Item 10.	Directors, Executive Officers and Corporate Governance		171

Item 11.	Executive Compensation		171

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		171

Item 13.	Certain Relationships and Related Transactions, and Director Independence		171

Item 14.	Principal Accounting Fees and Services		171

PART IV:

Item 15.	Exhibits, Financial Statement Schedules		172-174

Signatures			175

Consent and Certifications			After page 175

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

diversion of management time on acquisition-related issues;

•

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

•

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

•

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

•

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

•

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

•

the effects of terrorism and efforts to combat it;

•

political instability;

•

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

•

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

•

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

•

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

•

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

•

higher defaults on our loan portfolio than we expect; and

•

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

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see “Risk Factors”.

PART I

Item 1. BUSINESS

Company Overview

Home BancShares, Inc. (“Home BancShares”, which may also be referred to in this document as “we”, “us” or the “Company”) is a Conway, Arkansas headquartered bank holding company registered under the federal Bank Holding Company Act of 1956. The Company’s common stock is traded through the NASDAQ Global Select Market under the symbol “HOMB”. We are primarily engaged in providing a broad range of commercial and retail banking and related financial services to businesses, real estate developers and investors, individuals and municipalities through our wholly owned community bank subsidiary – Centennial Bank. Centennial Bank has branch locations in Arkansas, Florida, South Alabama and New York City. Although the Company has a diversified loan portfolio, at December 31, 2017 and 2016, commercial real estate loans represented 61.8% and 59.1% of gross loans and 289.6% and 328.9% of total stockholders’ equity, respectively. The Company’s total assets, total deposits, total revenue and net income for each of the past three years are as follows:


	As of or for the Years Ended December 31,
	2017		2016		2015
			(In thousands)
Total assets	$	14,449,760	$	9,808,465	$	9,289,122
Total deposits		10,388,502		6,942,427		6,438,509
Total revenue (interest income plus non-interest income)		619,887		523,588		442,934
Net income		135,083		177,146		138,199

Home BancShares acquires, organizes and invests in community banks that serve attractive markets. Our community banking team is built around experienced bankers with strong local relationships. The Company was formed in 1998 by an investor group led by John W. Allison, our Chairman, and Robert H. “Bunny” Adcock, Jr., our Vice Chairman. After obtaining a bank charter, we established First State Bank in Conway, Arkansas, in 1999. We acquired Community Bank, Bank of Mountain View and Centennial Bank in 2003, 2005 and 2008, respectively. Home BancShares and its founders were also involved in the formation of Twin City Bank and Marine Bank, both of which we acquired in 2005. During 2008 and 2009, we merged all of our banks into one charter and adopted Centennial Bank as the common name. In 2010, we acquired six banks in Florida through Federal Deposit Insurance Corporation (“FDIC”) assisted transactions with loss share, including Old Southern Bank, Key West Bank, Coastal Community Bank, Bayside Savings Bank, Wakulla Bank and Gulf State Community Bank. In 2012, we acquired three banks headquartered in Florida including Vision Bank, Premier Bank and Heritage Bank of Florida (“Heritage”). Heritage was acquired through an FDIC-assisted transaction without loss share. In 2013, we acquired Liberty Bancshares, Inc. headquartered in Jonesboro, Arkansas. During 2014, we acquired Florida Traditions Bank headquartered in Dade City, Florida and Broward Financial Holdings, Inc. headquartered in Fort Lauderdale, Florida. During 2015, we acquired Doral Bank’s Florida Panhandle operations (“Doral Florida”), a pool of national commercial real estate loans, and Florida Business BancGroup, Inc., headquartered in Tampa, Florida. In connection with the acquisition of the pool of national commercial real estate loans, we opened a loan production office in New York City, which was converted to a branch in 2016, and created Centennial Commercial Finance Group (“Centennial CFG”). During 2017, we completed the acquisitions of Giant Holdings, Inc. headquartered in Fort Lauderdale, Florida, The Bank of Commerce headquartered in Sarasota, Florida and Stonegate Bank headquartered in Pompano Beach, Florida and opened a loan production office in Los Angeles, California under the management of Centennial CFG.

We believe many individuals and businesses prefer banking with a locally managed community bank capable of providing flexibility and quick decisions. The execution of our community banking strategy has allowed us to rapidly build our network of banking operations through acquisitions. The following summary provides additional details concerning our acquisitions during the previous five fiscal years.

Liberty Bancshares, Inc. – On October 24, 2013, the Company completed the acquisition of all of the issued and outstanding shares of common stock of Liberty Bancshares, Inc. (“Liberty”), parent company of Liberty Bank of Arkansas (“Liberty Bank”), and merged Liberty Bank into Centennial Bank. Under the terms of the Agreement and Plan of Merger dated June 25, 2013 among Home BancShares, Centennial Bank, Liberty, Liberty Bank and an acquisition subsidiary of Home BancShares, the shareholders of Liberty received approximately $290.1 million of the Company’s common stock valued at the time of the closing, plus approximately $30.0 million in cash, in exchange for all outstanding shares of Liberty common stock. The Company also repurchased all of Liberty’s SBLF preferred stock held by the U.S. Treasury shortly after the closing.

Prior to the acquisition, Liberty operated 46 banking offices located in Northeast Arkansas, Northwest Arkansas and Western Arkansas. Including the effects of the purchase accounting adjustments, Centennial Bank acquired approximately $2.82 billion in assets, approximately $1.73 billion in loans including loan discounts and approximately $2.13 billion of deposits.

Florida Traditions Bank – On July 17, 2014, the Company completed the acquisition of all of the issued and outstanding shares of common stock of Florida Traditions Bank (“Traditions”) and merged Traditions into Centennial Bank. Under the terms of the Agreement and Plan of Merger dated April 25, 2014, by and among Home BancShares, Centennial Bank, and Traditions, the shareholders of Traditions received approximately $39.5 million of the Company’s common stock valued at the time of closing, in exchange for all outstanding shares of Traditions common stock.

Prior to the acquisition, Traditions operated eight banking locations in Central Florida, including its main office in Dade City, Florida. Including the effects of the purchase accounting adjustments, Traditions had $310.5 million in total assets, $241.6 million in loans after $8.5 million of loan discounts, and $267.3 million in deposits.

Broward Financial Holdings, Inc. – On October 23, 2014, the Company completed its acquisition of all of the issued and outstanding shares of common stock of Broward Financial Holdings, Inc. (“Broward”), parent company of Broward Bank of Commerce (“Broward Bank”), and merged Broward Bank into Centennial Bank. Under the terms of the Agreement and Plan of Merger dated July 30, 2014 by and among Home BancShares, Centennial Bank, Broward, Broward Bank and an acquisition subsidiary of Home BancShares, the shareholders of Broward received approximately $30.2 million of the Company’s common stock valued as of the closing date, plus $3.3 million in cash, in exchange for all outstanding shares of Broward common stock. The Company also agreed to pay the Broward shareholders at an undetermined date up to approximately $751,000 in additional consideration, the amount and timing of which, if any, was dependent on future payments received or losses incurred by Centennial Bank from certain current Broward Bank loans. During the first quarter of 2016, we determined and reached an agreement with the Broward shareholders that no additional consideration is owed or will be paid to the Broward shareholders.

Prior to the acquisition, Broward Bank operated two banking locations in Fort Lauderdale, Florida. Including the effects of the purchase accounting adjustments, Broward had approximately $184.4 million in total assets, $121.1 million in total loans after $3.0 million of loan discounts, and $134.2 million in deposits.

Doral Bank’s Florida Panhandle Operations – On February 27, 2015, Centennial Bank, acquired in an FDIC-assisted transaction all the deposits and substantially all the assets of the Florida Panhandle operations of Doral Bank of San Juan, Puerto Rico (“Doral Florida”) through an alliance agreement with Banco Popular of Puerto Rico (“Popular”), who was the successful lead bidder to acquire the assets and liabilities of the failed Doral Bank from the FDIC, as receiver for Doral Bank. Including the effects of the purchase accounting adjustments, the acquisition provided the Company with loans of approximately $37.9 million net of loan discounts, deposits of approximately $467.6 million, plus a $428.2 million cash settlement to balance the transaction. The FDIC did not provide any loss-sharing with respect to these acquired assets.

Prior to the acquisition, Doral Florida operated five branch locations in Panama City, Panama City Beach and Pensacola, Florida plus a loan production office in Tallahassee, Florida. At the time of acquisition, Centennial operated 29 branch locations in the Florida Panhandle. As a result, the Company closed all five branch locations during the July 2015 systems conversion and returned the facilities back to the FDIC.

Pool of National Commercial Real Estate Loans – On April 1, 2015, Centennial Bank purchased a pool of national commercial real estate loans totaling approximately $289.1 million from AM PR LLC, an affiliate of J.C. Flowers & Co. (collectively, the “Seller”) for a purchase price of 99% of the total principal value of the acquired loans. The acquired loans were originated by the former Doral Bank within its Doral Property Finance portfolio and were transferred to the Seller by Popular upon its acquisition of the assets and liabilities of Doral Bank from the FDIC. This pool of loans is now managed by Centennial CFG, which is responsible for servicing the acquired loan pool and originating new loan production.

In connection with this acquisition of loans, the Company opened a loan production office on April 23, 2015 in New York City, which became a full branch on September 1, 2016.

Florida Business BancGroup, Inc. – On October 1, 2015, the Company completed its acquisition of Florida Business BancGroup, Inc. (“FBBI”), parent company of Bay Cities Bank (“Bay Cities”). The Company paid a purchase price to the FBBI shareholders of $104.1 million for the FBBI acquisition. Under the terms of the agreement, shareholders of FBBI received shares of the Company’s common stock valued at approximately $83.8 million as of October 1, 2015, plus approximately $20.3 million in cash in exchange for all outstanding shares of FBBI common stock. A portion of the cash consideration, $2.0 million, was placed into escrow with the FBBI shareholders having a contingent right to receive their pro-rata portions of such amount. The amount, if any, of such escrowed funds to be released to FBBI shareholders would depend upon the amount of losses that the Company incurred in the two years following the completion of the merger related to two class action lawsuits that were pending against Bay Cities. In August 2017 the Company distributed the contingent cash consideration to the former FBBI shareholders, less $10,000 for compensation paid to a representative designated by FBBI who acted on behalf of the FBBI shareholders in connection with the escrow arrangements.

FBBI formerly operated six branch locations and a loan production office in the Tampa Bay area and in Sarasota, Florida. Including the effects of any purchase accounting adjustments, as of October 1, 2015, FBBI had approximately $564.5 million in total assets, $408.3 million in loans after $14.1 million of loan discounts, and $472.0 million in deposits.

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.

The Bank of Commerce – On February 28, 2017, the Company completed its acquisition of all of the issued and outstanding shares of common stock of The Bank of Commerce, a Florida state-chartered bank that operated in the Sarasota, Florida area (“BOC”), pursuant to an acquisition agreement, dated December 1, 2016, by and between 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.

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 at the time of closing plus approximately $50.1 million in cash in exchange for all outstanding shares of Stonegate common stock. In addition, the holders of outstanding stock options of Stonegate received approximately $27.6 million in cash in connection with the cancellation of their options immediately before the acquisition closed, for a total transaction value of approximately $820.0 million.

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

For an additional discussion regarding the acquisitions of BOC, GHI and Stonegate, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. For an additional discussion regarding the acquisitions of Doral Florida, the pool of national commercial real estate loans and FBBI, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. For an additional discussion regarding the acquisition of Liberty, see Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Our Management Team

The following table sets forth, as of December 31, 2017, information concerning the individuals who are our executive officers.


Name	Age	Positions Held with Home BancShares, Inc.	Positions Held with Centennial Bank

John W. Allison	71	Chairman of the Board	Chairman of the Board

C. Randall Sims	63	Chief Executive Officer, President and Director	Director

Brian S. Davis	52	Chief Financial Officer, Treasurer and Director	Chief Financial Officer, Treasurer and Director

Jennifer C. Floyd	43	Chief Accounting Officer and Investor Relations Officer	Chief Accounting Officer

Kevin D. Hester	54	Chief Lending Officer	Chief Lending Officer and Director

J. Stephen Tipton	36	Chief Operating Officer	Chief Operating Officer

Tracy M. French	56	Director	Chief Executive Officer, President and Director

Donna J. Townsell	47	Senior Executive Vice President	Senior Executive Vice President and Director of Marketing

Russell D. Carter, III	42	—	Regional President

Our Growth Strategy

Our goals are to achieve growth in earnings per share and to create and build stockholder value. Our growth strategy entails the following:

•

Strategic acquisitions – Strategic acquisitions have been a significant component of our historical growth strategy, and we believe properly priced bank acquisitions can continue to be a large part of our growth strategy. 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, although we may expand into other areas if attractive financial opportunities in other market areas arise. We are continually evaluating potential bank acquisitions to determine what is in the best interests of our Company. Our goals in making these decisions are to maximize the return to our shareholders and to enhance our franchise.

•

Organic growth – We believe our current branch network provides us with the capacity to grow within our existing market areas. We also believe we are well positioned to attract new business and additional experienced personnel as a result of ongoing changes in our competitive markets. We believe the markets we entered into as a result of historical acquisitions provide us opportunities for organic growth as we now have a presence in several large markets where our market share has not previously been significant. Additionally, through our Centennial CFG franchise, we are continuing to build out a national lending platform that focuses on commercial real estate plus commercial and industrial loans. As opportunities arise, we will evaluate new (commonly referred to as de novo) branches in our current markets and in other attractive market areas. During 2017, one de novo branch location was opened in Clearwater, Florida. During 2017, we also opened a loan production office in Los Angeles, California under the management of Centennial CFG. We will continue to evaluate de novo opportunities during 2018 and make decisions on a case-by-case basis in the best interest of the shareholders. Overall, we expect the organic loan growth we experienced during the last two years to continue in all of our markets as the economic environment has improved.

Community Banking Philosophy

Our community banking philosophy consists of four basic principles:

•

manage our community banking franchise with experienced bankers and community bank boards who are empowered to make customer-related decisions quickly;

•

provide exceptional service and develop strong customer relationships;

•

pursue the business relationships of our local boards of directors, executive officers, stockholders, and customers to actively promote our community bank; and

•

maintain our commitment to the communities we serve by supporting civic and nonprofit organizations.

These principles, which make up our community banking philosophy, are the driving force for our business. As we streamlined our legacy business into an efficient banking network and have integrated new acquisitions, we have preserved lending authority with local management in most cases by using local loan committees that maintain an integral connection to the communities we serve. These committees are empowered with lending authority of up to $6.0 million in their respective geographic areas. This allows us to capitalize on the strong relationships that these individuals and our local bank officers have in their respective communities to maintain and grow our business. Through experienced and empowered local bankers and board members, we are committed to maintaining a community banking experience for our customers.

Operating Goals

Our operating goals focus on maintaining strong credit quality, increasing profitability, finding experienced bankers, and maintaining a “fortress” balance sheet:

•

Maintain strong credit quality – Credit quality is our first priority. We employ a set of credit standards designed to ensure the proper management of credit risk. Our management team plays an active role in monitoring compliance with these credit standards in the different communities served by Centennial Bank. We have a centralized loan review process, which we believe enables us to take prompt action on potential problem loans. During the past few years we have taken an aggressive approach to resolving problem loans, including those problem loans acquired in our FDIC-assisted and non-FDIC-assisted acquisitions. We are committed to maintaining high credit quality standards.

•

Continue to improve profitability – We will continue to strive to improve our profitability and achieve high performance ratios as we continue to utilize the available capacity of branches and employees. As we work out problem loans in our special assets department, we plan to emphasize business development and relationship enhancement in lending and retail areas in our newly acquired markets. Our core efficiency ratio has improved from 59.4% for the year ended 2008 to 37.7% for the year ended 2017. Core efficiency ratio 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-fundamental items such as merger expenses and/or gain and losses. These improvements in operating efficiency are being driven by, among other factors, increasing revenue from organic loan growth, improving our cost savings from the acquisitions, implementing our efficiency study initiatives, streamlining the processes in our lending and retail operations and improving our purchasing power.

•

Attract and motivate experienced bankers – We believe a major factor in our success has been our ability to attract and motivate bankers who have experience in and knowledge of their local communities. Historically, our hiring and retaining experienced relationship bankers has been integral to our ability to grow quickly when entering new markets.

•

Maintain a “fortress” balance sheet – We intend to maintain a strong balance sheet through a focus on four key governing principles: (1) maintain solid asset quality; (2) remain well-capitalized; (3) pursue high performance metrics including return on tangible equity (ROTE), return on assets (ROA), efficiency ratio and net interest margin; and (4) retain liquidity at the bank holding company level that can be utilized should attractive acquisition opportunities be identified or for internal capital needs. We strive to maintain capital levels above the regulatory capital requirements through our focus on these governing principles, which historically has allowed us to take advantage of acquisition opportunities as they become available without the need for additional capital.

Our Market Areas

As of December 31, 2017, we conducted business principally through 76 branches in Arkansas, 88 branches in Florida, five branches in Alabama and one branch in New York City. Our branch footprint includes markets in which we are the deposit market share leader as well as markets where we believe we have opportunities for deposit market share growth.

Lending Activities

We originate loans primarily secured by single and multi-family real estate, residential construction and commercial buildings. In addition, we make loans to small and medium-sized commercial businesses as well as to consumers for a variety of purposes.

Our loan portfolio as of December 31, 2017, was comprised as follows:


	Total Loans Receivable		Percentage of portfolio
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,600,117		44.5	%
Construction/land development		1,700,491		16.4
Agricultural		82,229		0.8
Residential real estate loans
Residential 1-4 family		1,970,311		19.1
Multifamily residential		441,303		4.3

Total real estate		8,794,451		85.1
Consumer		46,148		0.4
Commercial and industrial		1,297,397		12.6
Agricultural		49,815		0.5
Other		143,377		1.4

Total	$	10,331,188		100.0	%

Real Estate – Non-farm/Non-residential. Non-farm/non-residential real estate loans consist primarily of loans secured by income-producing properties, such as shopping/retail centers, hotel/motel properties, office buildings, and industrial/warehouse properties. Commercial lending on income-producing properties typically involves higher loan principal amounts, and the repayment of these loans is dependent, in large part, on sufficient income from the properties collateralizing the loans to cover operating expenses and debt service. This category of loans also includes specialized properties such as churches, marinas, and nursing homes. Additionally, we make commercial mortgage loans to entities to operate in these types of properties, and the repayment of these loans is dependent, in large part, on the cash flow generated by these entities in the operations of the business. Often, a secondary source of repayment will include the sale of the subject collateral. When this is the case, it is generally our practice to obtain an independent appraisal of this collateral within the Interagency Appraisal and Evaluation Guidelines.

Real Estate – Construction/Land Development. This category of loans includes loans to residential and commercial developers to purchase raw land and to develop this land into residential and commercial land developments. In addition, this category includes construction loans for all of the types of real estate loans, including both commercial and residential. These loans are generally secured by a first lien on the real estate being purchased or developed. Often, the primary source of repayment will be the sale of the subject collateral. When this is the case, it is generally our practice to obtain an independent appraisal of this collateral within the Interagency Appraisal and Evaluation Guidelines.

Real Estate – Residential. Our residential mortgage loan program primarily originates loans to individuals for the purchase of residential property. We generally do not retain long-term, fixed-rate residential real estate loans in our portfolio due to interest rate and collateral risks. Residential mortgage loans to individuals retained in our loan portfolio primarily consisted of approximately 49.1% owner occupied 1-4 family properties and approximately 38.4% non-owner occupied 1-4 family properties (rental) as of December 31, 2017 with the remaining 12.5% relating to condos and mobile homes. The primary source of repayment for these loans is generally the income and/or assets of the individual to whom the loan is made. Often, a secondary source of repayment will include the sale of the subject collateral. When this is the case, it is generally our practice to obtain an independent appraisal of this collateral within the Interagency Appraisal and Evaluation Guidelines.

Consumer. While our focus is on service to small and medium-sized businesses, we also make a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The primary source of repayment for these loans is generally the income and/or assets of the individual to whom the loan is made. When secured, we may independently assess the value of the collateral using a third-party valuation source.

Commercial and Industrial. Our commercial and industrial loan portfolio primarily consisted of 44.1% inventory/accounts receivable financing, 14.1% equipment/vehicle financing and 41.8% other, including letters of credit at less than 1%, as of December 31, 2017. This category includes loans to smaller business ventures, credit lines for working capital and short-term inventory financing, for example. These loans are typically secured by the assets of the business, and are supplemented by personal guaranties of the principals and often mortgages on the principals’ primary residences. The primary source of repayment may be conversion of the assets into cash flow, as in inventory and accounts receivable, or may be cash flow generated by operations, as in equipment/vehicle financing. Assessing the value of inventory can involve many factors including, but not limited to, type, age, condition, level of conversion and marketability, and can involve applying a discount factor or obtaining an independent valuation, based on the assessment of the above factors. Assessing the value of accounts receivable can involve many factors including, but not limited to, concentration, aging, and industry, and can involve applying a discount factor or obtaining an independent valuation, based on the assessment of the above factors. Assessing the value of equipment/vehicles may involve a third-party valuation source, where applicable.

Agricultural Loans. Agricultural loans include loans for financing agricultural production, including loans to businesses or individuals engaged in the production of timber, poultry, livestock or crops and are not categorized as part of real estate loans. Our agricultural loans are generally secured by farm machinery, livestock, crops, vehicles or other agricultural-related collateral. A portion of our portfolio of agricultural loans is comprised of loans to individuals which would normally be characterized as consumer loans except for the fact that the individual borrowers are primarily engaged in the production of timber, poultry, livestock or crops.

Credit Risks. The principal economic risk associated with each category of the loans that we make is the creditworthiness of the borrower and the ability of the borrower to repay the loan. General economic conditions and the strength of the services and retail market segments affect borrower creditworthiness. General factors affecting a commercial borrower’s ability to repay include interest rates, inflation and the demand for the commercial borrower’s products and services as well as other factors affecting a borrower’s customers, suppliers and employees.

Risks associated with real estate loans also include fluctuations in the value of real estate, new job creation trends, tenant vacancy rates, and in the case of commercial borrowers, the quality of the borrower’s management. Consumer loan repayments depend upon the borrower’s financial stability and are more likely to be adversely affected by divorce, job loss, illness and other personal hardships.

Lending Policies. We have established common loan documentation procedures and policies, based on the type of loan, for our bank subsidiary. The board of directors periodically reviews these policies for validity. In addition, it has been and will continue to be our practice to attempt to independently verify information provided by our borrowers, including assets and income. We have not made loans similar to those commonly referred to as “no doc” or “stated income” loans. We focus on the primary and secondary methods of repayment, and prepare global cash flows where appropriate. There are legal restrictions on the dollar amount of loans available for each lending relationship. The Arkansas Banking Code provides that no loan relationship may exceed 20% of a bank’s risk based capital, and we are in compliance with this restriction. In addition, we are not dependent upon any single lending relationship for an amount exceeding 10% of our revenues. As of December 31, 2017, the maximum amount outstanding to a single borrower was $143.5 million. As a community lender, we believe from time to time it is in our best interest to agree to modifications or restructurings. These modifications/restructurings can take the form of a reduction in interest rate, a move to interest-only from principal and interest payments, or a lengthening in the amortization period or any combination thereof. Occasionally, we will modify/restructure a single loan by splitting it into two loans following the interagency guidance involving the workout of commercial real estate loans. The loan representing the portion that is supported by the current cash flow of the borrower or project will remain on our books, while the new loan representing the portion that cannot be serviced by the current cash flow is charged-off. Furthermore, we may make an additional loan or loans to a borrower or related interest of a borrower who is past due more than 90 days. These circumstances will be very limited in nature, and when approved by the appropriate lending authority, will likely involve obtaining additional collateral that will improve the collectability of the overall relationship. It is our belief that judicious usage of these tools can improve the quality of our loan portfolio by providing our borrowers an improved probability of survival during difficult economic times.

Loan Approval Procedures. Our bank subsidiary has supplemented our common loan policies to establish its loan approval procedures as follows:

•

Individual Authorities. The board of directors of Centennial Bank establishes the authorization levels for individual loan officers on a case-by-case basis. Generally, the more experienced a loan officer, the higher the authorization level. The approval authority for individual loan officers ranges from $2,500 to $4.0 million for secured loans and from $1,000 to $500,000 for unsecured loans.

•

Officers’ Loan Committees. Our bank subsidiary also gives its Officers’ Loan Committees loan approval authority. Credits in excess of individual loan limits are submitted to the region’s Officers’ Loan Committee. The Officers’ Loan Committee consists of members of the senior management team of that region and is chaired by that region’s chief lending officer. The regional Officers’ Loan Committees have approval authority of up to $2.0 million secured on all loans and $500,000 unsecured on loan renewals.

•

Directors’ Loan Committee. Our bank subsidiary has Directors’ Loan Committees (“DLC”) throughout our market areas consisting of outside directors and senior lenders of the respective market areas. Generally, each DLC requires a majority of outside directors be present to establish a quorum. Generally, this committee is chaired either by the Division Chief Lending Officer or the Regional President. The regional Directors’ Loan Committees have approval authority up to $6.0 million secured and $500,000 unsecured.

•

Executive Loan Committee – The board of directors of Centennial Bank established the Executive Loan Committee consisting of three outside board members and members of executive management. This committee requires five voting members to establish a quorum, including at least two of the outside board members, and is chaired by the Chief Lending Officer of the bank. The Executive Loan Committee has approval authority up to the in-house consolidated lending limit of $20.0 million.

Currently, our board of directors has established an in-house consolidated lending limit of $20.0 million to any one borrowing relationship without obtaining the approval of both our Chairman and our director Richard H. Ashley. We have 81 separate relationships that exceed this in-house limit.

Deposits and Other Sources of Funds

Our principal source of funds for loans and investing in securities is core deposits. We offer a wide range of deposit services, including checking, savings, money market accounts and certificates of deposit. We obtain most of our deposits from individuals and small businesses, and municipalities in our market areas. We believe that the rates we offer for core deposits are competitive with those offered by other financial institutions in our market areas. Additionally, our policy also permits the acceptance of brokered deposits. Secondary sources of funding include advances from the Federal Home Loan Bank of Dallas, the Federal Reserve Bank Discount Window and other borrowings. These secondary sources enable us to borrow funds at rates and terms which, at times, are more beneficial to us.

Other Banking Services

Given customer demand for increased convenience and account access, we offer a range of products and services, including 24-hour internet banking, mobile banking and voice response information, cash management, overdraft protection, direct deposit, safe deposit boxes, United States savings bonds and automatic account transfers. We earn fees for most of these services. We also receive ATM transaction fees from transactions performed by our customers participating in a shared network of automated teller machines and a debit card system that our customers can use throughout the United States, as well as in other countries.

As a result of our acquisition of Stonegate in September 2017, we also offer credit cards to both consumers and businesses. Credit cards typically involve a higher degree of credit risk since outstanding balances are unsecured and repayment of such balances is often negatively impacted by a decline in economic conditions. Our credit cards offer a variety of benefits and features designed to meet the needs of our customer. In addition, our consumer credit cards can be used in Cuba.

Insurance

Centennial Insurance Agency, Inc. is an independent insurance agency, originally founded in 1959 and purchased by Centennial Bank in 2000. Centennial Insurance Agency writes policies for commercial and personal lines of business including insurance for property, casualty, life, health and employee benefits. It is subject to regulation by the Arkansas Insurance Department. The offices of Centennial Insurance Agency are currently located in Jacksonville, Cabot and Conway, Arkansas.

Cook Insurance Agency, Inc. is an independent insurance agency, originally founded in 1913 and acquired by Centennial Bank in 2010 during our FDIC-assisted acquisition of Gulf State Community Bank. Cook Insurance Agency writes policies for commercial and personal lines of business including life insurance. It is subject to regulation by the Florida Insurance Department. The offices of Cook Insurance Agency are located in Apalachicola and Crawfordville, Florida.

The Company may merge the book of business of Cook Insurance Agency into the Centennial Insurance Agency at some point in the future.

Competition

As of December 31, 2017, we conducted business through 170 branches in our primary market areas of Pulaski, Faulkner, Craighead, Lonoke, Pope, Washington, White, Benton, Greene, Sebastian, Cleburne, Independence, Stone, Baxter, Clay, Conway, Crawford, Johnson, Saline, Sharp and Yell counties in Arkansas; Broward, Monroe, Hillsborough, Leon, Sarasota, Bay, Franklin, Palm Beach, Gulf, Charlotte, Collier, Escambia, Orange, Osceola, Pasco, Pinellas, Polk, Walton, Miami-Dade, Lee, Calhoun, Gadsden, Hernando, Liberty, Okaloosa, Santa Rosa, Seminole, Wakulla and Manatee counties in Florida; Baldwin County in Alabama; and New York County in New York. Many other commercial banks, savings institutions and credit unions have offices in our primary market areas. These institutions include many of the largest banks operating in these respective states, including some of the largest banks in the country. Many of our competitors serve the same counties we do. Our competitors often have greater resources, have broader geographic markets, have higher lending limits, offer various services that we may not currently offer and may better afford and make broader use of media advertising, support services and electronic technology than we do. To offset these competitive disadvantages, we depend on our reputation as having greater personal service, consistency, and flexibility and the ability to make credit and other business decisions quickly.

Employees

On December 31, 2017, we had 1,744 full-time equivalent employees. Except for any additional employees acquired in future acquisitions, we expect that our 2018 staffing levels will be slightly lower than those at year end 2017 as we continue to achieve efficiencies throughout our Company. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.

SUPERVISION AND REGULATION

General

We and our bank subsidiary are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our company and its operations. These laws generally are intended to protect depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation (“FDIC”) and the banking system as a whole, and not shareholders.

The following discussion describes the material elements of the regulatory framework that applies to us. This description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to us and our subsidiaries could have a material effect on our business, financial condition and results of operations. Because our bank subsidiary’s total assets exceed $10 billion, it is subject to additional supervision and regulation, including by the Consumer Financial Protection Bureau (“CFPB”), with such additional supervision and regulation discussed throughout this section.

Financial Regulatory Reform

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of financial institutions and their holding companies. The Dodd-Frank Act contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. Some of these provisions are described in more detail below. Many provisions of the Dodd-Frank Act have delayed effective dates, and the legislation requires various federal agencies to adopt a broad range of new rules and regulations, some of which have not yet been issued in final form. In addition, we and our bank subsidiary will become subject to certain Dodd-Frank Act provisions for the first time in 2018 as our bank subsidiary’s total assets now exceed $10 billion. We expect our operating and compliance costs to continue to increase as a result of the Dodd-Frank Act and implementing its regulations.

Home BancShares

We are a bank holding company registered under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”) and are subject to supervision, regulation and examination by the Federal Reserve Board. The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before:

•

acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

•

acquiring all or substantially all of the assets of any bank; or

•

merging or consolidating with any other bank holding company.

Under the Bank Holding Company Act, if well-capitalized and well managed, we, as well as other bank holding companies located within the states in which we operate, may purchase a bank located outside of those states. Conversely, a well-capitalized and well managed bank holding company located outside of the states in which we operate may purchase a bank located inside those states. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider, among other things, the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served and various competitive factors.

Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

•

banking or managing or controlling banks; and

•

any activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve Board has found to be so closely related to banking as to be a proper incident to the business of banking include but are not limited to: factoring accounts receivable; making, acquiring, brokering or servicing loans and usual related activities; leasing personal or real property; operating a non-bank depository institution, such as a savings association; trust company functions; financial and investment advisory activities; conducting securities brokerage activities; underwriting and dealing in government obligations and money market instruments; providing specified management consulting and counseling activities; performing selected data processing services and support services; acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and performing selected insurance underwriting activities.

Support of Subsidiary Institutions. Under the Dodd-Frank Act, we are required to act as a source of financial strength for our bank subsidiary and to commit resources to support the bank. Under current federal law, the Federal Reserve may require us to make capital injections into our bank subsidiary and may charge us with engaging in unsafe and unsound practices if we fail to commit resources to our bank subsidiary or if we undertake actions that the Federal Reserve believes might jeopardize our ability to commit resources to the bank. As a result, an obligation to support our bank subsidiary may be required at times when, without this requirement, we might not be inclined to provide it.

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues.

Annual Reporting; Examinations. We are required to file annual reports with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the company for the cost of such examination.

Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies having $500 million or more in assets on a consolidated basis. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines in effect as of December 31, 2017 require a minimum total risk-based capital ratio of 8.0% (of which at least 6.0% is required to consist of Tier 1 capital elements) and a total risk-based capital ratio of at least 10% (of which at least 8.0% is required to consist of Tier 1 capital elements) to be “well-capitalized.” Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2017, our Tier 1 risk-based capital ratio was 11.48% and our total risk-based capital ratio was 15.05%. Thus, as of December 31, 2017, we are considered well-capitalized for regulatory purposes.

In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of at least 4.0%. Well-capitalized is a leverage ratio in excess of 5%. As of December 31, 2017, our leverage ratio was 9.98%.

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets.

The Dodd-Frank Act includes certain provisions concerning the capital regulations of the federal banking agencies. These provisions, often referred to as the “Collins Amendment,” are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued before May 19, 2010 by a company, such as our Company, with total consolidated assets of less than $15 billion as of December 31, 2009, and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. The Collins Amendment requires banking regulators to develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the prompt corrective action regulations discussed below. The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction.

The final rule permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The rule phases out of Tier 1 capital these non-qualifying capital instruments issued before May 19, 2010 by all other bank holding companies. Because our total consolidated assets were less than $15 billion as of December 31, 2009, our outstanding trust preferred securities will continue to be treated as Tier 1 capital even if we should ever exceed $15 billion assets due to organic growth. However, if we should exceed $15 billion in assets as the result of a merger or acquisition, then the Tier 1 treatment of our outstanding trust preferred securities will be phased out, but those securities will still be treated as Tier 2 capital.

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 the Company and our bank subsidiary 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. As of January 1, 2016, the required capital conservation buffer was 0.625% of common equity Tier 1 capital to risk-weighted assets. The required capital conservation buffer increased to 1.25% as of January 1, 2017, and further increased to 1.875% effective January 1, 2018. As of December 31, 2017, our capital conservation buffer was 5.48%.

Liquidity Requirements. Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without minimum required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The federal banking agencies have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.

Stress Testing. Pursuant to the Dodd-Frank Act, in October 2012, the Federal Reserve Board published its final rules regarding company-run stress testing. The rules require institutions with average total consolidated assets greater than $10 billion, such as the Company and our bank subsidiary, to conduct an annual company-run stress test of capital and consolidated earnings and losses under one base and at least two stress scenarios provided by bank regulatory agencies. Institutions with total consolidated assets between $10 billion and $50 billion use data as of December 31 and scenarios released by the agencies. The results of these stress tests must be reported to the agencies by July 31 of the following year. Public disclosure of summary stress test results under the severely adverse scenario will occur between October 15 and October 31. The Company’s capital ratios reflected in the stress test calculations are an important factor considered by the Federal Reserve Board in evaluating the capital adequacy of the Company and our bank subsidiary and determining whether proposed payments of dividends or stock repurchases may be an unsafe or unsound practice. As of December 31, 2017, our average assets for the prior four quarters were in excess of $10 billion, subjecting our bank subsidiary and us to stress testing beginning July 1, 2018. As a result, the Bank and Company’s first required annual stress test will occur for 2018, using its financial data as of December 31, 2017.

Payment of Dividends. We are a legal entity separate and distinct from our bank subsidiary and other affiliated entities. The principal sources of our cash flow, including cash flow to pay dividends to our shareholders, are dividends that our bank subsidiary pays to us as its sole shareholder. Statutory and regulatory limitations apply to the dividends that our bank subsidiary can pay to us, as well as to the dividends we can pay to our shareholders.

The policy of the Federal Reserve Board that a bank holding company should serve as a source of strength to its subsidiary bank also results in the position of the Federal Reserve Board that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiary or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Arkansas law.

There are certain state-law limitations on the payment of dividends by our bank subsidiary. Centennial Bank, which is subject to Arkansas banking laws, may not declare or pay a dividend of 75% or more of the net profits of such bank after all taxes for the current year plus 75% of the retained net profits for the immediately preceding year without the prior approval of the Arkansas State Bank Commissioner. Members of the Federal Reserve System must also comply with the dividend restrictions with which a national bank would be required to comply. Among other things, these restrictions require that if losses have at any time been sustained by a bank equal to or exceeding its undivided profits then on hand, no dividend may be paid. Although we have historically paid quarterly dividends on our common stock, there can be no assurances that we will be able to pay dividends in the future under the applicable regulatory limitations.

The payment of dividends by us, or by our bank subsidiary, may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under FDICIA, a depository institution may not pay any dividend if payment would result in the depository institution being undercapitalized.

Subsidiary Bank

General. Our bank subsidiary, Centennial Bank, is chartered as an Arkansas state bank and is a member of the Federal Reserve System, making it primarily subject to regulation and supervision by both the Federal Reserve Board and the Arkansas State Bank Department. In addition, our bank subsidiary is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that they may charge, and limitations on the types of investments they may make and on the types of services they may offer. Various consumer laws and regulations also affect the operations of our bank subsidiary. Further, because our bank subsidiary had total assets of over $10 billion as of December 31, 2017, it is subject to supervision and regulation by the CFPB, which is responsible for implementing, examining and enforcing compliance with federal consumer protection laws.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. The federal banking agencies have specified by regulation the relevant capital level for each category.

An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

The Basel III final rule issued by the federal bank regulatory agencies in July 2013 amended the prompt corrective action rules to incorporate a common equity Tier 1 capital requirement and to raise the capital requirements for certain capital categories. These rules became effective as of January 1, 2015. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio, a 4.5% common equity Tier 1 risk-based capital ratio and a 4% Tier 1 leverage ratio. To be well-capitalized, a banking organization will be required to have at least a 10% total risk-based capital ratio, an 6% Tier 1 risk-based capital ratio, a 6.5% common equity Tier 1 risk-based capital ratio and a 5% Tier 1 leverage ratio.

Deposit Insurance and Assessments. Centennial Bank’s deposit accounts are insured up to applicable limits by the FDIC’s Deposit Insurance Fund (“DIF”). The Dodd-Frank Act permanently increased the deposit coverage limit to $250,000 per depositor retroactive to January 1, 2008.

The FDIC imposes an assessment against institutions for deposit insurance. This assessment is based primarily on the risk category of the institution and certain risk adjustments specified by the FDIC, with riskier institutions paying higher assessments. Under the FDIC’s risk-based assessment system, insured institutions with at least $10 billion in assets are assessed on the basis of a scoring system that combines the institution’s regulatory ratings and certain financial measures. The scoring system assesses risk measures to produce two scores, a performance score and a loss severity score, that will be combined and converted to an initial assessment rate. The performance score measures an institution’s financial performance and its ability to withstand stress. The loss severity score quantifies the relative magnitude of potential losses to the FDIC in the event of an institution’s failure. Once the performance and loss severity scores are calculated, these scores will be converted to a total score. The FDIC has the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments.

The FDIC’s restoration program for the DIF adopted in 2010 is designed to bolster the DIF reserve ratio to 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The plan provides that, at least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. Under the Dodd-Frank Act, insured institutions with assets of $10 billion or more are required to fund the increase in the designated reserve ratio (“DRR”) to 1.35%.

In 2011, the FDIC approved a final rule implementing changes to the deposit insurance assessment system, as authorized by the Dodd-Frank Act, which, among other things, changed the assessment base for insured depository institutions from adjusted domestic deposits to the institution’s average consolidated total assets during an assessment period less average tangible equity capital (Tier 1 capital) during that period. The rule revised the assessment rate schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest institutions. The rule also suspended indefinitely the requirement of the FDIC to pay dividends from the DIF when it reaches 1.5% of insured deposits. In lieu of the dividends, the FDIC adopted progressively lower assessment rate schedules when the reserve ratio exceeds 1.15%, 2.0% and 2.5%, respectively. In addition, a final rule issued by the FDIC in March 2016 requires insured institutions with an assessment base (total assets less tangible capital) of over $10 billion to pay surcharge insurance assessments at an annual rate of 4.5 basis points of their assessment base, starting the quarter after the DRR surpasses 1.15% and ending when the DRR reaches 1.35%. The 4.5 basis point surcharge will be assessed against each covered institution’s assessment base, less $10 billion.

The DRR exceeded 1.15% as of June 30, 2016. As a result, the base deposit insurance rates now range from (i) 1.5 to 30 basis points of an institution’s assessment base for small banks and (ii) 1.5 to 40 basis points for institutions with an assessment base of over $10 billion, which are also now subject to the 4.5 basis point surcharge. The FDIC has stated that it expects that the DRR will likely reach 1.35%, allowing termination of the surcharge, in 2018.

In addition, all institutions with deposits insured by the FDIC must pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established as a financing vehicle for the Federal Savings & Loan Insurance Corporation. The assessment rate for the first quarter of fiscal 2018 is 0.46% of assets and is adjusted quarterly. These assessments will continue until the bonds mature in 2019.

Under the Federal Deposit Insurance Act, as amended, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Community Reinvestment Act. The Community Reinvestment Act requires, in connection with examinations of financial institutions, that federal banking regulators evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on our bank subsidiary. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements. Our bank subsidiary received a “satisfactory” CRA rating from the Federal Reserve Bank during its last exam as published in our bank’s CRA Public Evaluation.

Capital Requirements. Our bank subsidiary is also subject to certain restrictions on the payment of dividends as a result of the requirement that it maintain adequate levels of capital in accordance with guidelines promulgated from time to time by applicable regulators. The regulating agencies consider a bank’s capital levels when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of individual banks and the banking system. The Federal Reserve Bank monitors the capital adequacy of our bank subsidiary by using a combination of risk-based guidelines and leverage ratios.

The FDIC Improvement Act. The Federal Deposit Insurance Corporation Improvement Act of 1991, or “FDICIA,” made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions, and improvement of accounting standards. This statute also limited deposit insurance coverage, implemented changes in consumer protection laws and provided for least-cost resolution and prompt regulatory action with regard to troubled institutions.

FDICIA requires every bank with total assets in excess of $500 million to have an annual independent audit made of the bank’s financial statements by an independent public accountant to verify that the financial statements of the bank are presented fairly and in accordance with generally accepted accounting principles and comply with such other disclosure requirements as prescribed by the FDIC. FDICIA also places certain restrictions on activities of banks depending on their level of capital.

The capital classification of a bank affects the frequency of examinations of the bank and impacts the ability of the bank to engage in certain activities and affects the deposit insurance premiums paid by such bank. Under FDICIA, the federal banking regulators are required to conduct a full-scope, on-site examination of every bank at least once every 12 months.

Brokered Deposits. Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well-capitalized” banks are permitted to accept brokered deposits, but banks that are not well-capitalized are not permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank.

Federal Home Loan Bank System. The Federal Home Loan Bank system, of which our bank subsidiary is a member, consists of regional FHLBs governed and regulated by the Federal Housing Finance Agency, or FHFA. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the Boards of Directors of each regional FHLB.

As a system member, our bank subsidiary is entitled to borrow from the FHLB of its region and is required to own a certain amount of capital stock in the FHLB. Our bank subsidiary is in compliance with the stock ownership rules with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to our bank subsidiary are secured by a portion of its respective loan portfolio, certain other investments and the capital stock of the FHLB held by such bank.

Federal Reserve System. Federal Reserve regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $16.0 million and $112.3 million (subject to adjustment by the Federal Reserve) plus a reserve of 10% (subject to adjustment by the Federal Reserve between 8% and 14%) against that portion of total transaction accounts in excess of $122.3 million. The first $16.0 million of otherwise reservable balances (subject to adjustment by the Federal Reserve) is exempt from the reserve requirements. Centennial Bank is in compliance with the foregoing requirements.

Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending, which was re-emphasized in December 2015. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for construction, land development and other land represent 100% or more of total capital or (2) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.

Mortgage Banking Operations. Our bank subsidiary is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates.

Consumer Financial Protection. Our bank subsidiary is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the bank’s ability to raise interest rates and subject the bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which our bank subsidiary operates and civil money penalties. Failure to comply with consumer protection requirements may also result in the our bank subsidiary’s failure to obtain any required bank regulatory approval for merger or acquisition transactions the bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.

The Dodd-Frank Act established the CFPB, which has supervisory authority over depository institutions with total assets of $10 billion or greater. The CFPB focuses its supervision and regulatory efforts on (1) risks to consumers and compliance with the federal consumer financial laws when it evaluates the policies and practices of a financial institution; (2) the markets in which firms operate and risks to consumers posed by activities in those markets; (3) depository institutions that offer a wide variety of consumer financial products and services; (4) certain depository institutions with a more specialized focus; and (5) non-depository companies that offer one or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (1) lack of financial savvy, (2) inability to protect himself in the selection or use of consumer financial products or services or (3) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.

Loans to One Borrower. Our bank subsidiary generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2017, our bank subsidiary was in compliance with the loans-to-one-borrower limitations.

Restrictions on Transactions with Affiliates. We and our bank subsidiary are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of transactions between the bank and its affiliates, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to affiliates which are collateralized by the securities or obligations of the bank or its nonbanking affiliates. An affiliate of a bank is generally any company or entity that controls, is controlled by, or is under common control with the bank.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain other transactions between the bank and its affiliates be on terms substantially the same, or at least as favorable to the bank, as those prevailing at that time for comparable transactions with or involving other non-affiliated persons.

Sections 22(g) and (h) of the Federal Reserve Act and its implementing regulation, Regulation O, also place restrictions on loans by a bank to executive officers, directors, and principal shareholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% shareholder of a bank and certain of their related interests, or insiders, and insiders of affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s loans-to-one-borrower limit. Section 22(h) also requires that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. In addition, Section 22(h) requires prior board of director’s approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve Board adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Federal Reserve Board rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. A debit card issuer may also recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. In addition, the Federal Reserve has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. We exceeded $10 billion in assets during the first quarter of 2017 and will become subject to these interchange fee restrictions beginning July 1, 2018. The Durbin Amendment is expected to negatively impact debit card and ATM fees beginning in the second half of 2018. During fiscal year 2017, we collected $20.8 million in debit card interchange fees. We estimate that had we been subject to this limitation during 2017, our interchange fee revenue would have been reduced by approximately $7.0 million.

The Volcker Rule. The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. The statutory provision is commonly called the “Volcker Rule.” In December 2013, federal regulators adopted final rules to implement the Volcker Rule that generally became effective in July 2015. The Volcker Rule also requires covered banking entities, including us and our bank subsidiary, to implement certain compliance programs, and the complexity and rigor of such programs is determined based on the asset size and complexity of the business of the covered company. Since neither we nor our bank subsidiary engages in the types of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on our or our bank subsidiary’s operations.

Privacy. Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. We and our subsidiary have established policies and procedures to assure our compliance with all privacy provisions of the Gramm-Leach-Bliley Act.

Anti-Terrorism and Anti-Money Laundering Legislation. Our bank subsidiary is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), the Bank Secrecy Act and rules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes and related rules and regulations impose requirements and limitations on specific financial transactions and account relationships intended to guard against money laundering, terrorism financing and transactions with designated foreign countries, nationals and others on whom the United States has imposed economic sanctions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Incentive Compensation. The Dodd-Frank Act requires the federal bank regulators and the Securities and Exchange Commission (the “SEC”) to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements.

In June 2010, the Federal Reserve and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk, (2) be compatible with effective internal controls and risk management and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

In May 2016, the Federal Reserve, other federal banking agencies and the SEC jointly published a revised version of proposed rulemaking initially issued in April 2011 designed to implement the provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that encourage inappropriate risk taking at a covered institution, which includes a bank or bank holding company with $1 billion or more of assets, such as the Company and our bank subsidiary. The proposed joint compensation regulations would require compensation practices consistent with the three principles discussed above. As of February 1, 2018, these regulations have not been finalized. Unless and until a final rule is adopted, we cannot fully determine whether compliance with such a rule will adversely affect the Company’s or our bank subsidiary’s ability to hire, retain and motivate our key employees.

The Federal Reserve Board reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Proposed Legislation and Regulatory Action

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment for us and our bank subsidiary in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Polices

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to banks and its influence over reserve requirements to which banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

AVAILABLE INFORMATION

We are subject to the information requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. You can also review our filings by accessing the website maintained by the SEC at http://www.sec.gov. The site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. In addition, we maintain a website at http://www.homebancshares.com. We make available on our website copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such documents as soon as practicable after we electronically file such materials with or furnish such documents to the SEC.

Item 1A. RISK FACTORS

Our business exposes us to certain risks. Risks and uncertainties that management is not aware of or focused on may also adversely affect our business and operation. The following is a discussion of the most significant risks and uncertainties that may affect our business, financial condition and future results.

Risks Related to Our Industry

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, and changes in the laws and regulations to which we are subject could adversely affect our profitability.

We and our bank subsidiary are subject to extensive federal and state regulation and supervision. As a registered bank holding company, we are primarily regulated by the Federal Reserve Board. Our bank subsidiary is also primarily regulated by the Federal Reserve Board and the Arkansas State Bank Department.

Banking industry regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. Complying with such regulations is costly and may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements by our regulators. Violations of various laws, even if unintentional, may result in significant fines or other penalties, including restrictions on branching or bank acquisitions.

Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector during the recession of the last decade. The act requires the issuance of a substantial number of new regulations by federal regulatory agencies which will affect financial institutions, some of which have yet to be issued or implemented.

President Trump and the Congressional majority have indicated that they intend to closely scrutinize the Dodd-Frank Act and that provisions of the act and rules promulgated thereunder may be revised, repealed or amended. While any such reforms are expected to be favorable to our industry, we cannot assure than they will not significantly increase our compliance or operating costs or otherwise have a significant impact on our business. The provisions of the Dodd-Frank Act and the regulations promulgated under the act may continue to be implemented, and there could be additional new federal or state laws, regulations and policies regarding lending and funding practices and liquidity standards. Additionally, financial institution regulatory agencies have intensified their response to concerns and trends identified in examinations, including through the issuance of formal enforcement actions. Negative developments in the financial services industry or other new legislation or regulations could adversely impact our operations and our financial performance by subjecting us to additional costs, restricting our business operations, including our ability to originate or sell loans, and/or increasing the ability of non-banks to offer competing financial services.

As regulation of the banking industry continues to evolve, we expect the costs of compliance to continue to increase and, thus, to affect our ability to operate profitably. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans. If these developments negatively impact our ability to implement our business strategies, it may have a material adverse effect on our results of operations and future prospects.

We have exceeded $10 billion in assets, and as result, we will become subject to increased regulatory requirements, which could materially and adversely affect us.

We and our bank subsidiary exceeded $10 billion in total assets for the first time during the first quarter of 2017, and as of December 31, 2017, our total assets remain in excess of $10 billion. Therefore, we and our bank subsidiary will become subject to increased regulatory requirements beginning in 2018. The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress testing requirements. Failure to meet the enhanced prudential standards and stress testing requirements could limit, among other things, our ability to engage in expansionary activities or make dividend payments to our shareholders. In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to various federal consumer financial protection laws and regulations. Previously, our bank subsidiary has been subject to regulations adopted by the CFPB, but the Federal Reserve was primarily responsible for examining our bank subsidiary’s compliance with consumer protection laws and those CFPB regulations. As a relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB’s examination and regulatory authority might impact our business. Further, the possibility of future changes in the authority of the CFPB by Congress or the Trump Administration is uncertain, and we cannot ascertain the impact, if any, changes to the CFPB may have on our business.

With respect to deposit-taking activities, banks with assets in excess of $10 billion are subject to two changes. First, these institutions are subject to a deposit assessment based on a new scorecard issued by the FDIC. This scorecard considers, among other things, the bank’s CAMELS rating, results of asset-related stress testing and funding-related stress, as well as our use of core deposits, among other things. Depending on the results of the bank’s performance under that scorecard, the total base assessment rate is between 1.5 to 40 basis points. Any increase in our bank subsidiary’s deposit insurance assessments may result in an increased expense related to our use of deposits as a funding source. Additionally, banks with over $10 billion in total assets are no longer exempt from the requirements of the Federal Reserve’s rules on interchange transaction fees for debit cards. This means that, beginning on July 1, 2018, our bank subsidiary will be limited to receiving only a “reasonable” interchange transaction fee for any debit card transactions processed using debit cards issued by our bank subsidiary to our customers. The Federal Reserve has determined that it is unreasonable for a bank with more than $10 billion in total assets to receive more than $0.21 plus 5 basis points of the transaction plus a $0.01 fraud adjustment for an interchange transaction fee for debit card transactions. A reduction in the amount of interchange fees we receive for electronic debit interchange will reduce our revenues. During fiscal year 2017, we collected $20.8 million in debit card interchange fees. We estimate that had we been subject to this limitation during 2017, our interchange fee revenue would have been reduced by approximately $7.0 million.

In anticipation of becoming subject to the heightened regulatory requirements, we have hired additional compliance personnel and implemented structural initiatives to address these requirements. However, compliance with these requirements may necessitate that we hire additional compliance or other personnel, design and implement additional internal controls, and/or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our customers and, as a result, may adversely affect our stock price or our ability to retain our customers or effectively compete for new business opportunities. Our regulators may also consider our compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters.

Difficult market and economic conditions may adversely affect our industry and our business.

The financial crisis and the resulting economic downturn in the latter years of the last decade had a significant adverse impact on the banking industry, and particularly community banks. Dramatic declines in the housing market, with falling home prices and increased delinquencies and foreclosures, negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. Reduced availability of commercial credit and sustained higher unemployment negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. As a result of these market conditions and the raising of credit standards, our industry experienced commercial and consumer deficiencies, low customer confidence, market volatility and generally sluggish business activity.

Although general economic conditions nationally and locally in our market areas have improved in recent years, we cannot be certain that the recent positive economic trends will continue. The improvement of certain economic indicators, such as real estate asset values, rents and unemployment, may vary between geographic markets and may continue to lag behind improvement in the overall economy. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly than other economic sectors. If the positive movement in these economic indicators in our market areas subsides or conditions once again worsen, the adverse effects of an economic downturn on us, our customers and the other financial institutions in our market may result in increased foreclosures, delinquencies and customer bankruptcies as well as more restricted access to funds. Any such negative events may have an adverse effect on our business, financial condition, results of operations and stock price.

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.

Our FDIC insurance premiums and assessments may increase and result in higher noninterest expense.

Our bank subsidiary’s deposits are insured by the FDIC up to legal limits, and accordingly, we are subject to FDIC deposit insurance assessments. As our bank subsidiary has exceeded $10 billion in assets, the method for calculating its FDIC assessments has changed and our FDIC assessments will increase as a result. See “Item 1. Business—Supervision and Regulation—Deposit Insurance and Assessments.” In addition, the FDIC recently increased the deposit insurance fund’s target reserve ratio to 2.0% of insured deposits following the Dodd-Frank Act’s elimination of the 1.5% cap on the insurance fund’s reserve ratio and has put in place a restoration plan to restore the deposit insurance fund to its 1.35% minimum reserve ratio mandated by the Dodd-Frank Act by September 30, 2020. In March 2016, the FDIC approved a final rule to meet this requirement by 2018. To meet the minimum reserve ratio by 2018, during the third calendar quarter of 2016 the FDIC began assessing banks with consolidated assets of more than $10.0 billion a surcharge assessment of 0.045%. The surcharge will continue through the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018. In the event the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC has approved imposing a shortfall assessment on banks with $10.0 billion or more in consolidated assets on March 31, 2019.

We are generally unable to control the amount and timetable for payment of premiums that we are required to pay for FDIC insurance. There is no guarantee that our assessment rate will not increase in the future. Additionally, if there is another increase in bank or financial institution failures or the recently adopted changes do not have their desired effect of strengthening the DIF reserve ratio, the FDIC may further revise the assessment rates or the risk-based assessment system. Such changes may require us to pay higher FDIC premiums than our current levels, or the FDIC may charge additional special assessments, either of which would increase our noninterest expense.

Our profitability is vulnerable to interest rate fluctuations and monetary policy.

Most of our assets and liabilities are monetary in nature, and thus subject us to significant risks from changes in interest rates. Consequently, our results of operations can be significantly affected by changes in interest rates and our ability to manage interest rate risk. Changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationship between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income or a decrease in interest rate spread. In addition to affecting our profitability, changes in interest rates can impact the valuation of our assets and liabilities. Changes in interest rates can also affect our business and profitability in numerous other ways. For example, increases in interest rates can have a negative impact on our results of operations by reducing loan demand and the ability of borrowers to repay their current obligations, while decreases in interest rates may affect loan prepayments.

As of December 31, 2017, our one-year ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities was 117.9% and our cumulative repricing gap position was 9.1% of total earning assets, resulting in a limited impact on earnings for various interest rate change scenarios. Floating rate loans made up 49.9% of our $10.33 billion total loan portfolio. A loan is considered fixed rate if the loan is currently at its adjustable floor or ceiling. In addition, 62.7% of our loans receivable and 69.9% of our time deposits at December 31, 2017, were scheduled to reprice within 12 months and our other rate sensitive asset and rate sensitive liabilities composition is subject to change. As a result, our interest rate sensitivity profile was asset sensitive as of December 31, 2017, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates. Significant composition changes in our rate sensitive assets or liabilities could result in a more unbalanced position and interest rate changes would have more of an impact on our earnings.

Our results of operations are also affected by the monetary policies of the Federal Reserve Board. Actions by the Federal Reserve Board involving monetary policies could have an adverse effect on our deposit levels, loan demand or business and earnings.

Risks Related to Our Business

The total impact of Hurricane Irma on our financial condition and results of operations 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.

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 December 31, 2017. In addition, in order to assist our customers during this crisis, we offered customers located in the disaster area a 90-day deferment on outstanding loans. During the fourth quarter of 2017, customers with loan balances totaling approximately $211.7 million accepted the 90-day deferment. As of December 31, 2017, loan balances totaling approximately $63.6 million remained on the 90-day deferment.

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.

Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which would materially and adversely affect us.

Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our secured loans. We endeavor to maintain an allowance for loan losses that we consider adequate to absorb future losses that may occur in our loan portfolio. As of December 31, 2017, our allowance for loan losses was approximately $110.3 million, or 1.07% of our total loans. In determining the size of the allowance, we analyze our loan portfolio based on our historical loss experience, volume and classification of loans, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If our assumptions are incorrect, our current allowance may be insufficient to absorb future loan losses, and increased loan loss reserves may be needed to respond to different economic conditions or adverse developments in our loan portfolio. When there is an economic downturn it is more difficult for us to estimate the losses that we will experience in our loan portfolio. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs could have a negative effect on our operating results.

Our high concentration of real estate loans and especially commercial real estate loans exposes us to increased lending risk.

As of December 31, 2017, 85.1% of our total loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. This includes commercial real estate loans (excluding construction/land development) of $4.68 billion, or 45.3% of total loans, construction/land development loans of $1.70 billion, or 16.4% of total loans, and residential real estate loans of $2.41 billion, or 23.4% of total loans. This high concentration of real estate loans could subject us to increased credit risk in the event of a decrease in real estate values in our markets, a real estate recession or a natural disaster. Also, in any such event, our ability to recover on defaulted loans by foreclosing and selling real estate collateral would be diminished, and we would be more likely to suffer losses on defaulted loans.

In addition to the risks associated with the high concentration of real estate-secured loans, the commercial real estate and construction/land development loans, which comprised 61.7% of our total loan portfolio as of December 31, 2017, expose us to a greater risk of loss than our residential real estate loans, which comprised 23.4% of our total loan portfolio as of December 31, 2017. Commercial real estate and land development loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential loans. Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to a significantly greater risk of loss compared to an adverse development with respect to one residential mortgage loan.

The repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flows from the project are reduced, a borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, we may be compelled to modify the terms of the loan, or in the most extreme cases, we may have to foreclose.

Our geographic concentration of banking activities and loan portfolio makes us more vulnerable to adverse conditions in our local markets.

Our bank subsidiary operates through branch locations in Arkansas, Florida, Alabama and New York City and a loan production office in Los Angeles, California. However, approximately 90.4% of our total loans and 90.8% of our real estate loans as of December 31, 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. An adverse development with respect to the market conditions of any of these specific market areas or a decrease in real estate values in those market areas could expose us to a greater risk of loss than a portfolio that is spread among a larger geographic base.

Depressed local economic and housing markets have led to loan losses and reduced earnings in the past and could lead to additional loan losses and reduced earnings.

During the latter years of the last decade, our Florida markets experienced a dramatic reduction in housing and real estate values, coupled with significantly higher unemployment. These conditions contributed to increased non-performing loans and reduced asset quality during this time period. While market conditions in our Florida markets have improved in recent years leading to resulting improvements in our non-performing loans and asset quality, any similar future economic downturn or deterioration in real estate values could cause us to incur additional losses relating to increased non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income and our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then-fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. These factors, individually or in the aggregate, could have an adverse effect on our financial condition and results of operations.

Additionally, our success significantly depends upon the growth in population, income levels, deposits and housing starts in our markets. If the communities in which we operate do not grow or if prevailing economic conditions deteriorate locally or nationally, our business may be adversely affected. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

If the value of real estate in our Florida markets were to once again deteriorate, a significant portion of our loans in our Florida market could become under-collateralized, which could have a material adverse effect on us.

As of December 31, 2017, loans in the Florida market totaled $5.26 billion, or 50.9% of our loans receivable. Of the Florida loans, approximately 88.7% were secured by real estate. In prior years, the difficult local economic conditions have adversely affected the values of our real estate collateral in Florida, and they could do so again if the markets were to once again deteriorate in the future. The real estate collateral in each case provides an alternate source of repayment on our loans in the event of default by the borrower but may deteriorate in value during the time credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

Because we have a concentration of exposure to a number of individual borrowers, a significant loss on any of those loans could materially and adversely affect us.

We have a concentration of exposure to a number of individual borrowers. Under applicable law, our bank subsidiary is generally permitted to make loans to one borrowing relationship up to 20% of its Tier 1 capital plus the allowance for loan losses. As of December 31, 2017, the legal lending limit of our bank subsidiary for secured loans was approximately $331.3 million. Our board of directors has established an in-house lending limit of $20.0 million to any one borrowing relationship without obtaining the approval of both our Chairman, John W. Allison, and our director Richard H. Ashley. As of December 31, 2017, we had a total of $3.60 billion, or 34.8% of our total loans, committed to the aggregate group of borrowers whose total debt exceeds the established in-house lending limit of $20.0 million.

Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures.

Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures. We have traditionally obtained funds principally through local deposits, and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders. In addition, local deposits reflect a mix of transaction and time deposits, whereas brokered deposits typically are less stable time deposits, which may need to be replaced with higher cost funds. Our costs of funds and our profitability and liquidity are likely to be adversely affected if and to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.

The loss of key officers may materially and adversely affect us.

Our success depends significantly on our Chairman, John W. Allison, and our executive officers, especially C. Randall Sims, Brian S. Davis, J. Stephen Tipton and Kevin D. Hester plus Centennial Bank Chief Executive Officer and President, Tracy M. French, and our regional Centennial Bank presidents. Centennial Bank, in particular, relies heavily on its management team’s relationships in its local communities to generate business. The loss of services from a member of our current management team may materially and adversely affect our business, financial condition, results of operations and future prospects.

The value of securities in our investment portfolio may decline in the future.

As of December 31, 2017, we owned $1.89 billion of investment securities. The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio. We analyze our securities on a quarterly basis to determine if an other-than-temporary impairment has occurred. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could have a material adverse effect on our business, financial condition or results of operations.

Our recent results do not indicate our future results and may not provide guidance to assess the risk of an investment in our common stock.

We are unlikely to sustain our historical rate of growth, and may not even be able to expand our business at all. Further, our recent growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.

We may not be able to raise the additional capital we need to grow and, as a result, our ability to expand our operations could be materially impaired.

Federal and state regulatory authorities require us and our bank subsidiary to maintain adequate levels of capital to support our operations. While we believe that our existing capital (which well exceeds the federal and state capital requirements) will be sufficient to support our current operations, anticipated expansion and potential acquisitions, factors such as faster than anticipated growth, reduced earnings levels, operating losses, changes in economic conditions, revisions in regulatory requirements, or additional acquisition opportunities may lead us to seek additional capital.

Our ability to raise additional capital, if needed, will depend on our financial performance and on conditions in the capital markets at that time, which are outside our control. If we need additional capital but cannot raise it on terms acceptable to us, our ability to expand our operations could be materially impaired, our business, financial condition, results of operations and prospects may be adversely affected, and our stock price may decline.

Our growth and expansion strategy may not be successful and our market value and profitability may suffer.

Growth through the acquisition of banks, including FDIC-assisted transactions, and de novo branching represent important components of our business strategy. Acquisitions are subject to regulatory approval, and we cannot assure that we will be able to obtain approval for a proposed acquisition in a timely manner or at all. Any future acquisitions we might make will also be accompanied by other risks commonly encountered in acquisitions. These risks include, among other things:

•

credit risk associated with the acquired bank’s loans and investments;

•

the use of inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

•

the potential exposure to unknown or contingent liabilities related to the acquisition;

•

the time and expense required to integrate an acquisition;

•

the effectiveness of integrating operations, personnel and customers;

•

risks of impairment to goodwill or other than temporary impairment; and

•

potential disruption of our ongoing business.

We expect that competition for suitable acquisition candidates may be significant. We may compete with other banks or financial service companies with similar acquisition strategies, many of which are larger and have greater financial and other resources. We cannot assure you that we will be able to successfully identify and acquire suitable acquisition targets on acceptable terms and conditions.

We may continue to have opportunities from time to time to acquire the assets and liabilities of failed banks in FDIC-assisted transactions. These acquisitions involve risks similar to acquiring existing banks even though the FDIC might provide assistance to mitigate certain risks such as sharing in exposure to loan losses and providing indemnification against certain liabilities of the failed institution. However, because these acquisitions are structured in a manner that would not allow us the time normally associated with preparing for integration of an acquired institution, we may face additional risks in FDIC-assisted transactions. These risks include, among other things, the loss of customers, strain on management resources related to collection and management of problem loans and problems related to integration of personnel and operating systems.

In addition to the acquisition of existing financial institutions, as opportunities arise, we may grow through de novo branching. De novo branching and any acquisition carry with them numerous risks, including the following:

•

the inability to obtain all required regulatory approvals;

•

the significant upfront costs and anticipated operating losses associated with establishing a de novo branch or a new bank;

•

the inability to secure the services of qualified senior management;

•

the local market receptivity for branches established or banks acquired outside of those markets in which we currently maintain a material presence;

•

the local economic conditions within the market to be served by the de novo branch or new bank;

•

the inability to obtain attractive locations within a new market at a reasonable cost; and

•

the additional strain on management resources and internal systems and controls.

We cannot assure that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions (including FDIC-assisted transactions) and de novo branching. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value and profitability.

There may be undiscovered risks or losses associated with our bank acquisitions which would have a negative impact upon our future income.

Our growth strategy includes strategic acquisitions of banks. We have acquired 22 banks since we started our first subsidiary bank in 1999, including a total of 17 banks since 2010. We will continue to consider strategic acquisitions, with a primary focus on Arkansas, Florida, South Alabama and other nearby markets. In most cases, our acquisition of a bank includes the acquisition of all or a substantial portion of the target bank’s assets and liabilities, including all or a substantial portion of its loan portfolio. There may be instances when we, under our normal operating procedures, may find after the acquisition that there may be additional losses or undisclosed liabilities with respect to the assets and liabilities of the target bank, and, with respect to its loan portfolio, that the ability of a borrower to repay a loan may have become impaired, the quality of the value of the collateral securing a loan may fall below our standards, or our determination of the fair value of any such loan may be inadequate. One or more of these factors might cause us to have additional losses or liabilities, additional loan charge-offs, or increases in allowances for loan losses, which would have a negative impact upon our financial condition and results of operations.

Changes in national and local economic conditions could lead to higher loan charge-offs in connection with our acquisitions.

In connection with our acquisitions since 2010, we have acquired a significant portfolio of loans. Although we marked down the loan portfolios we have acquired, there is no assurance that the non-impaired loans we acquired will not become impaired or that the impaired loans will not suffer further deterioration in value resulting in additional charge-offs to the acquired loan portfolio. Fluctuations in national, regional and local economic conditions, including those related to local residential and commercial real estate and construction markets, may increase the level of charge-offs we make to our loan portfolio, and, may consequently, reduce our net income. Such fluctuations may also increase the level of charge-offs on the loan portfolios we have acquired in the acquisitions and correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition even if other favorable events occur.

If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings.

When we acquire a business, a portion of the purchase price of the acquisition is generally allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2017, our goodwill and other identifiable intangible assets were $977.3 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired because, for example, the acquired business does not meet projected revenue targets or certain key employees leave, we are required to write down the carrying value of these assets. We conduct a review at least annually to determine whether goodwill is impaired. Our annual goodwill impairment evaluation performed during the fourth quarter of 2017 indicated no impairment of goodwill for our reporting segments. We cannot provide assurance, however, that we will not be required to take an impairment charge in the future. Any impairment charge would have an adverse effect on our shareholders’ equity and financial results and could cause a decline in our stock price.

Our acquisitions have caused us to modify our disclosure controls and procedures, which may not result in the material information that we are required to disclose in our SEC reports being recorded, processed, summarized, and reported timely.

Our management is responsible for establishing and maintaining effective disclosure controls and procedures that are designed to cause the material information that we are required to disclose in reports that we file or submit under the Exchange Act to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the SEC’s rules and forms. As a result of our acquisitions, we may implement changes to processes, information technology systems and other components of internal control over financial reporting as part of our integration activities. Notwithstanding any changes to our disclosure controls and procedures resulting from our evaluation of the same after the acquisition, our control systems, no matter how well designed and operated, may not result in the material information that we are required to disclose in our SEC reports being recorded, processed, summarized, and reported within required time periods. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. If, as a result of our acquisitions or otherwise, we are unable to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, investors and customers may lose confidence in the accuracy and completeness of our financial reports, we may suffer adverse regulatory consequences or violate listing standards, and the market price of our common stock could decline.

Competition from other financial institutions and financial service providers may adversely affect our profitability.

We face substantial competition in all phases of our operations from a variety of different competitors. We experience strong competition, not only from commercial banks, savings and loan associations and credit unions, but also from mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial services providers operating in or near our market areas. We compete with these institutions both in attracting deposits and in making loans.

Many of our competitors are much larger national and regional financial institutions. We may face a competitive disadvantage against them as a result of our smaller size and resources and our lack of geographic diversification. Due to their size, larger competitors can achieve economies of scale and may offer a broader range of products and services or more attractive pricing than us. If we are unable to offer competitive products and services, our business may be negatively affected. Many of our competitors are not subject to the same degree of regulation that we are as an FDIC-insured institution, which gives them greater operating flexibility and reduces their expenses relative to ours. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.

We also compete against community banks that have strong local ties. These smaller institutions are likely to cater to the same small and mid-sized businesses that we target and to use a relationship-based approach similar to ours. In addition, our competitors may seek to gain market share by pricing below the current market rates for loans and paying higher rates for deposits. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements and innovations.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services, including innovative ways that customers can make payments or manage their accounts, such as through the use of digital wallets or digital currencies. In addition to better serving customers, effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients, which may adversely affect our results of operations and future prospects.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures, interruption or security breaches will not occur, or if they do occur that they will be adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

Future hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on us.

As illustrated by the impact of Hurricane Irma, our markets in Alabama and Florida, like other coastal areas, are susceptible to hurricanes and tropical storms. Such weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or other weather events will affect our operations or the economies in our market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties or other collateral securing our loans and an increase in the delinquencies, foreclosures and loan losses. Our business or results of operations may be adversely affected by these and other negative effects of hurricanes or other significant weather events.

We may incur environmental liabilities with respect to properties to which we take title.

A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own or foreclose and take title to real estate and could become subject to environmental liabilities with respect to these properties. In addition, we acquire branches and real estate in connection with our acquisitions of banks. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. If we were to become subject to significant environmental liabilities, it could have a material adverse effect on our results of operations and financial condition.

Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their services or fail to comply with banking laws and regulations.

We depend to a significant extent on relationships with third party service providers. Specifically, we utilize third party core banking services and receive credit card and debit card services, branch capture services, Internet banking services and services complementary to our banking products from various third party service providers. If these third party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking, credit card and debit card services, in a timely manner if they were unwilling or unable to provide us with these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on our business, financial condition or results of operations. Even if we are able to replace them, it may be at higher cost to us, which could have a material adverse effect on our business, financial condition or results of operations. In addition, if a third party provider fails to provide the services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm that could have a material adverse effect on our business, financial condition or results of operations.

Our earnings could be adversely impacted by incidences of fraud and compliance failure.

Financial institutions are inherently exposed to fraud risk. A fraud can be perpetrated by a customer of our bank subsidiary, an employee, a vendor, or members of the general public. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, and checking transactions. Our largest fraud risk, associated with the origination of loans, includes the intentional misstatement of information in property appraisals or other underwriting documentation provided to us by third parties. Compliance risk is the risk that loans are not originated in compliance with applicable laws and regulations and our standards. There can be no assurance that we can prevent or detect acts of fraud or violation of law or our compliance standards by the third parties that we deal with. Repeated incidences of fraud or compliance failures would adversely impact the performance of our loan portfolio.

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 our 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 fair value adjustments.

As of December 31, 2017, we have recorded at fair value all credit-impaired loans acquired in the merger of Stonegate Bank into Centennial Bank 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. 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.

Our banking relationships with the Cuban government and Banco Internacional de Comercia, S.A. (“BICSA”) as a result of our Stonegate acquisition may increase our compliance risk and compliance costs.

U.S. persons, including U.S. banks, are restricted in their ability to establish relationships and engage in transactions with Cuba and Cuban persons pursuant to the existing U.S. embargo and the Cuban Assets Control Regulations. However, 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 (“OFAC”) 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. (“BICSA”) in Havana, Cuba.

Cross-border correspondent banking relationships pose unique risks because they create situations in which a U.S. financial institution will be handling funds from a foreign financial institution whose customers may not be transparent to the U.S. financial institution. Moreover, Cuban financial institutions are not subject to the same or similar regulatory guidelines as U.S. banks; therefore, these foreign institutions may pose a higher money laundering risk to their respective U.S. bank correspondent(s). Investigations have determined that, in the past, foreign correspondent accounts have been used by drug traffickers and other criminal elements to launder funds. Shell companies are sometimes used in the layering process to hide the true ownership of accounts at foreign correspondent financial institutions. Because of the large amount of funds, multiple transactions, and the U.S. bank’s potential lack of familiarity with a foreign correspondent financial institution’s customer, criminals and terrorists can more easily conceal the source and use of illicit funds. Consequently, we may have a higher risk of noncompliance with the Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) rules due to its new correspondent banking relationship with BICSA and will likely need to more closely monitor transactions related to correspondent accounts in Cuba, potentially resulting in increased compliance costs. Our failure to strictly adhere to the terms and requirements of our OFAC license or our failure to adequately manage our BSA/AML compliance risk in light of our new correspondent banking relationship with BICSA could result in regulatory or other actions being taken against us, which could significantly increase our compliance costs and materially and adversely affect our results of operations.

Risks Related to Owning Our Stock

The rights of our common shareholders are subordinate to the holders of any debt securities that we may issue from time to time and may be subordinate to the holders of any series of preferred stock that may issue in the future.

On April 3, 2017, we issued $300.0 million of 5.625% fixed-to-floating rate subordinated notes, which mature in 2027. Because these subordinated notes are senior to our shares of common stock, in the event of our bankruptcy, dissolution or liquidation, the holders of the subordinated notes must be satisfied before any distributions can be made to the holders of our common stock.

As of December 31, 2017, we also have $73.3 million of outstanding subordinated debentures issued in connection with trust preferred securities. Payments of the principal and interest on the trust preferred securities are unconditionally guaranteed by us. The subordinated debentures are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of our common stock. We have the right to defer distributions on the subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our capital stock. If we elect to defer or if we default with respect to our obligations to make payments on these subordinated debentures, this would likely have a material adverse effect on the market value of our common stock.

Our Board of Directors has the authority to issue in the aggregate up to 5,500,000 shares of preferred stock, and to incur senior or subordinated indebtedness, generally without shareholder approval. Our preferred stock could be issued with voting, liquidation, dividend and other rights that may be superior to the rights of our common stock. In addition, like our outstanding subordinated debentures, any future indebtedness that we incur would be expected to be senior to our common stock with respect to payment upon liquidation, dissolution or winding up. Accordingly, common shareholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.

We may be unable to, or choose not to, pay dividends on our common stock.

Although we have paid a quarterly dividend on our common stock since 2003 and expect to continue this practice, we cannot assure you of our ability to continue. Our ability to pay dividends depends on the following factors, among others:

•

We may not have sufficient earnings since our primary source of income, the payment of dividends to us by our bank subsidiary, is subject to federal and state laws that limit the ability of that bank to pay dividends.

•

Federal Reserve Board policy requires bank holding companies to pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.

•

Before dividends may be paid on our common stock in any year, payments must be made on our subordinated debentures.

•

Our board of directors may determine that, even though funds are available for dividend payments, retaining the funds for internal uses, such as expansion of our operations, is a better strategy.

If we fail to pay dividends, capital appreciation, if any, of our common stock may be the sole opportunity for gains on an investment in our common stock. In addition, in the event our bank subsidiary becomes unable, due to regulatory restrictions, capital planning needs or otherwise, to pay dividends to us, we may not be able to service our debt, pay our other obligations or pay dividends on our common stock. Accordingly, our inability to receive dividends from our bank subsidiary could also have a material adverse effect on our business, financial condition and results of operations and the value of your investment in our common stock.

Our stock trading volume may not provide adequate liquidity for investors.

Although shares of our common stock are listed for trading on the NASDAQ Global Select Market, the average daily trading volume in the common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of a sufficient number of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the daily average trading volume of our common stock, significant sales of the common stock in a brief period of time, or the expectation of these sales, could cause a decline in the price of our common stock.

Item 1B. UNRESOLVED STAFF COMMENTS

There are currently no unresolved Commission staff comments received by the Company more than 180 days prior to the end of the fiscal year covered by this annual report.

Item 2. PROPERTIES

The Company’s main office is located in a Company-owned 33,000 square foot building located at 719 Harkrider Street in downtown Conway, Arkansas. As of December 31, 2017, our bank subsidiary owned or leased a total of 76 branches located in Arkansas, 88 branches in Florida, five branches in South Alabama and one branch in New York City. The Company also owns or leases other buildings that provide space for operations, mortgage lending and other general purposes. We believe that our banking and other offices are in good condition and are suitable to our needs.

Item 3. LEGAL PROCEEDINGS

While we and our bank subsidiary and other affiliates are from time to time parties to various legal proceedings arising in the ordinary course of their business, management believes, after consultation with legal counsel, that there are no proceedings threatened or pending against us or our bank subsidiary or other affiliates that will, individually or in the aggregate, have a material adverse effect on our business or consolidated financial condition.

Item 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the NASDAQ Global Select Market under the symbol “HOMB.” Set forth below are the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market for the two most recently completed fiscal years. Also set forth below are dividends declared per share in each of these periods:


	Price per Common Share				Quarterly Dividends Per Common
	High		Low		Share
2017
First Quarter	$	29.45	$	25.87	$	0.0900
Second Quarter		26.40		22.82		0.0900
Third Quarter		25.86		21.22		0.1100
Fourth Quarter		25.80		21.39		0.1100

2016
First Quarter	$	21.29	$	17.07	$	0.0750
Second Quarter		22.30		18.55		0.0875
Third Quarter		23.50		18.91		0.0900
Fourth Quarter		28.46		19.89		0.0900

As of February 23, 2018, there were approximately 1,499 stockholders of record of the Company’s common stock.

Our policy is to declare regular quarterly dividends based upon our earnings, financial position, capital improvements and such other factors deemed relevant by the Board of Directors. The dividend policy is subject to change, however, and the payment of dividends is not necessarily dependent upon the availability of earnings and future financial condition. Information regarding regulatory restrictions on our ability to pay dividends is discussed in “Supervision and Regulation – Payment of Dividends.”

There were no sales of our unregistered securities during the period covered by this report.

During the three months ended December 31, 2017, the Company utilized a portion of its stock repurchase program approved by the Board of Directors, on January 20, 2017. Additionally, on February 21, 2018, the Board of Directors of the Company authorized the repurchase of up to an additional 5,000,000 shares of the Company’s common stock under this repurchase program. 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:

Issuer Purchases of Equity Securities


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
October 1 through October 31, 2017		22,800	$	22.72		22,800		5,262,136
November 1 through November 31, 2017		35,000		21.96		35,000		5,227,136
December 1 through December 31, 2017		—		—		—		5,227,136

Total		57,800				57,800

Performance Graph

Below is a graph which summarizes the cumulative return earned by the Company’s stockholders since December 31, 2012, compared with the cumulative total return on the Russell 2000 Index and SNL Bank and Thrift Index. This presentation assumes that the value of the investment in the Company’s common stock and each index was $100.00 on December 31, 2012 and that subsequent cash dividends were reinvested.

LOGO


	*Period Ending*
*Index*	12/31/12		12/31/13		12/31/14		12/31/15		12/31/16		12/31/17
Home BancShares, Inc.		100.00		229.02		199.43		254.97		355.04		302.20
Russell 2000 Index		100.00		138.82		145.62		139.19		168.85		193.58
SNL Bank and Thrift Index		100.00		136.92		152.85		155.94		196.86		231.49

Item 6. SELECTED FINANCIAL DATA.


Summary Consolidated Financial Data
	As of or for the Years Ended December 31,
	2017			2016			2015			2014			2013
	(Dollars and shares in thousands, except per share data)
Income statement data:
Total interest income	$	520,251		$	436,537		$	377,436		$	335,888		$	217,126
Total interest expense		64,346			30,579			21,724			18,870			14,531

Net interest income		455,905			405,958			355,712			317,018			202,595
Provision for loan losses		44,250			18,608			25,164			22,664			5,180

Net interest income after provision for loan losses		411,655			387,350			330,548			294,354			197,415
Non-interest income		99,636			87,051			65,498			44,762			40,365
Non-interest expense		240,208			191,755			177,555			161,943			133,307

Income before income taxes		271,083			282,646			218,491			177,173			104,473
Income tax expense		136,000			105,500			80,292			64,110			37,953

Net income	$	135,083		$	177,146		$	138,199		$	113,063		$	66,520

Per share data:
Basic earnings per common share	$	0.90		$	1.26		$	1.01		$	0.86		$	0.58
Diluted earnings per common share		0.89			1.26			1.01			0.85			0.57
Book value per common share		12.70			9.45			8.55			7.51			6.46
Tangible book value per common share⁽¹⁾⁽⁴⁾		7.07			6.63			5.71			4.95			3.97
Dividends – common		0.4000			0.3425			0.275			0.175			0.145
Average common shares outstanding		150,806			140,418			136,615			131,902			115,816
Average diluted shares outstanding		151,528			140,713			137,130			132,662			116,504
Performance ratios:
Return on average assets		1.17	%		1.85	%		1.68	%		1.63	%		1.43	%
Return on average assets excluding intangible amortization⁽⁵⁾		1.26			1.95			1.79			1.75			1.52
Return on average common equity		8.23			14.08			12.77			12.34			11.27
Return on average tangible common equity excluding intangible amortization⁽¹⁾⁽⁶⁾		12.92			20.82			19.37			19.80			15.26
Net interest margin⁽³⁾⁽⁹⁾		4.51			4.81			4.98			5.37			5.19
Net interest margin (non-GAAP) ⁽³⁾		4.12			4.26			4.23			4.20			4.26
Efficiency ratio⁽⁸⁾		41.89			37.65			40.44			42.67			52.44
Core efficiency ratio (non-GAAP) ⁽⁸⁾		37.66			36.55			39.48			41.23			45.49
Asset quality:
Non-performing assets to total assets		0.44	%		0.81	%		0.89	%		1.18	%		1.84	%
Non-performing loans to total loans		0.43			0.85			0.96			1.23			1.66
Allowance for loan losses to non-performing loans		246.70			126.74			109.00			88.65			59.12
Allowance for loans losses to total loans		1.07			1.08			1.04			1.09			0.98
Net charge-offs to average total loans		0.17			0.11			0.22			0.22			0.51

Summary Consolidated Financial Data – Continued


	As of or for the Years Ended December 31,
	2017			2016			2015			2014			2013
	(Dollars and shares in thousands, except per share data)
Balance sheet data (period end):
Total assets	$	14,449,760		$	9,808,465		$	9,289,122		$	7,403,272		$	6,811,861
Investment securities – available-for-sale		1,663,517			1,072,920			1,206,580			1,067,287			1,175,484
Investment securities – held-to-maturity		224,756			284,176			309,042			356,790			114,621
Loans receivable		10,331,188			7,387,699			6,641,571			5,057,502			4,476,953
Allowance for loan losses		110,266			80,002			69,224			55,011			43,815
Intangible assets		977,300			396,294			399,426			346,348			324,034
Non-interest-bearing deposits		2,385,252			1,695,184			1,456,624			1,203,306			991,161
Total deposits		10,388,502			6,942,427			6,438,509			5,423,971			5,393,046
Subordinated debentures (trust preferred securities)		368,031			60,826			60,826			60,826			60,826
Stockholders’ equity		2,204,291			1,327,490			1,199,757			1,015,292			840,955
Capital ratios:
Common equity to assets		15.25	%		13.53	%		12.92	%		13.71	%		12.35	%
Tangible common equity to tangible assets⁽¹⁾⁽⁷⁾		9.11			9.89			9.00			9.48			7.97
Common equity Tier 1 capital		10.86			11.30			10.50			—			—
Tier 1 leverage ratio⁽²⁾		9.98			10.63			9.91			10.31			9.38
Tier 1 risk-based capital ratio		11.48			12.01			11.26			12.55			10.88
Total risk-based capital ratio		15.05			12.97			12.16			13.51			11.75
Dividend payout - common		44.69			27.15			27.19			20.49			25.51

(1)	Tangible calculations eliminate the effect of goodwill and acquisition-related intangible assets and the corresponding amortization expense on a tax-effected basis.

(2)	Leverage ratio is Tier 1 capital to quarterly average total assets less intangible assets and gross unrealized gains/losses on available-for-sale investment securities.

(3)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 26,” for the non-GAAP tabular reconciliation.

(4)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 28,” for the non-GAAP tabular reconciliation.

(5)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 29,” for the non-GAAP tabular reconciliation.

(6)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 30,” for the non-GAAP tabular reconciliation.

(7)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 31,” for the non-GAAP tabular reconciliation.

(8)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Table 32,” for the non-GAAP tabular reconciliation.

(9)	Fully taxable equivalent (assuming an income tax rate of 39.225%).

Item 7.

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

The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2017, 2016 and 2015. This discussion should be read together with the “Summary Consolidated Financial Data,” our consolidated financial statements and the notes thereto, and other financial data included in this document. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and in the forward-looking statements as a result of certain factors, including those discussed in the section of this document captioned “Risk Factors,” and elsewhere in this document. 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 (“Centennial”). As of December 31, 2017, we had, on a consolidated basis, total assets of $14.45 billion, loans receivable, net of $10.22 billion, total deposits of $10.39 billion, and stockholders’ equity of $2.20 billion.

We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and FHLB 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 net interest margin, return on average assets and return on average common equity. We also measure our performance by our efficiency ratio and core efficiency ratio (non-GAAP). The efficiency ratio 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.


Table 1: Key Financial Measures

	As of or for the Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands, except per share data)
Total assets	$	14,449,760		$	9,808,465		$	9,289,122
Loans receivable		10,331,188			7,387,699			6,641,571
Allowance for loan losses		110,266			80,002			69,224
Total deposits		10,388,502			6,942,427			6,438,509
Total stockholders’ equity		2,204,291			1,327,490			1,199,757
Net income		135,083			177,146			138,199
Basic earnings per share		0.90			1.26			1.01
Diluted earnings per share		0.89			1.26			1.01
Net interest margin – FTE		4.51	%		4.81	%		4.98	%
Net interest margin – FTE (non-GAAP)		4.12			4.26			4.23
Efficiency ratio		41.89			37.65			40.44
Core efficiency ratio (non-GAAP)		37.66			36.55			39.48
Return on average assets		1.17			1.85			1.68
Return on average common equity		8.23			14.08			12.77

2017 Overview

Our net income decreased $42.0 million, or 23.7%, to $135.1 million for the year ended December 31, 2017, from $177.1 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.89 per share and $1.26 per share for the years ended December 31, 2017 and 2016, respectively, representing a decrease of $0.37 per share or 29.37% for the year ended 2017 when compared to the previous year. Excluding the $36.9 million one-time Tax Cuts and Jobs Act (“TCJA”) charge, $33.4 million of hurricane expense, and $25.7 million of merger expenses associated with the 2017 acquisitions offset by $3.8 million of one-time non-taxable gain on acquisition, 2017 annual after-tax earnings excluding non-fundamental items were $204.8 million, an increase of $27.8 million, or 15.7%, from 2016 annual after-tax earnings excluding non-fundamental items of $177.0 million (See Table 27 for the non-GAAP tabular reconciliation). The $27.8 million increase in earnings excluding non-fundamental items is primarily associated with additional net interest income largely resulting from our acquisitions combined with $125.2 million of organic loan growth plus a decrease in the non-hurricane related provision for loan losses during 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 on deposits and 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 4.81% for the year ended December 31, 2016 to 4.51% for the year ended December 31, 2017. For the year ended December 31, 2017 and 2016, we recognized $35.7 million and $42.3 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was 4.12% and 4.26% for the years ended December 31, 2017 and 2016, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was 5.21% and 5.10% for the years ended December 31, 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 $13.1 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 2017.

Our efficiency ratio was 41.89% for the year ended December 31, 2017, compared to 37.65% for the same period in 2016. For year ended 2017, our core efficiency ratio was 37.66% which increased from the 36.55% reported for the year ended 2016 (See Table 32 for the non-GAAP tabular reconciliation). 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 and/or gains and losses.

Our return on average assets was 1.17% for the year ended December 31, 2017, compared to 1.85% for the same period in 2016. Excluding non-fundamental items, our return on average assets was 1.78% for the year ended December 31, 2017, compared to 1.85% for the same period in 2016 (See Table 29 for the non-GAAP tabular reconciliation). Our return on average common equity was 8.23% for the year ended December 31, 2017, compared to 14.08% for the same period in 2016. Excluding non-fundamental items, our return on average common equity was 12.48% for the year ended December 31, 2017, compared to 14.07% for the same period in 2016 (See Table 30 for the non-GAAP tabular reconciliation).

Our total assets as of December 31, 2017 increased $4.64 billion to $14.45 billion from the $9.81 billion reported as of December 31, 2016. Our loan portfolio increased $2.94 billion to $10.33 billion as of December 31, 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 $876.8 million to $2.20 billion as of December 31, 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 $74.7 million increase in retained earnings offset by $3.8 million of comprehensive loss and the repurchase of $20.8 million of our common stock during 2017. The improvement in stockholders’ equity for 2017, excluding the $77.5 million and $742.3 million of common stock issued to the GHI and Stonegate shareholders, respectively, was 4.3%.

As of December 31, 2017, our non-performing loans decreased to $44.7 million, or 0.43%, 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 246.70% as of December 31, 2017, compared to 126.74% as of December 31, 2016. Non-performing loans from our Arkansas franchise were $15.5 million at December 31, 2017 compared to $28.5 million as of December 31, 2016. Non-performing loans from our Florida franchise were $28.2 million at December 31, 2017 compared to $34.0 million as of December 31, 2016. Non-performing loans from our Alabama franchise were $929,000 at December 31, 2017 compared to $656,000 as of December 31, 2016. There were no non-performing loans from our Centennial CFG franchise.

As of December 31, 2017, our non-performing assets decreased to $63.6 million, or 0.44%, 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 $25.6 million at December 31, 2017 compared to $41.0 million as of December 31, 2016. Non-performing assets from our Florida franchise were $36.4 million at December 31, 2017 compared to $36.8 million as of December 31, 2016. Non-performing assets from our Alabama franchise were $1.6 million at December 31, 2017 compared to $1.2 million as of December 31, 2016. There were no non-performing assets from our Centennial CFG franchise.

2016 Overview

Our net income increased $38.9 million, or 28.2%, to $177.1 million for the year ended December 31, 2016, from $138.2 million for the same period in 2015. On a diluted earnings per share basis, our earnings were $1.26 per share and $1.01 per share for the years ended December 31, 2016 and 2015, respectively, representing an increase of $0.25 per share or 24.8% for the year ended 2016 when compared to the previous year. The $38.9 million increase in net income is primarily associated with additional net interest income during 2016 largely resulting from our 2015 acquisitions, organic loan growth, a slight decrease in provision for loan losses, growth in non-interest income and the reduced amortization of the indemnification asset, when compared to the same period in 2015. These improvements were partially offset by an increase in the costs associated with the asset growth when compared to the same period in 2015.

Our GAAP net interest margin decreased from 4.98% for the year ended December 31, 2015 to 4.81% for the year ended December 31, 2016. For the year ended December 31, 2016 and 2015, we recognized $42.3 million and $47.6 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was flat at 4.24% and 4.23% for the year ended December 31, 2016 and 2015. Additionally, the non-GAAP yield on loans excluding accretion income was also relatively flat at 5.10% and 5.05% for the year ended December 31, 2016 and 2015, respectively. Consequently, with a growth of the average loan balance of $1.25 billion, we experienced a decline in the GAAP yield on loans and net interest margin because the organic loan growth was approximately at our lower non-GAAP loan yields.

Our efficiency ratio was 37.65% for the year ended December 31, 2016, compared to 40.44% for the same period in 2015. For year ended 2016, our core efficiency ratio was 36.55% which is improved from the 39.48% reported for the year ended 2015. While we have realized the cost savings from our acquisitions and reduced costs from our recent branch closures, the improvement in the core efficiency ratio was primarily achieved through revenue from additional net interest income during 2016 resulting from our acquisitions and our organic loan growth, growth in non-interest income and our July 2016 buy-out of the FDIC loss share portfolio. 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-fundamental items such as merger expenses, FDIC loss share buy-out expense and/or gains and losses.

Our return on average assets was 1.85% for the year ended December 31, 2016, compared to 1.68% for the same period in 2015. Our return on average common equity was 14.08% for the year ended December 31, 2016, compared to 12.77% for the same period in 2015. We have been making notable progress in improving the performance of our legacy and acquired franchises, which is reflected in the improvement in our return on average assets and return on average common equity from 2015 to 2016.

Our total assets as of December 31, 2016 increased $519.3 million to $9.81 billion from the $9.29 billion reported as of December 31, 2015. Our loan portfolio increased $746.1 million to $7.39 billion as of December 31, 2016, from $6.64 billion as of December 31, 2015. This increase is a result of our organic loan growth since December 31, 2015. Stockholders’ equity increased $127.7 million to $1.33 billion as of December 31, 2016, compared to $1.20 billion as of December 31, 2015. The improvement in stockholders’ equity for the year ended 2016 was 10.6%. The increase in stockholders’ equity is primarily associated with the $129.1 million increase in retained earnings.

As of December 31, 2016, our non-performing loans decreased to $63.1 million, or 0.85%, of total loans from $63.5 million, or 0.96%, of total loans as of December 31, 2015. The allowance for loan losses as a percent of non-performing loans increased to 126.74% as of December 31, 2016, compared to 109.00% as of December 31, 2015. Non-performing loans from our Arkansas franchise were $28.5 million at December 31, 2016 compared to $28.3 million as of December 31, 2015. Non-performing loans from our Florida franchise were $34.0 million at December 31, 2016 compared to $35.1 million as of December 31, 2015. Non-performing loans from our Alabama franchise were $656,000 at December 31, 2016 compared to $132,000 as of December 31, 2015. There were no non-performing loans from our Centennial CFG franchise.

As of December 31, 2016, our non-performing assets decreased to $79.1 million, or 0.81%, of total assets from $82.7 million, or 0.89%, of total assets as of December 31, 2015. Non-performing assets from our Arkansas franchise were $41.0 million at December 31, 2016 compared to $40.3 million as of December 31, 2015. Non-performing assets from our Florida franchise were $36.8 million at December 31, 2016 compared to $41.5 million as of December 31, 2015. Non-performing assets from our Alabama franchise were $1.2 million at December 31, 2016 compared to $892,000 as of December 31, 2015. 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.

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

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

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

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

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

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

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

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

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

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.

Through our acquisition and merger of Stonegate into Centennial, we maintain a customer relationship to handle the accounts for Cuba’s diplomatic missions at the United Nations and for the Cuban Interests Section (now the Cuban Embassy) in Washington, D.C. This relationship was established in May 2015 pursuant to a special license granted to Stonegate 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 established a correspondent banking relationship with Banco Internacional de Comercio, S.A. in Havana, Cuba. As of December 31, 2017, this correspondent banking relationship does not have a material impact to the Company’s financial position and results of operations.

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

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.

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

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.

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

Florida Business BancGroup, Inc.

On October 1, 2015, we completed our acquisition of FBBI, parent company of Bay Cities Bank (“Bay Cities”). We paid a purchase price to the FBBI shareholders of $104.1 million for the FBBI acquisition. Under the terms of the agreement, shareholders of FBBI received 4,159,708 shares of our common stock valued at approximately $83.8 million as of October 1, 2015, plus approximately $20.3 million in cash in exchange for all outstanding shares of FBBI common stock. A portion of the cash consideration, $2.0 million, was placed into escrow with the FBBI shareholders having a contingent right to receive their pro-rata portions of such amount. The amount, if any, of such escrowed funds to be released to FBBI shareholders would depend upon the amount of losses that the Company incurred in the two years following the completion of the merger related to two class action lawsuits pending against Bay Cities. In August 2017, the Company distributed the full amount of this contingent cash consideration to the former FBBI shareholders, less $10,000 for compensation paid to a representative designated by FBBI who acted on behalf of the FBBI shareholders in connection with the escrow arrangements.

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

Pool of National Commercial Real Estate Loans

On April 1, 2015, Centennial acquired a pool of national commercial real estate loans from AM PR LLC, an affiliate of J.C. Flowers & Co., totaling approximately $289.1 million for a purchase price of 99% of the total principal value of the acquired loans. The acquired loans were originated by the former Doral Bank of San Juan, Puerto Rico within its Doral Property Finance portfolio and were transferred to the Seller by Banco Popular of Puerto Rico (“Popular”) upon its acquisition of the assets and liabilities of Doral Bank from the FDIC, as receiver for the failed Doral Bank. This pool of loans is now managed by a division of Centennial known as the Centennial Commercial Finance Group (“Centennial CFG”), which is responsible for servicing the acquired loan pool and originating new loan production.

In connection with this acquisition of loans, the Company opened a loan production office on April 23, 2015 in New York City, which became a branch on September 1, 2016. Through the New York office, Centennial CFG is building out a national lending platform focusing on commercial real estate plus commercial and industrial loans. As of December 31, 2017 and 2016, Centennial CFG had $1.44 billion and $1.11 billion in total loans net of discount, respectively.

Doral Bank’s Florida Panhandle operations

On February 27, 2015, Centennial acquired all the deposits and substantially all the assets of Doral Florida through an alliance agreement with Popular who was the successful lead bidder to acquire the assets and liabilities of the failed Doral Bank from the FDIC. Including the effects of the purchase accounting adjustments, the acquisition provided us with loans of approximately $37.9 million net of loan discounts, deposits of approximately $467.6 million, plus a $428.2 million cash settlement to balance the transaction. We recorded a bargain purchase gain of $1.6 million, in connection with the Doral Florida acquisition. The FDIC did not provide loss-sharing with respect to the acquired assets.

Prior to the acquisition, Doral Florida operated five branch locations in Panama City, Panama City Beach and Pensacola, Florida plus a loan production office in Tallahassee, Florida. At the time of acquisition, Centennial operated 29 branch locations in the Florida Panhandle. As a result, we closed all five branch locations during the July 2015 systems conversion and returned the facilities back to the FDIC.

See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements for an additional discussion regarding the acquisition of Doral Florida.

Termination of Remaining Loss-Share Agreements

Effective July 27, 2016, we reached an agreement terminating our remaining loss-share agreements with the FDIC. As a result, $57.4 million of these loans including their associated discounts previously classified as covered loans migrated to non-covered loans status during 2016. 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 will, however, 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. During 2017, the Company opened a branch location in Clearwater, Florida and a loan production office in Los Angeles, California which is under the management of Centennial CFG.

As a result of our continued focus on efficiency, during 2017, we closed four branch locations in our Florida footprint and one branch location in Daphne, Alabama.

During 2017, the Company acquired a total of 33 branches through the acquisitions of GHI, BOC and Stonegate. In an effort to achieve efficiencies, primarily from the Stonegate acquisition, the Company plans to close or merge several Florida locations during the first quarter of 2018. During the remainder of 2018, we may announce additional strategic consolidations where it improves efficiency in certain markets.

As of December 31, 2017, we had 170 branch locations. There were 76 branches in Arkansas, 88 branches in Florida, five branches in Alabama and one branch in New York City.

Results of Operations for the Years Ended December 31, 2017, 2016 and 2015

Our net income decreased $42.0 million, or 23.7%, to $135.1 million for the year ended December 31, 2017, from $177.1 million for the same period in 2016. On a diluted earnings per share basis, our earnings were $0.89 per share and $1.26 per share for the years ended December 31, 2017 and 2016, respectively, representing a decrease of $0.37 per share or 29.37% for the year ended 2017 when compared to the previous year. Excluding the $36.9 million one-time TCJA charge, $33.4 million of hurricane expense, and $25.7 million of merger expenses associated with the 2017 acquisitions offset by $3.8 million of one-time non-taxable gain on acquisition, 2017 annual after-tax earnings excluding non-fundamental items were $204.8 million, an increase of $27.8 million, or 15.7%, from 2016 annual after-tax earnings excluding non-fundamental items of $177.0 million (See Table 27 for the non-GAAP tabular reconciliation). The $27.8 million increase in earnings excluding non-fundamental items is primarily associated with additional net interest income largely resulting from our acquisitions combined with $125.2 million of organic loan growth plus a decrease in the non-hurricane related provision for loan losses during 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 on deposits and 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 increased $38.9 million, or 28.2%, to $177.1 million for the year ended December 31, 2016, from $138.2 million for the same period in 2015. On a diluted earnings per share basis, our earnings were $1.26 per share and $1.01 per share for the years ended December 31, 2016 and 2015, respectively, representing an increase of $0.25 per share, or 24.8%, for the year ended 2016 when compared to the previous year. The $38.9 million increase in net income is primarily associated with additional net interest income during 2016 largely resulting from our 2015 acquisitions, organic loan growth, a slight decrease in provision for loan losses, growth in non-interest income, and the reduced amortization of the indemnification asset, when compared to the same period in 2015. These improvements were partially offset by an increase in the costs associated with the asset growth when compared to the same period in 2015.

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 and 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 years ended December 31, 2017, 2016 and 2015).

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 100 basis points and is currently at 1.50% to 1.25%.

Net interest income on a fully taxable equivalent basis increased $49.9 million, or 12.1%, to $463.8 million for the year ended December 31, 2017, from $413.9 million for the same period in 2016. This increase in net interest income was the result of an $83.6 million increase in interest income combined with a $33.8 million increase in interest expense. The $83.6 million increase in interest income was primarily the result of a higher level of earning assets offset by lower yields on our loans. The higher level of earning assets resulted in an increase in interest income of $84.9 million. The lower yield was primarily driven by the decline of loan accretion income on our historical acquisitions offset by increased loan production in the higher rate environment, which resulted in a $1.3 million decrease in interest income. The $33.8 million increase in interest expense for the year ended December 31, 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 $22.0 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 $11.8 million.

Our net interest margin decreased from 4.98% for the year ended December 31, 2015 to 4.81% for the year ended December 31, 2016. For the years ended December 31, 2016 and 2015, we recognized $42.3 million and $47.6 million, respectively, in total net accretion for acquired loans and deposits. The non-GAAP margin excluding accretion income was flat at 4.24% and 4.23% for the years ended December 31, 2016 and 2015, respectively. Additionally, the non-GAAP yield on loans excluding accretion income was also relatively flat at 5.10% and 5.05% for the years ended December 31, 2016 and 2015, respectively. Consequently, with growth of the average loan balance of $1.25 billion, we experienced a decline in the GAAP yield on loans and net interest margin because the organic loan growth was approximately at our lower non-GAAP loan yields.

Net interest income on a fully taxable equivalent basis increased $50.5 million, or 13.9%, to $413.9 million for the year ended December 31, 2016, from $363.4 million for the same period in 2015. This increase in net interest income was the result of a $59.3 million increase in interest income combined with an $8.8 million increase in interest expense. The $59.3 million increase in interest income was primarily the result of a higher level of earning assets offset by lower yields on our loans. The higher level of earning assets resulted in an increase in interest income of $74.2 million. The lower yield was primarily driven by the repricing of our loans, which resulted in a $14.9 million decrease in interest income. The $8.8 million increase in interest expense for the year ended December 31, 2016, is primarily the result of an increase in higher level of our interest bearing liabilities from our acquisitions combined with our interest bearing liabilities repricing in a slightly higher interest rate environment. The higher level of our interest bearing liabilities resulted in an increase in interest expense of approximately $4.9 million. The repricing of our interest bearing liabilities in a slightly higher interest rate environment resulted in a $3.9 million increase in interest expense.

Net interest margin, on a fully taxable equivalent basis, was 4.51% for the year ended December 31, 2017, compared to 4.81% and 4.98% for the same periods in 2016 and 2015, respectively. The non-GAAP margin excluding accretion income was 4.12%, 4.26% and 4.23% for the years ended December 31, 2017, 2016 and 2015, respectively.

Additional information and analysis for our net interest margin can be found in Tables 24 through 26 of our Non-GAAP Financial Measurements section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2017, 2016 and 2015, as well as changes in fully taxable equivalent net interest margin for the years 2017 compared to 2016 and 2016 compared to 2015.

Table 2: Analysis of Net Interest Income


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Interest income	$	520,251		$	436,537		$	377,436
Fully taxable equivalent adjustment		7,856			7,924			7,710

Interest income – fully taxable equivalent		528,107			444,461			385,146
Interest expense		64,346			30,579			21,724

Net interest income – fully taxable equivalent	$	463,761		$	413,882		$	363,422

Yield on earning assets – fully taxable equivalent		5.14	%		5.17	%		5.28	%
Cost of interest-bearing liabilities		0.82			0.46			0.38
Net interest spread – fully taxable equivalent		4.32			4.71			4.90
Net interest margin – fully taxable equivalent		4.51			4.81			4.98

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin


	December 31,
	2017 vs. 2016			2016 vs. 2015
	(In thousands)
Increase (decrease) in interest income due to change in earning assets	$	84,906		$	74,166
Increase (decrease) in interest income due to change in earning asset yields		(1,260	)		(14,850	)
(Increase) decrease in interest expense due to change in interest-bearing liabilities		(11,752	)		(4,903	)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities		(22,015	)		(3,953	)

Increase (decrease) in net interest income	$	49,879		$	50,460

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 years ended December 31, 2017, 2016 and 2015. 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


	Years Ended December 31,
	2017							2016							2015
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	220,231	$	2,309		1.05	%	$	117,022	$	471		0.40	%	$	108,315	$	233		0.22	%
Federal funds sold		6,308		10		0.16			1,764		9		0.51			9,250		24		0.26
Investment securities – taxable		1,300,384		26,776		2.06			1,161,428		21,246		1.83			1,114,829		21,695		1.95
Investment securities – non-taxable		348,865		19,411		5.56			337,318		18,598		5.51			332,048		18,309		5.51
Loans receivable		8,403,154		479,601		5.71			6,986,759		404,137		5.78			5,732,315		344,885		6.02

Total interest-earning assets		10,278,942	$	528,107		5.14			8,604,291	$	444,461		5.17			7,296,757	$	385,146		5.28

Non-earning assets		1,220,163							964,562							914,225

Total assets	$	11,499,105						$	9,568,853						$	8,210,982

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	4,823,626	$	23,176		0.48	%	$	3,717,880	$	8,978		0.24	%	$	3,218,745	$	6,306		0.20	%
Time deposits		1,444,828		10,601		0.73			1,362,680		6,948		0.51			1,381,562		6,665		0.48

Total interest-bearing deposits		6,268,454		33,777		0.54			5,080,560		15,926		0.31			4,600,307		12,971		0.28
Federal funds purchased		77		1		1.30			255		2		0.78			824		4		0.49
Securities sold under agreement to repurchase		134,689		918		0.68			120,576		574		0.48			156,513		621		0.40
FHLB borrowed funds		1,117,817		14,513		1.30			1,376,364		12,484		0.91			902,852		6,774		0.75
Subordinated debentures		285,733		15,137		5.30			60,826		1,593		2.62			60,826		1,354		2.23

Total interest-bearing liabilities		7,806,770		64,346		0.82			6,638,581		30,579		0.46			5,721,322		21,724		0.38

Non-interest bearing liabilities
Non-interest bearing deposits		2,005,632							1,619,128							1,358,905
Other liabilities		45,425							53,218							48,170

Total liabilities		9,857,827							8,310,927							7,128,397
Stockholders’ equity		1,641,278							1,257,926							1,082,585

Total liabilities and stockholders’ equity	$	11,499,105						$	9,568,853						$	8,210,982

Net interest spread						4.32	%						4.71	%						4.90	%
Net interest income and margin			$	463,761		4.51				$	413,882		4.81				$	363,422		4.98

Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the year ended December 31, 2017 compared to 2016 and 2016 compared to 2015 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

	Years Ended December 31,
	2017 over 2016									2016 over 2015
	Volume			Yield /Rate			Total			Volume			Yield /Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	651		$	1,187		$	1,838		$	20		$	218		$	238
Federal funds sold		10			(9	)		1			(28	)		13			(15	)
Investment securities – taxable		2,698			2,832			5,530			885			(1,333	)		(448	)
Investment securities – non-taxable		641			172			813			291			(2	)		289
Loans receivable		80,906			(5,442	)		75,464			72,998			(13,746	)		59,252

Total interest income		84,906			(1,260	)		83,646			74,166			(14,850	)		59,316

Interest expense:
Interest-bearing transaction and savings deposits		3,281			10,917			14,198			1,069			1,603			2,672
Time deposits		441			3,212			3,653			(92	)		375			283
Federal funds purchased		—			(1	)		(1	)		—			(1	)		(1	)
Securities sold under agreement to repurchase		73			271			344			(158	)		111			(47	)
FHLB borrowed funds		(2,652	)		4,681			2,029			4,084			1,626			5,710
Subordinated debentures		10,609			2,935			13,544			—			239			239

Total interest expense		11,752			22,015			33,767			4,903			3,953			8,856

Increase (decrease) in net interest income	$	73,154		$	(23,275	)	$	49,879		$	69,263		$	(18,803	)	$	50,460

Provision for Loan Losses

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

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

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

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

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

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

Our 2017 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 the Company’s financial condition and results of operations may not be known for some time, the Florida Keys appears to be currently operating at approximately 75% of its normal business activity. We included in 2017 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, we have 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 December 31, 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. As of December 31, 2017, charge-offs of $2.2 million have been taken against the storm-related provision for loan losses. Additionally, as a result of Hurricane Irma, we offered customers located in the disaster area a 90-day deferment on outstanding loans. During the fourth quarter of 2017, customers with loan balances totaling approximately $211.7 million accepted the 90-day deferment. As of December 31, 2017, loan balances totaling approximately $63.6 million remained on the 90-day deferment.

There was $44.3 million, $18.6 million and $25.2 million provision loan losses for years ended December 31, 2017, 2016 and 2015, respectively. Excluding $32.9 million of additional provision for loan losses related to Hurricane Irma during 2017 and the reduced provision for loan losses as a result of a significant loan recovery during 2016, we experienced a $12.3 million decrease in the provision for loan losses during 2017 versus the 2016. This $12.3 million decrease is primarily a result of lower organic loan growth versus 2016.

We experienced a $6.6 million decrease in the provision for loan losses during 2016 versus 2015. This $6.6 million decrease is primarily a reflection of reduced provision for loan losses as a result of a significant loan recovery offset by lower organic loan growth versus the year ended 2015. We were able to reduce 2016 provision for loan losses as a result of a significant loan recovery from a borrower which was charged-off in 2010. We estimate the 2016 provision for loan losses was reduced by $4.5 million as a result of this loan recovery.

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 was used for these loans. Our current or historical provision levels should not be relied upon as a predictor or indicator of future levels going forward.

Non-Interest Income

Total non-interest income was $99.6 million in 2017, compared to $87.1 million in 2016 and $65.5 million in 2015. 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 years ended December 31, 2017, 2016, and 2015, respectively, as well as changes for the years 2017 compared to 2016 and 2016 compared to 2015.


Table 6: Non-Interest Income

	Years Ended December 31,									2017 Change					2016 Change
	2017			2016			2015			from 2016					from 2015
	(Dollars in thousands)
Service charges on deposit accounts	$	24,922		$	25,049		$	24,252		$	(127	)	(0.5	)%	$	797		3.3	%
Other service charges and fees		36,127			30,200			26,186			5,927		19.6			4,014		15.3
Trust fees		1,678			1,457			2,381			221		15.2			(924	)	(38.8	)
Mortgage lending income		13,286			14,399			10,423			(1,113	)	(7.7	)		3,976		38.1
Insurance commissions		1,948			2,296			2,268			(348	)	(15.2	)		28		1.2
Increase in cash value of life insurance		1,989			1,412			1,199			577		40.9			213		17.8
Dividends from FHLB, FRB, Bankers’ bank & other		3,485			3,091			1,698			394		12.7			1,393		82.0
Gain on acquisitions		3,807			—			1,635			3,807		100.0			(1,635	)	(100.0	)
Gain on sale of SBA loans		738			1,088			541			(350	)	(32.2	)		547		101.1
Gain (loss) on sale of branches, equipment and other assets, net		(960	)		700			(214	)		(1,660	)	(237.1	)		914		427.1
Gain (loss) on OREO, net		1,025			(554	)		(317	)		1,579		285.0			(237	)	74.8
Gain (loss) on securities, net		2,132			669			4			1,463		218.7			665		16,625.0
FDIC indemnification accretion/(amortization), net		—			(772	)		(9,391	)		772		(100.0	)		8,619		(91.8	)
Other income		9,459			8,016			4,833			1,443		18.0			3,183		65.9

Total non-interest income	$	99,636		$	87,051		$	65,498		$	12,585		14.5	%	$	21,553		32.9	%

Non-interest income increased $12.6 million, or 14.5%, to $99.6 million for the year ended December 31, 2017 from $87.1 million for the same period in 2016. Non-interest income excluding gain on acquisitions increased $8.8 million, or 10.1%, to $95.8 million for the year ended December 31, 2017 from $87.1 million for the same period in 2016.

Excluding gain on acquisitions, the primary factors that resulted in the increase from December 31, 2016 to December 31, 2017 were changes related to other service charges and fees, mortgage lending, net loss on branches, equipment and other assets, net gain on OREO, net gain on securities, and amortization on our former FDIC indemnification asset and other income.

Additional details for the year ended December 31, 2017 on some of the more significant changes are as follows:

•

The $5.9 million increase in other service charges and fees is primarily from our 2017 acquisitions plus additional loan payoff fees generated by Centennial CFG and approximately $1.3 million of MasterCard incentive income received during 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 2017 combined with net gains on four vacant properties during 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 2017 versus the revaluation of seven OREO properties during 2016.

•

The $1.5 million increase in gain (loss) on securities, net, is a result of a strategic decision to recognize the gains on sales of investment securities when compared to the same period in 2016.

•

The $1.1 million decrease in mortgage lending income is primarily the result of lower organic loan growth versus 2016 combined with the effects 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.

•

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.

•

Other income includes loan recoveries of $2.1 million on purchased loans and $3.0 million of investment brokerage fees.

Excluding gain on acquisitions, the primary factors that resulted in the increase from December 31, 2015 to December 31, 2016 were changes related to service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, dividends, gain (loss) on sale of branches, equipment and other assets, net, amortization on our FDIC indemnification asset and other income.

•

Additional details for the year ended December 31, 2016 on some of the more significant changes are as follows:

•

The $8.6 million increase in FDIC indemnification accretion/amortization, net, is primarily associated with the conclusion of the five-year covered loan loss-share agreements plus the termination of our loss share agreements during 2016.

•

The $4.0 million increase in other service charges and fees is primarily from our 2015 acquisitions plus additional loan payoff fees generated by Centennial CFG.

•

The $4.0 million increase in mortgage lending income is from the additional lending volume from our 2015 acquisitions combined with organic loan growth. We hired a mortgage lending president during 2014 to oversee this product offering. This additional management position is responsible for improved pricing and efficiencies which are ultimately generating more revenue from the organic growth.

•

The $1.4 million increase in dividends from FHLB, FRB, Bankers’ bank & other is primarily associated with additional dividends from the FHLB. We have been increasing our use of FHLB borrowings, which has caused us to increase our ownership in the FHLB stock, plus the FHLB has been increasing the rate on their cash dividend.

•

The $924,000 decrease in trust fees is primarily associated with $865,000 in 12B-1 trust fees during the second quarter of 2015, of which the Company anticipates only $77,000 will be received on a recurring basis.

•

The $914,000 increase in gain (loss) on sale of branches, equipment and other assets, net is primarily associated with a gain on the sale of our Clermont, Florida branch location and a gain on the sale of a piece of software for $738,000 and $102,000, respectively, offset by a $140,000 net loss on sale of vacant properties from closed branches during 2016.

•

The $797,000 increase in service charges on deposit accounts primarily results from an increase in overdraft fees from additional volume from our 2015 acquisitions and deposit growth.

•

Other income includes $561,000 of additional other income for an item previously charged-off plus loan recoveries of $591,000 on our former FDIC covered transactions, $244,000 on other purchased loans, $925,000 on other historical losses and $1.9 million of investment brokerage fees.

Non-Interest Expense

Non-interest expense 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 years ended December 31, 2017, 2016, and 2015, as well as changes for the years ended 2017 compared to 2016 and 2016 compared to 2015.

Table 7: Non-Interest Expense


	Years Ended December 31,						2017 Change					2016 Change
	2017		2016		2015		from 2016					from 2015
	(Dollars in thousands)
Salaries and employee benefits	$	119,369	$	101,962	$	87,512	$	17,407		17.1	%	$	14,450		16.5	%
Occupancy and equipment		30,611		26,129		25,967		4,482		17.2			162		0.6
Data processing expense		11,998		10,499		10,774		1,499		14.3			(275	)	(2.6	)
Other operating expenses:
Advertising		3,203		3,332		2,986		(129	)	(3.9	)		346		11.6
Merger and acquisition expenses		25,743		433		4,800		25,310		100.0			(4,367	)	(91.0	)
FDIC loss share buy-out expense		—		3,849		—		(3,849	)	(100.0	)		3,849		100.0
Amortization of intangibles		4,207		3,132		4,079		1,075		34.3			(947	)	(23.2	)
Electronic banking expense		6,662		5,742		5,166		920		16.0			576		11.1
Directors’ fees		1,259		1,150		1,071		109		9.5			79		7.4
Due from bank service charges		1,602		1,354		1,096		248		18.3			258		23.5
FDIC and state assessment		5,239		5,491		5,287		(252	)	(4.6	)		204		3.9
Insurance		2,512		2,193		2,542		319		14.5			(349	)	(13.7	)
Legal and accounting		2,993		2,206		2,028		787		35.7			178		8.8
Other professional fees		5,359		4,049		3,226		1,310		32.4			823		25.5
Operating supplies		1,978		1,758		1,880		220		12.5			(122	)	(6.5	)
Postage		1,184		1,084		1,196		100		9.2			(112	)	(9.4	)
Telephone		1,374		1,751		1,917		(377	)	(21.5	)		(166	)	(8.7	)
Other expense		14,915		15,641		16,028		(726	)	(4.6	)		(387	)	(2.4	)

Total non-interest expense	$	240,208	$	191,755	$	177,555	$	48,453		25.3	%	$	14,200		8.0	%

Non-interest expense, excluding merger expenses, increased $23.1 million, or 12.1%, to $214.5 million for the year ended December 31, 2017, from $191.3 million for the same period in 2016. Non-interest expense, excluding merger expenses and FDIC loss share buy-out expense, was $187.5 million for the year ended December 31, 2016 compared to $172.8 million for the same period in 2015.

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 $18.6 million of non-interest expense during the year ended December 31, 2017, respectively, compared to $14.5 million of non-interest expense during the year ended December 31, 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 2017, the Company recorded a $556,000 charge related to direct damage expenses from Hurricane Irma incurred through December 31, 2017. Of the $556,000, approximately $185,000 remained at December 31, 2017.

During 2017 and 2016, the Company had write-downs on vacant property from closed branches of approximately $47,000 and $2.3 million, respectively. These write-downs are included in other expense.

The change in non-interest expense for 2016 when compared to 2015 is primarily related to the completion of our 2015 acquisitions, the opening of the Centennial CFG loan production office during the second quarter of 2015, the termination of the FDIC loss share agreements, write-downs on vacant properties from closed branches and the normal increased cost of doing business.

Income Taxes

Income tax expense increased $30.5 million, or 28.9%, to $136.0 million for the year ended December 31, 2017, from $105.5 million for 2016. The income tax expense increased $25.2 million, or 31.4%, to $105.5 million for the year ended December 31, 2016, from $80.3 million for 2015. The effective tax rate for the years ended December 31, 2017, 2016 and 2015 were 50.17%, 37.33% and 36.75%, respectively.

In December 2017, President Trump signed into law the TCJA. As a result, the Company was required to revalue its deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts, which resulted in a one-time write-down of $36.9 million. This resulted in a dilution to tangible book value of $0.21 per share as of December 31, 2017. The Company historically had a marginal tax rate of 39.225%. Beginning January 1, 2018, the Company will benefit from a marginal tax rate of 26.135%. The one-time write-down will result in an approximately eight month earn back for the dilution to tangible book value.

Excluding the $36.9 million one-time TCJA charge, the income tax expense decreased $6.4 million, or 6.1%, to $99.1 million for the year ended December 31, 2017, from $105.5 million for 2016. The primary cause of the decrease in taxes excluding the TCJA charge for the year ended December 31, 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 2017.

The primary cause of the increase in taxes from 2015 to 2016 is the result of higher earnings at our historical marginal tax rate of 39.225%.

Financial Condition as of and for the Years Ended December 31, 2017 and 2016

Loan Portfolio

Our loan portfolio averaged $8.40 billion and $6.99 billion during the years ended December 31, 2017 and 2016, respectively. Loans receivable were $10.33 billion as of December 31, 2017 compared to $7.39 billion as of December 31, 2016, which is an increase of $2.94 billion, or 39.8%.

During 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 $7.51 billion as of December 31, 2017 compared to $7.39 billion as of December 31, 2016, which is $125.2 million of organic loan growth, or 1.69% increase. Centennial CFG produced $295.5 million of net organic loan growth during 2017 while the legacy and Stonegate footprints experienced significant net payoffs during 2017, resulting in a net decline of $153.9 million and $16.5 million, respectively. Centennial CFG had total loans of $1.44 billion at December 31, 2017.

On February 27, 2015, we acquired $37.9 million of loans after $4.3 million of loan discounts from Doral Florida. On April 1, 2015, we acquired a pool of national commercial real estate loans from J.C. Flowers & Co. LLC totaling approximately $289.1 million. On October 1, 2015, we acquired $408.3 million of loans, after $14.1 million of loan discounts, from FBBI. All of these acquired loans are being accounted for in accordance with the provisions of ASC Topic 310-20 and ASC Topic 310-30.

During 2015, the five-year loss share coverage on the commercial real estate and commercial and industrial loans acquired through the FDIC-assisted acquisitions of Old Southern, Key West, Coastal, Bayside, Wakulla and Gulf State concluded. As a result, $145.2 million of these loans including their associated discounts previously classified as covered loans migrated to non-covered loans status during 2015.

During 2016, we reached an agreement terminating our remaining loss-share agreements with the FDIC. As a result, $57.4 million of these loans including their associated discounts previously classified as covered loans migrated to non-covered loans status during 2016.

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 $3.41 billion, $5.26 billion, $220.0 million and $1.44 billion as of December 31, 2017 in Arkansas, Florida, Alabama and Centennial CFG, respectively.

As of December 31, 2017, we had $485.0 million of construction/land development loans which were collateralized by land. This consisted of $239.3 million for raw land and $245.6 million for land with commercial and/or residential lots.

Table 8 presents our loans receivable balances by category as of December 31, 2017, 2016, 2015, 2014, and 2013.

Table 8: Loans Receivable


	As of December 31,
	2017		2016		2015		2014		2013
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,600,117	$	3,153,121	$	2,968,335	$	2,081,869	$	1,856,832
Construction/land development		1,700,491		1,135,843		944,787		740,085		611,055
Agricultural		82,229		77,736		75,027		73,154		82,850
Residential real estate loans:
Residential 1-4 family		1,970,311		1,356,136		1,190,279		1,051,299		1,011,735
Multifamily residential		441,303		340,926		430,256		258,839		223,610

Total real estate		8,794,451		6,063,762		5,608,684		4,205,246		3,786,082
Consumer		46,148		41,745		52,258		56,736		69,590
Commercial and industrial		1,297,397		1,123,213		850,587		678,775		517,273
Agricultural		49,815		74,673		67,109		48,833		37,129
Other		143,377		84,306		62,933		67,912		66,879

Total loans receivable	$	10,331,188	$	7,387,699	$	6,641,571	$	5,057,502	$	4,476,953

As of December 31, 2017 and 2016 we had no covered loan balances. As of December 31, 2015, 2014 and 2013, we had covered loan balances of $62.2 million, $240.2 million and $282.5 million, respectively.

Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 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 December 31, 2017, commercial real estate loans totaled $6.38 billion, or 61.8% 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 $1.92 billion, $3.36 billion, $114.4 million and $995.7 million at December 31, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $1.69 billion of commercial real estate loans, as of acquisition date from our 2017 acquisitions.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 49.1% and 38.4% 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 December 31, 2017 with the remaining 12.5% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to many factors including the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

As of December 31, 2017, residential real estate loans totaled $2.41 billion, or 23.3%, 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 franchises in Arkansas, Florida, Alabama and Centennial CFG were $847.6 million, $1.31 billion, $75.0 million and $182.4 million at December 31, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $670.8 million of residential real estate loans, as of acquisition date from our 2017 acquisitions.

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 December 31, 2017, consumer loans totaled $46.2 million, or 0.4% of loans receivable, compared to $41.8 million, or 0.6% of loans receivable, as of December 31, 2016. Consumer loans originated in our franchises in Arkansas, Florida, Alabama and Centennial CFG were $22.8 million, $22.4 million, $947,000 and zero at December 31, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $12.7 million of consumer loans, as of acquisition date from our 2017 acquisitions.

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 December 31, 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 franchises in Arkansas, Florida, Alabama and Centennial CFG were $552.1 million, $454.5 million, $27.6 million and $263.2 million at December 31, 2017, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $339.0 million of commercial and industrial loans, as of acquisition date from our 2017 acquisitions.

Agricultural Loans. Agricultural loans include loans for financing agricultural production, including loans to businesses or individuals engaged in the production of timber, poultry, livestock or crops and are not categorized as part of real estate loans. Our agricultural loans are generally secured by farm machinery, livestock, crops, vehicles or other agricultural-related collateral. A portion of our portfolio of agricultural loans is comprised of loans to individuals which would normally be characterized as consumer loans except for the fact that the individual borrowers are primarily engaged in the production of timber, poultry, livestock or crops.

As of December 31, 2017, agricultural loans totaled $49.8 million, or 0.5% of loans receivable, compared to the $74.7 million, or 1.0% of loans receivable as of December 31, 2016. Agricultural loans originated in our franchises in Arkansas, Florida, Alabama and Centennial CFG were $38.9 million, $10.8 million, $101,000 and zero at December 31, 2017, respectively.

Table 9 presents the distribution of the maturity of our total loans as of December 31, 2017. The table also presents the portion of our loans that have fixed interest rates and interest rates that fluctuate over the life of the loans based on changes in the interest rate environment.

The loans acquired during our acquisitions accrete interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the weighted-average life of the loans).

Table 9: Maturity of Loans


	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	764,149	$	2,047,620	$	1,788,348	$	4,600,117
Construction/land development		631,733		893,857		174,901		1,700,491
Agricultural		21,393		36,251		24,585		82,229
Residential real estate loans
Residential 1-4 family		311,225		657,576		1,001,510		1,970,311
Multifamily residential		57,921		201,799		181,583		441,303

Total real estate		1,786,421		3,837,103		3,170,927		8,794,451
Consumer		15,784		25,866		4,498		46,148
Commercial and industrial		337,749		677,458		282,190		1,297,397
Agricultural		17,566		21,890		10,359		49,815
Other		3,312		25,627		114,438		143,377

Total loans receivable	$	2,160,832	$	4,587,944	$	3,582,412	$	10,331,188

Fixed interest rates	$	1,094,559	$	3,029,216	$	853,553	$	4,977,328
Floating interest rates		1,013,139		1,460,261		2,682,408		5,155,808
Purchased credit impaired loans		53,134		98,467		46,451		198,052

Total loans receivable	$	2,160,832	$	4,587,944	$	3,582,412	$	10,331,188

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 December 31, 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 10 below:

•

Allowance for loan losses to non-performing loans;

•

Non-performing loans to total loans; and

•

Non-performing assets to total assets.

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

Table 10 sets forth information with respect to our non-performing assets as of December 31, 2017, 2016, 2015, 2014, and 2013. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 10: Non-performing Assets


	As of December 31,
	2017			2016			2015			2014			2013
	(Dollars in thousands)
Non-accrual loans	$	34,032		$	47,182		$	36,374		$	24,691		$	15,133
Loans past due 90 days or more (principal or interest payments)		10,665			15,942			27,137			37,364			58,983

Total non-performing loans		44,697			63,124			63,511			62,055			74,116

Other non-performing assets
Foreclosed assets held for sale, net		18,867			15,951			19,140			24,822			50,868
Other non-performing assets		3			3			38			189			391

Total other non-performing assets		18,870			15,954			19,178			25,011			51,259

Total non-performing assets	$	63,567		$	79,078		$	82,689		$	87,066		$	125,375

Allowance for loan losses to non-performing loans		246.70	%		126.74	%		109.00	%		88.65	%		59.12	%
Non-performing loans to total loans		0.43			0.85			0.96			1.23			1.66
Non-performing assets to total assets		0.44			0.81			0.89			1.18			1.84

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 $44.7 million as of December 31, 2017, compared to $63.1 million as of December 31, 2016, for a decrease of $18.4 million. The $18.4 million decrease in non-performing loans is the result of a $13.0 million decrease in non-performing loans in our Arkansas franchise, a $5.7 million decrease in non-performing loans in our Florida franchise and a $273,000 increase in non-performing loans in our Alabama franchise. Non-performing loans at December 31, 2017 are $15.5 million, $28.2 million, $929,000 and zero in the Arkansas, Florida, Alabama and Centennial CFG franchises, respectively. Our acquisition of Stonegate during 2017 increased our non-performing loans accruing past due 90 days or more by $5.4 million as of December 31, 2017.

Although the current state of the real estate market has improved, future fluctuations in the economy have the potential 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 December 31, 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, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. Only non-performing restructured loans are included in our non-performing loans. As of December 31, 2017, we had $19.0 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 10. Our Florida market contains $13.1 million and our Arkansas market contains $5.9 million of these restructured loans.

A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of 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 December 31, 2017, the amount of TDRs was $21.2 million, a decrease of 16.9% from $25.5 million at December 31, 2016. As of December 31, 2017 and 2016, 89.7% and 88.0%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $18.9 million as of December 31, 2017, compared to $16.0 million as of December 31, 2016 for an increase of $2.9 million. The foreclosed assets held for sale as of December 31, 2017 are comprised of $10.1 million of assets located in Arkansas, $8.1 million of assets located in Florida, $641,000 located in Alabama and zero from Centennial CFG. Our acquisition of Stonegate during 2017 increased our foreclosed assets held for sale by $2.8 million as of December 31, 2017.

As of December 31, 2017, we had three foreclosed properties with a carrying value greater than $1.0 million. The first property is a development property in Northwest Arkansas which was foreclosed in the first quarter of 2011. The carrying value was $2.0 million at December 31, 2017. We were able to sell approximately $382,000 of this property during January 2018. The second property was a development property in Florida acquired from BOC with a carrying value of $2.1 million at December 31, 2017. The last property was a nonfarm non-residential property in Florida acquired from Stonegate with a carrying value of $1.8 million at December 31, 2017. The Company does not currently anticipate any additional losses on these properties. As of December 31, 2017, no other foreclosed assets held for sale have a carrying value greater than $1.0 million.

Table 11 shows the summary of foreclosed assets held for sale as of December 31, 2017, 2016, 2015, 2014 and 2013.

Table 11: Total Foreclosed Assets Held For Sale


	As of December 31, 2017						As of December 31, 2016
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	9,766	$	—	$	9,766	$	9,423	$	—	$	9,423
Construction/land development		5,920		—		5,920		4,009		—		4,009
Agricultural		—		—		—		—		—		—
Residential real estate loans
Residential 1-4 family		2,654		—		2,654		2,076		—		2,076
Multifamily residential		527		—		527		443		—		443

Total foreclosed assets held for sale	$	18,867	$	—	$	18,867	$	15,951	$	—	$	15,951


	As of December 31, 2015						As of December 31, 2014
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	9,787	$	—	$	9,787	$	6,894	$	3,935	$	10,829
Construction/land development		5,286		—		5,286		6,189		2,847		9,036
Agricultural		—		—		—		—		3		3
Residential real estate loans
Residential 1-4 family		3,233		614		3,847		3,381		1,086		4,467
Multifamily residential		220		—		220		487		—		487

Total foreclosed assets held for sale	$	18,526	$	614	$	19,140	$	16,951	$	7,871	$	24,822


	As of December 31, 2013
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	8,422	$	9,677	$	18,099
Construction/land development		17,675		5,517		23,192
Agricultural		—		651		651
Residential real estate loans
Residential 1-4 family		3,772		5,154		8,926

Total foreclosed assets held for sale	$	29,869	$	20,999	$	50,868

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 December 31, 2017, average impaired loans were $87.2 million compared to $89.6 million as of December 31, 2016. As of December 31, 2017, impaired loans were $75.6 million compared to $93.1 million as of December 31, 2016, for a decrease of $17.5 million. This decrease is primarily associated with the $18.4 million decrease in non-performing loans since December 31, 2016. As of December 31, 2017, our Arkansas, Florida, Alabama and Centennial CFG franchises accounted for approximately $33.9 million, $40.8 million, $929,000 and zero of the impaired loans, respectively.

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

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

As of December 31, 2017 and 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 12 shows the summary non-accrual loans as of December 31, 2017, 2016, 2015, 2014 and 2013:

Table 12: Total Non-Accrual Loans


	As of December 31, 2017						As of December 31, 2016
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	9,600	$	—	$	9,600	$	17,988	$	—	$	17,988
Construction/land development		5,011		—		5,011		3,956		—		3,956
Agricultural		19		—		19		435		—		435
Residential real estate loans
Residential 1-4 family		14,437		—		14,437		20,311		—		20,311
Multifamily residential		153		—		153		262		—		262

Total real estate		29,220		—		29,220		42,952		—		42,952
Consumer		145		—		145		140		—		140
Commercial and industrial		4,584		—		4,584		3,155		—		3,155
Agricultural		54		—		54		—		—		—
Other		29		—		29		935		—		935

Total non-accrual loans	$	34,032	$	—	$	34,032	$	47,182	$	—	$	47,182


	As of December 31, 2015						As of December 31, 2014
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	15,811	$	—	$	15,811	$	8,901	$	—	$	8,901
Construction/land development		2,952		—		2,952		926		—		926
Agricultural		531		—		531		—		—		—
Residential real estate loans
Residential 1-4 family		12,574		—		12,574		11,949		—		11,949
Multifamily residential		870		—		870		1,344		—		1,344

Total real estate		32,738		—		32,738		23,120		—		23,120
Consumer		239		—		239		279		—		279
Commercial and industrial		2,363		—		2,363		1,108		—		1,108
Agricultural		—		—		—		—		—		—
Other		1,034		—		1,034		184		—		184

Total non-accrual loans	$	36,374	$	—	$	36,374	$	24,691	$	—	$	24,691


	As of December 31, 2013
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	5,093	$	—	$	5,093
Construction/land development		1,080		—		1,080
Agricultural		89		—		89
Residential real estate loans
Residential 1-4 family		7,283		—		7,283
Multifamily residential		1		—		1

Total real estate		13,546		—		13,546
Consumer		124		—		124
Commercial and industrial		1,463		—		1,463
Agricultural		—		—		—
Other		—		—		—

Total non-accrual loans	$	15,133	$	—	$	15,133

If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $2.3 million for the year ended December 31, 2017, $2.4 million in 2016, and $1.8 million in 2015 would have been recorded. Interest income recognized on the non-accrual loans for the years ended December 31, 2017, 2016 and 2015 was considered immaterial.

Table 13 shows the summary of accruing past due loans 90 days or more as of December 31, 2017, 2016, 2015, 2014 and 2013:

Table 13: Total Loans Accruing Past Due 90 Days or More


	As of December 31, 2017						As of December 31, 2016
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	3,119	$	—	$	3,119	$	9,530	$	—	$	9,530
Construction/land development		3,247		—		3,247		3,086		—		3,086
Agricultural		—		—		—		—		—		—
Residential real estate loans
Residential 1-4 family		2,175		—		2,175		2,996		—		2,996
Multifamily residential		100		—		100		—		—		—

Total real estate		8,641		—		8,641		15,612		—		15,612
Consumer		26		—		26		21		—		21
Commercial and industrial		1,944		—		1,944		309		—		309
Agricultural and other		54		—		54		—		—		—

Total loans accruing past due 90 days or more	$	10,665	$	—	$	10,665	$	15,942	$	—	$	15,942


	As of December 31, 2015						As of December 31, 2014
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total		Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	9,247	$	—	$	9,247	$	5,880	$	9,029	$	14,909
Construction/land development		4,176		—		4,176		734		4,376		5,110
Agricultural		30		—		30		34		72		106
Residential real estate loans				—
Residential 1-4 family		3,915		3,292		7,207		4,128		7,597		11,725
Multifamily residential		1		—		1		691		—		691

Total real estate		17,369		3,292		20,661		11,467		21,074		32,541
Consumer		46		—		46		579		—		579
Commercial and industrial		6,430		—		6,430		2,825		1,387		4,212
Other		—		—		—		—		32		32

Total loans accruing past due 90 days or more	$	23,845	$	3,292	$	27,137	$	14,871	$	22,493	$	37,364


	As of December 31, 2013
	Not Covered by Loss Share		Covered by FDIC Loss Share		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	7,914	$	15,287	$	23,201
Construction/land development		4,879		8,410		13,289
Agricultural		—		162		162
Residential real estate loans
Residential 1-4 family		6,492		10,177		16,669
Multifamily residential		1		357		358

Total real estate		19,286		34,393		53,679
Consumer		100		—		100
Commercial and industrial		3,755		825		4,580
Other		—		624		624

Total loans accruing past due 90 days or more	$	23,141	$	35,842	$	58,983

Our total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.43% and 0.85% as of December 31, 2017 and 2016, respectively. Our acquisition of Stonegate during 2017 increased our loans accruing past due 90 days or more by $5.4 million as of December 31, 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.

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 $2.86 billion from $7.08 billion at December 31, 2016 to $9.94 billion at December 31, 2017. Our acquisition of Stonegate during 2017 increased our loans collectively evaluated by $2.32 billion as of December 31, 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 decreased slightly from 1.08% at December 31, 2016 to 1.06% at December 31, 2017.

Charge-offs and Recoveries. Total charge-offs was $17.5 million for the years ended December 31, 2017 and 2016. Total recoveries decreased to $3.5 million for the year ended December 31, 2017, compared to $9.7 million for the same period in 2016.

The net loans charged off for the years ended December 31, 2017, 2016 and 2015 were $14.0 million, $7.8 million and $12.4 million. For the years ended December 31, 2017, 2016 and 2015, approximately $10.0 million, $6.6 million and $9.3 million, respectively, of the net charge-offs are from our Arkansas market. For the years ended December 31, 2017, 2016 and 2015, approximately $3.8 million, $1.3 million and $2.7 million, respectively, of the net charge-offs are from our Florida market. The remaining $215,000, $76,000 and $367,000 relates to net charge-offs, net recoveries and net charge-offs, respectively, on loans in our Alabama market for the years ended December 31, 2017, 2016 and 2015, respectively. There have been zero charge-offs for Centennial CFG since the franchise was formed in 2015.

While the 2017 charge-offs and recoveries consisted of many relationships, there were three individual relationships consisting of a charge-offs greater than $1.0 million. The combined impact of these charge-offs was $4.5 million at December 31, 2017.

While the 2016 charge-offs and recoveries consisted of many relationships, there were two individual relationships consisting of charge-offs greater than $1.0 million. The combined impact of these charge-offs was $4.0 million at December 31, 2016. During 2016, there was a substantial $5.3 million recovery from a large loan charge-off taken in 2010.

We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower’s repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance.

Table 14 shows the allowance for loan losses, charge-offs and recoveries for loans as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013.

Table 14: Analysis of Allowance for Loan Losses


	As of December 31,
	2017			2016			2015			2014			2013
	(Dollars in thousands)
Balance, beginning of year	$	80,002		$	69,224		$	55,011		$	43,815		$	50,632
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		3,622			3,586			4,878			4,376			7,480
Construction/land development		1,632			382			644			1,099			1,903
Agricultural		127			—			—			—			—
Residential real estate loans:
Residential 1-4 family		3,895			4,986			4,257			3,218			4,798
Multifamily residential		85			611			460			266			2,336

Total real estate		9,361			9,565			10,239			8,959			16,517
Consumer		198			220			567			355			926
Commercial and industrial		5,578			5,778			2,638			2,323			694
Agricultural		—			—			—			—			—
Other		2,334			1,938			2,508			2,440			1,374

Total loans charged off		17,471			17,501			15,952			14,077			19,511

Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		1,042			857			762			279			2,083
Construction/land development		462			1,125			236			474			49
Agricultural		—			—			—			—			1
Residential real estate loans:
Residential 1-4 family		621			1,098			845			1,473			1,052
Multifamily residential		55			54			70			37			102

Total real estate		2,180			3,134			1,913			2,263			3,287
Consumer		119			209			61			246			145
Commercial and industrial		464			5,533			802			306			72
Agricultural		—			—			—			—			—
Other		722			795			766			913			556

Total recoveries		3,485			9,671			3,542			3,728			4,060

Net loans charged off (recovered)		13,986			7,830			12,410			10,349			15,451
Provision for loan losses		44,250			18,608			25,164			22,664			5,180
Increase in FDIC indemnification asset		—			—			1,459			(1,119	)		3,454

Balance, end of year	$	110,266		$	80,002		$	69,224		$	55,011		$	43,815

Net charge-offs (recoveries) to average loans receivable		0.17	%		0.11	%		0.22	%		0.22	%		0.51	%
Allowance for loan losses to total loans		1.07			1.08			1.04			1.09			0.98
Allowance for loan losses to net charge-offs (recoveries)		788			1,022			558			532			284

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

The Company’s 2017 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 operations may not be known for some time, the Company has included in 2017 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 accrued $32.9 million during 2017 to establish a storm-related provision for loan losses. For the year ended December 31, 2017, there were $2.2 million in charge-offs taken against the $32.9 million storm-related provision for loan loss, which left the reserve balance at $30.7 million as of December 31, 2017.

The changes for the years ended December 31, 2017 and 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 15 presents the allocation of allowance for loan losses as of December 31, 2017, 2016, 2015, 2014 and 2013.

Table 15: Allocation of Allowance for Loan Losses


	As of December 31,
	2017					2016					2015					2014					2013
	Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	42,893		44.5	%	$	27,695		42.7	%	$	26,330		44.7	%	$	17,770		41.2	%	$	15,685		41.5	%
Construction/land development		20,343		16.4			11,522		15.4			10,782		14.3			8,548		14.6			7,989		13.6
Agricultural		1,046		0.8			493		1.1			468		1.1			387		1.5			254		1.8
Residential real estate loans:
Residential 1-4 family		21,370		19.1			14,397		18.3			12,552		17.9			11,061		20.8			8,149		22.6
Multifamily residential		3,136		4.3			2,120		4.6			2,266		6.5			3,545		5.1			2,852		5.0

Total real estate		88,788		85.1			56,227		82.1			52,398		84.5			41,311		83.1			34,929		84.5
Consumer		462		0.4			398		0.6			544		0.8			763		1.1			632		1.6
Commercial and industrial		15,292		12.6			12,756		15.2			9,324		12.8			5,965		13.4			2,068		11.6
Agricultural		2,692		0.5			3,790		1.0			4,463		1.0			5,035		1.0			1,931		0.8
Other		180		1.4			—		1.1			9		0.9			3		1.3			—		1.5
Unallocated		2,852		—			6,831		—			2,486		—			1,934		—			4,255		—

Total	$	110,266		100.0	%	$	80,002		100.0	%	$	69,224		100.0	%	$	55,011		100.0	%	$	43,815		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 2.8 years as of December 31, 2017.

As of December 31, 2017 and 2016 we had $224.8 million and $284.2 million of held-to-maturity securities, respectively. Of the $224.8 million of held-to-maturity securities as of December 31, 2017, $5.8 million were invested in U.S. Government-sponsored enterprises, $73.6 million were invested in mortgage-backed securities and $145.4 million were invested in state and political subdivisions. 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.

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 $1.66 billion and $1.07 billion as of December 31, 2017 and 2016, respectively.

As of December 31, 2017, $971.4 million, or 58.4%, 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, $250.3 million, or 15.0%, of our available-for-sale securities portfolio as of December 31, 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 $406.3 million, or 24.4%, invested in obligations of U.S. Government-sponsored enterprises as of December 31, 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.

Table 16 presents the carrying value and fair value of investment securities as of December 31, 2017, 2016 and 2015.

Table 16: Investment Securities


	As of December 31, 2017									As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available-for-sale
U.S. government-sponsored enterprises	$	407,387	$	899	$	(1,982	)	$	406,304	$	237,439	$	963	$	(1,641	)	$	236,761
Residential mortgage-backed securities		481,981		538		(4,919	)		477,600		259,037		1,226		(1,627	)		258,636
Commercial mortgage-backed securities		497,870		332		(4,430	)		493,772		322,316		845		(2,342	)		320,819
State and political subdivisions		247,292		3,783		(774	)		250,301		215,209		3,471		(2,181	)		216,499
Other securities		34,617		1,225		(302	)		35,540		38,261		2,603		(659	)		40,205

Total	$	1,669,147	$	6,777	$	(12,407	)	$	1,663,517	$	1,072,262	$	9,108	$	(8,450	)	$	1,072,920

Held-to-maturity
U.S. government-sponsored enterprises	$	5,791	$	15	$	(15	)	$	5,791	$	6,637	$	23	$	(32	)	$	6,628
Residential mortgage-backed securities		56,982		107		(402	)		56,687		71,956		267		(301	)		71,922
Commercial mortgage-backed securities		16,625		114		(40	)		16,699		35,863		107		(133	)		35,837
State and political subdivisions		145,358		3,031		(27	)		148,362		169,720		3,100		(169	)		172,651

Total	$	224,756	$	3,267	$	(484	)	$	227,539	$	284,176	$	3,497	$	(635	)	$	287,038


	As of December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available-for-sale
U.S. government-sponsored enterprises	$	367,911	$	1,875	$	(1,246	)	$	368,540
Residential mortgage-backed securities		254,531		1,580		(1,356	)		254,755
Commercial mortgage-backed securities		311,279		994		(1,713	)		310,560
State and political subdivisions		211,546		7,723		(151	)		219,118
Other securities		54,440		191		(1,024	)		53,607

Total	$	1,199,707	$	12,363	$	(5,490	)	$	1,206,580

Held-to-maturity
U.S. government-sponsored enterprises	$	7,395	$	37	$	(17	)	$	7,415
Residential mortgage-backed securities		92,585		250		(282	)		92,553
Commercial mortgage-backed securities		41,579		155		(42	)		41,692
State and political subdivisions		167,483		4,870		(69	)		172,284

Total	$	309,042	$	5,312	$	(410	)	$	313,944

Table 17 reflects the amortized cost and estimated fair value of debt securities as of December 31, 2017, by contractual maturity and the weighted-average yields (for tax-exempt obligations on a fully taxable equivalent basis) of those securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Table 17: Maturity Distribution of Investment Securities


	As of December 31, 2017
	1 Year or Less			1 Year Through 5 Years			5 Years Through 10 Years			Over 10 Years			Total Amortized Cost			Total Fair Value
	(Dollars in thousands)
Available-for-sale
U.S. Government-sponsored enterprises	$	164,892		$	180,138		$	43,974		$	18,383		$	407,387		$	406,304
Residential mortgage-backed securities		89,750			276,702			86,196			29,333			481,981			477,600
Commercial mortgage-backed securities		59,978			295,139			110,123			32,630			497,870			493,772
State and political subdivisions		42,777			153,018			38,564			12,933			247,292			250,301
Other securities		8,944			17,181			7,273			1,219			34,617			35,540

Total	$	366,341		$	922,178		$	286,130		$	94,498		$	1,669,147		$	1,663,517

Percentage of total amortized cost		21.9	%		55.3	%		17.1	%		5.7	%		100.0	%

Weighted-average yield		2.4	%		2.5	%		2.7	%		2.8	%		2.5	%

Held-to-maturity
U.S. Government-sponsored enterprises	$	2,001		$	2,736		$	627		$	427		$	5,791		$	5,791
Residential mortgage-backed securities		12,491			35,800			4,946			3,745			56,982			56,687
Commercial mortgage-backed securities		4,100			5,438			5,796			1,291			16,625			16,699
State and political subdivisions		53,772			45,291			1,053			45,242			145,358			148,362

Total	$	72,364		$	89,265		$	12,422		$	50,705		$	224,756		$	227,539

Percentage of total amortized cost		32.2	%		39.7	%		5.5	%		22.6	%		100.0	%

Weighted-average yield		3.8	%		3.3	%		2.7	%		5.8	%		4.0	%

Deposits

Our deposits averaged $8.27 billion for the year ended December 31, 2017, and $6.70 billion for 2016. Total deposits increased $3.45 billion, or 49.6%, to $10.39 billion as of December 31, 2017, from $6.94 billion as of December 31, 2016. Including the effects of the purchase accounting adjustments, we acquired approximately $2.97 billion of deposits, as of acquisition date from our 2017 acquisitions. 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.

Table 18 reflects the classification of the brokered deposits as of December 31, 2017 and 2016.

Table 18: Brokered Deposits


	December 31, 2017		December 31, 2016
	(In thousands)
Time Deposits	$	60,022	$	70,028
CDARS		53,588		26,389
Insured Cash Sweep and Other Transaction Accounts		915,060		406,120

Total Brokered Deposits	$	1,028,670	$	502,537

The $526.1 million increase in our brokered deposits from December 31, 2016 to December 31, 2017 was primarily due to our 2017 acquisitions, of which approximately $378.3 million was related to Stonegate as of December 31, 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.

Table 19 reflects the classification of the average deposits and the average rate paid on each deposit category which is in excess of 10 percent of average total deposits, for the years ended December 31, 2017, 2016, and 2015.

Table 19: Average Deposit Balances and Rates


	Years Ended December 31,
	2017					2016					2015
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,005,632		—	%	$	1,619,128		—	%	$	1,358,905		—	%
Interest-bearing transaction accounts		4,265,529		0.53			3,252,416		0.27			2,789,346		0.22
Savings deposits		558,097		0.11			465,464		0.06			429,399		0.06
Time deposits:
$100,000 or more		961,371		0.86			868,839		0.58			780,815		0.53
Other time deposits		483,457		0.48			493,841		0.38			600,747		0.42

Total	$	8,274,086		0.41	%	$	6,699,688		0.24	%	$	5,959,212		0.22	%

Table 20 presents our maturities of large denomination time deposits as of December 31, 2017 and 2016.

Table 20: Maturities of Large Denomination Time Deposits ($100,000 or more)


	As of December 31,
	2017					2016
	Balance		Percent			Balance		Percent
	(Dollars in thousands)
Maturing
Three months or less	$	134,117		13.4	%	$	162,422		19.3	%
Over three months to six months		199,701		20.0			100,547		11.9
Over six months to 12 months		184,526		18.5			356,145		42.3
Over 12 months		479,999		48.1			223,767		26.5

Total	$	998,343		100.0	%	$	842,881		100.0	%

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 $26.5 million, or 21.8%, from $121.3 million as of December 31, 2016 to $147.8 million as of December 31, 2017.

FHLB Borrowings

Our FHLB borrowed funds were $1.30 billion and $1.31 billion at December 31, 2017 and 2016, respectively. At December 31, 2017, $525.0 million and $774.2 million of the outstanding balance were issued as short-term and long-term advances, respectively. Including the effects of the purchase accounting adjustments, we acquired approximately $89.4 million of FHLB borrowed funds, as of acquisition date from our 2017 acquisitions. 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 $1.96 billion and $718.2 million as of December 31, 2017 and 2016, respectively. Maturities of borrowings as of December 31, 2017 include: 2018 – $984.3 million; 2019 – $143.1 million; 2020 – $146.4 million; 2021 – zero; 2022 – zero; after 2022 – $25.4 million. Expected maturities will differ from contractual maturities because FHLB may have the right to call or we may have the right to prepay certain obligations.

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $368.0 million as of December 31, 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.

During 2017, we acquired $12.5 million in trust preferred securities with a fair value of $9.8 million from the Stonegate acquisition. The difference between the fair value purchased of $9.8 million and the $12.5 million face amount, will be amortized into interest expense over the remaining life of the debentures. The associated subordinated debentures are redeemable, in whole or in part, prior to maturity at our option on a quarterly basis when interest is due and payable and in whole at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the debentures.

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 $2.20 billion at December 31, 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 $74.7 million increase in retained earnings offset by $3.8 million of comprehensive loss and the repurchase of $20.8 million of our common stock during 2017. The improvement in stockholders’ equity for 2017 excluding the $819.8 million of common stock issued to both the GHI and Stonegate shareholders was 4.3%. As of December 31, 2017 and 2016, our equity to asset ratio was 15.25% and 13.53%, respectively. Book value per common share was $12.70 at December 31, 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 December 31, 2017.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.4000, $0.3425 and $0.2750 per share for the years ended December 31, 2017, 2016 and 2015, respectively. The common stock dividend payout ratio for the year ended December 31, 2017, 2016 and 2015 was 44.69%, 27.15% and 27.19%, respectively.

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 2017, we utilized a portion of this stock repurchase program. We repurchased a total of 857,800 shares with a weighted-average stock price of $24.29 per share during 2017. Shares repurchased to date under the program total 4,524,864 shares. The remaining balance available for repurchase is 5,227,136 shares at December 31, 2017. Additionally, on February 21, 2018, the Board of Directors of the Company authorized the repurchase of up to an additional 5,000,000 shares of Company’s common stock under this repurchase program.

Liquidity and Capital Adequacy Requirements

Parent Company Liquidity. The primary sources for payment of our operating expenses, and dividends are current cash on hand ($44.0 million as of December 31, 2017), dividends received from our bank subsidiary and a $20.0 million unfunded line of credit with another financial institution.

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.

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

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of December 31, 2017 and 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.

Table 21 presents our risk-based capital ratios as of December 31, 2017 and 2016.

Table 21: Risk-Based Capital


	As of December 31, 2017			As of December 31, 2016
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,204,291		$	1,327,490
Goodwill and core deposit intangibles, net		(966,890	)		(388,336	)
Unrealized (gain) loss on available-for-sale securities		3,421			(400	)
Deferred tax assets		—			—

Total common equity Tier 1 capital		1,240,822			938,754
Qualifying trust preferred securities		70,698			59,000

Total Tier 1 capital		1,311,520			997,754

Tier 2 capital
Qualifying subordinated notes		297,332			—
Qualifying allowance for loan losses		110,266			80,002

Total Tier 2 capital		407,598			80,002

Total risk-based capital	$	1,719,118		$	1,077,756

Average total assets for leverage ratio	$	13,147,046		$	9,388,812

Risk weighted assets	$	11,424,963		$	8,308,468

Ratios at end of period
Common equity Tier 1 capital		10.86	%		11.30	%
Leverage ratio		9.98			10.63
Tier 1 risk-based capital		11.48			12.01
Total risk-based capital		15.05			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.

Table 22 presents actual capital amounts and ratios as of December 31, 2017 and 2016, for our bank subsidiary and us.

Table 22: Capital and Ratios


	Actual					Minimum Capital Requirement – Basel III Phase-In Schedule					Minimum Capital Requirement – Basel III Fully Phased-In					Minimum To Be Well-Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of December 31, 2017
Common equity Tier 1 capital ratios:
Home BancShares	$	1,240,822		10.86	%	$	656,973		5.750	%	$	799,793		7.00	%	$	N/A		N/A	%
Centennial Bank		1,546,451		13.55			656,243		5.750			798,905		7.00			741,840		6.50
Leverage ratios:
Home BancShares	$	1,311,520		9.98	%	$	525,659		4.000	%	$	525,659		4.00	%	$	N/A		N/A	%
Centennial Bank		1,546,451		11.76			526,004		4.000			526,004		4.00			657,505		5.00
Tier 1 capital ratios:
Home BancShares	$	1,311,520		11.48	%	$	828,268		7.250	%	$	971,073		8.50	%	$	N/A		N/A	%
Centennial Bank		1,546,451		13.55			827,437		7.250			970,098		8.50			913,034		8.00
Total risk-based capital ratios:
Home BancShares	$	1,719,118		15.05	%	$	1,056,601		9.250	%	$	1,199,385		10.50	%	$	N/A		N/A	%
Centennial Bank		1,656,717		14.52			1,055,415		9.250			1,198,039		10.50			1,140,990		10.00
As of December 31, 2016
Common equity Tier 1 capital ratios:
Home BancShares	$	938,754		11.30	%	$	425,762		5.125	%	$	581,529		7.00	%	$	N/A		N/A	%
Centennial Bank		920,232		11.10			424,882		5.125			580,326		7.00			538,875		6.50
Leverage ratios:
Home BancShares	$	997,754		10.63	%	$	375,448		4.000	%	$	375,448		4.00	%	$	N/A		N/A	%
Centennial Bank		920,232		9.81			375,222		4.000			375,222		4.00			469,028		5.00
Tier 1 capital ratios:
Home BancShares	$	997,754		12.01	%	$	550,385		6.625	%	$	706,154		8.50	%	$	N/A		N/A	%
Centennial Bank		920,232		11.10			549,238		6.625			704,682		8.50			663,230		8.00
Total risk-based capital ratios:
Home BancShares	$	1,077,756		12.97	%	$	716,704		8.625	%	$	872,509		10.50	%	$	N/A		N/A	%
Centennial Bank		1,000,234		12.07			714,749		8.625			870,129		10.50			828,694		10.00

Off-Balance Sheet Arrangements and Contractual Obligations

In the normal course of business, we enter into a number of financial commitments. Examples of these commitments include but are not limited to operating lease obligations, FHLB advances, lines of credit, subordinated debentures, unfunded loan commitments and letters of credit.

Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having certain expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $70.5 million and $41.1 million at December 31, 2017 and 2016, respectively, with maturities ranging from currently due to four years.

Table 23 presents the funding requirements of our most significant financial commitments, excluding interest, as of December 31, 2017.

Table 23: Funding Requirements of Financial Commitments


	Payments Due by Period
	Less than One Year		One- Three Years		Three- Five Years		Greater than Five Years		Total
	(In thousands)
Operating lease obligations	$	8,543	$	14,978	$	9,867	$	28,799	$	62,187
FHLB advances by contractual maturity		984,279		289,498		—		25,411		1,299,188
Subordinated debentures		—		—		—		368,031		368,031
Loan commitments		39,249		897,236		748,495		693,140		2,378,120
Letters of credit		56,372		13,512		531		38		70,453

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, 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 24 through 26 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 24: Average Yield on Loans


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Interest income on loans receivable – FTE	$	479,601		$	404,137		$	344,885
Purchase accounting accretion		35,257			41,070			46,509

Non-GAAP interest income on loans receivable – FTE	$	444,344		$	363,067		$	298,376

Average loans	$	8,403,154		$	6,986,759		$	5,732,315
Average purchase accounting loan discounts ⁽¹⁾		120,160			127,210			177,389

Average loans (non-GAAP)	$	8,523,314		$	7,113,969		$	5,909,704

Average yield on loans (reported)		5.71	%		5.78	%		6.02	%
Average contractual yield on loans (non-GAAP)		5.21			5.10			5.05

(1)

Balance includes $146.6 million, $100.1 million and $149.4 million of discount for credit losses on purchased loans as of December 31, 2017, 2016 and 2015, respectively.

Table 25: Average Cost of Deposits


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Interest expense on deposits	$	33,777		$	15,926		$	12,971
Amortization of time deposit (premiums)/discounts, net		459			1,273			1,101

Non-GAAP interest expense on deposits	$	34,236		$	17,199		$	14,072

Average interest-bearing deposits	$	6,268,454		$	5,080,560		$	4,600,307
Average unamortized CD (premium)/discount, net		(733	)		(930	)		(1,276	)

Average interest-bearing deposits (non-GAAP)	$	6,267,721		$	5,079,630		$	4,599,031

Average cost of deposits (reported)		0.54	%		0.31	%		0.28	%
Average contractual cost of deposits (non-GAAP)		0.55			0.34			0.31

Table 26: Net Interest Margin


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Net interest income – FTE	$	463,761		$	413,882		$	363,422
Total purchase accounting accretion		35,716			42,343			47,610

Non-GAAP net interest income – FTE	$	428,045		$	371,539		$	315,812

Average interest-earning assets	$	10,278,942		$	8,604,291		$	7,296,757
Average purchase accounting loan discounts⁽¹⁾		120,160			127,210			177,389

Average interest-earning assets (non-GAAP)	$	10,399,102		$	8,731,501		$	7,474,146

Net interest margin (reported)		4.51	%		4.81	%		4.98	%
Net interest margin (non-GAAP)		4.12			4.26			4.23

(1)

Balance includes $146.6 million, $100.1 million and $149.4 million of discount for credit losses on purchased loans as of December 31, 2017, 2016 and 2015, respectively.

In tables 27 through 32 below, we have provided 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.

In Table 27 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 27: Earnings Excluding Non-Fundamental Items


	2017			2016			2015
	(In thousands, except per share data)
GAAP net income available to common shareholders (A)	$	135,083		$	177,146		$	138,199
Non-fundamental items:
Gain on acquisitions		(3,807	)		—			(1,635	)
Merger expenses		25,743			433			4,800
FDIC loss share buy-out		—			3,849			—
Reduced provision for loan losses as a result of a significant loan recovery		—			(4,457	)		—
Hurricane expenses ⁽¹⁾		33,445			—			—
Effect of tax rate change		36,935			—			—

Total non-fundamental items		92,316			(175	)		3,165
Tax-effect of non-fundamental items ⁽²⁾		22,626			(69	)		1,241

Non-fundamental items after-tax (B)		69,690			(106	)		1,924

Earnings excluding non-fundamental items (C)	$	204,773		$	177,040		$	140,123

Average diluted shares outstanding (D)		151,528			140,713			137,130
GAAP diluted earnings per share: A/D	$	0.89		$	1.26		$	1.01
Non-fundamental items after-tax: B/D		0.46			—			0.01

Diluted earnings per common share excluding non-fundamental items: C/D	$	1.35		$	1.26		$	1.02

(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 $977.3 million, $396.3 million, and $399.4 million total goodwill, core deposit intangibles and other intangible assets as of December 31, 2017, 2016 and 2015, respectively. Because of our level of intangible assets and related amortization expenses, management believes diluted earnings per common share excluding intangible amortization, tangible book value per common share, return on average assets excluding intangible amortization, return on average tangible common equity excluding intangible amortization and tangible common equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings per common share, book value, return on average assets, return on average common equity, and common equity to assets, are presented in Tables 28 through 31, respectively.

Table 28: Tangible Book Value Per Share


	Years Ended December 31,
	2017		2016		2015
	(In thousands, except per share data)
Book value per share: A/B	$	12.70	$	9.45	$	8.55
Tangible book value per share: (A-C-D)/B		7.07		6.63		5.71

(A) Total equity	$	2,204,291	$	1,327,490	$	1,199,757
(B) Shares outstanding		173,633		140,472		140,241
(C) Goodwill	$	927,949	$	377,983	$	377,983
(D) Core deposit and other intangibles		49,351		18,311		21,443

Table 29: Return on Average Assets Excluding Intangible Amortization


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Return on average assets: A/D		1.17	%		1.85	%		1.68	%
Return on average assets excluding intangible amortization: B/(D-E)		1.26			1.95			1.79
Return on average assets excluding gain on acquisitions, merger expenses, FDIC loss share buy-out expense, reduced provision for loan losses as a result of a significant loan recovery, hurricane expenses & effect of tax rate change: (A+C)/D		1.78			1.85			1.71
(A) Net income	$	135,083		$	177,146		$	138,199
Intangible amortization after-tax		2,557			1,903			2,479

(B) Earnings excluding intangible amortization	$	137,640		$	179,049		$	140,678

(C) Non-fundamental items after-tax	$	69,690		$	(106	)	$	1,924
(D) Average assets		11,499,105			9,568,853			8,210,982
(E) Average goodwill, core deposits and other intangible assets		576,258			397,809			356,385

Table 30: Return on Average Tangible Equity Excluding Intangible Amortization


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Return on average equity: A/C		8.23	%		14.08	%		12.77	%
Return on average tangible equity excluding intangible amortization: B/(D-E)		12.92			20.82			19.37
Return on average equity excluding gain on acquisitions, merger expenses, FDIC loss share buy-out expense, reduced provision for loan losses as a result of a significant loan recovery, hurricane expenses & effect of tax rate change: (A+C)/D		12.48			14.07			12.94

(A) Net income	$	135,083		$	177,146		$	138,199
(B) Earnings excluding intangible amortization		137,640			179,049			140,678
(C) Non-fundamental items after-tax		69,690			(106	)		1,924
(D) Average equity		1,641,278			1,257,926			1,082,585
(E) Average goodwill, core deposits and other intangible assets		576,258			397,809			356,385

Table 31: Tangible Equity to Tangible Assets


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Equity to assets: B/A		15.25	%		13.53	%		12.92	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		9.11			9.89			9.00

(A) Total assets	$	14,449,760		$	9,808,465		$	9,289,122
(B) Total equity		2,204,291			1,327,490			1,199,757
(C) Goodwill		927,949			377,983			377,983
(D) Core deposit and other intangibles		49,351			18,311			21,443

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

Table 32: Core Efficiency Ratio


	Years Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Net interest income (A)	$	455,905		$	405,958		$	355,712
Non-interest income (B)		99,636			87,051			65,498
Non-interest expense (C)		240,208			191,755			177,555
FTE Adjustment (D)		7,856			7,924			7,710
Amortization of intangibles (E)		4,207			3,132			4,079

Non-core items:
Non-interest income:
Gain on acquisitions	$	3,807		$	—		$	1,635
Gain (loss) on OREO, net		1,025			(554	)		(317	)
Gain (loss) on SBA loans		738			1,088			541
Gain (loss) on branches, equipment and other assets, net		(960	)		700			(214	)
Gain (loss) on securities, net		2,132			669			4
Other income⁽¹⁾		—			925			—

Total non-core non-interest income (F)	$	6,742		$	2,828		$	1,649

Non-interest expense:
Merger expenses	$	25,743		$	433		$	4,800
FDIC loss share buy-out		—			3,849			—
Hurricane damage expense		556			—			—
Other expense⁽²⁾		47			2,283			—

Total non-core non-interest expense (G)	$	26,346		$	6,565		$	4,800

Efficiency ratio (reported): ((C-E)/(A+B+D))		41.89	%		37.65	%		40.44	%
Core efficiency ratio (non-GAAP): ((C-E-G)/(A+B+D-F))		37.66			36.55			39.48

(1)	Amount includes recoveries on historical losses.

(2)	Amount includes vacant properties write-downs.

Table 33 presents selected unaudited quarterly financial information for 2017 and 2016.

Table 33: Quarterly Results


	2017 Quarters
	First		Second		Third		Fourth		Total
	(In thousands, except per share data)
Income statement data:
Total interest income	$	114,494	$	122,863	$	123,913	$	158,981	$	520,251
Total interest expense		9,679		15,511		17,144		22,012		64,346

Net interest income		104,815		107,352		106,769		136,969		455,905
Provision for loan losses		3,914		387		35,023		4,926		44,250

Net interest income after provision for loan losses		100,901		106,965		71,746		132,043		411,655
Total non-interest income		26,470		24,417		21,457		27,292		99,636
Total non-interest expense		55,141		51,003		70,846		63,218		240,208

Income before income taxes		72,230		80,379		22,357		96,117		271,083
Income tax expense		25,374		30,282		7,536		72,808		136,000

Net income	$	46,856	$	50,097	$	14,821	$	23,309	$	135,083

Per share data:
Basic earnings per common share	$	0.33	$	0.35	$	0.10	$	0.13	$	0.90
Diluted earnings per common share		0.33		0.35		0.10		0.13		0.89


	2016 Quarters
	First		Second		Third		Fourth		Total
	(In thousands, except per share data)
Income statement data:
Total interest income	$	105,284	$	108,490	$	111,375	$	111,388	$	436,537
Total interest expense		7,227		7,449		7,722		8,181		30,579

Net interest income		98,057		101,041		103,653		103,207		405,958
Provision for loan losses		5,677		5,692		5,536		1,703		18,608

Net interest income after provision for loan losses		92,380		95,349		98,117		101,504		387,350
Total non-interest income		19,437		21,772		22,014		23,828		87,051
Total non-interest expense		45,648		47,587		51,026		47,494		191,755

Income before income taxes		66,169		69,534		69,105		77,838		282,646
Income tax expense		24,742		26,025		25,485		29,248		105,500

Net income	$	41,427	$	43,509	$	43,620	$	48,590	$	177,146

Per share data:
Basic earnings per common share	$	0.30	$	0.31	$	0.31	$	0.35	$	1.26
Diluted earnings per common share		0.29		0.31		0.31		0.35		1.26

Recent Accounting Pronouncements

See Note 25 to the Notes to Consolidated Financial Statements for a discussion of certain recent accounting pronouncements.

Item 7A. 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 December 31, 2017, our cash and cash equivalents were $635.9 million, or 4.4% 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 $1.69 billion and $1.07 billion as of December 31, 2017 and 2016, respectively.

As of December 31, 2017, our investment portfolio was comprised of approximately 76.6% or $1.45 billion of securities which mature in less than five years. As of December 31, 2017 and 2016, $1.18 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 December 31, 2017, our total deposits were $10.39 billion, or 71.9% 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 December 31, 2017 and 2016, we could have borrowed up to $106.4 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 $1.30 billion and $1.31 billion at December 31, 2017 and 2016, respectively. At December 31, 2017, $525.0 million and $774.2 million of the outstanding balance were issued as short-term and long-term advances, respectively. 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 $1.96 billion and $718.2 million as of December 31, 2017 and 2016, respectively.

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 8.64% and 11.19%, respectively, as of December 31, 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.

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At December 31, 2017, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

Table 34 presents our sensitivity to net interest income as of December 31, 2017.

Table 34: Sensitivity of Net Interest Income


Interest Rate Scenario	Percentage Change from Base
Up 200 basis points		14.29	%
Up 100 basis points		6.92
Down 100 basis points		(8.35	)
Down 200 basis points		(14.32	)

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 December 31, 2017, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 9.1%.

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.

100

Table 35 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of December 31, 2017.

Table 35: 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	$	469,018		$	—		$	—		$	—		$	—		$	—		$	—		$	469,018
Federal funds sold		24,109			—			—			—			—			—			—			24,109
Investment securities		282,442			85,037			67,306			158,681			211,180			431,505			652,122			1,888,273
Loans receivable		4,162,419			533,191			634,365			1,144,891			1,363,462			2,131,253			361,607			10,331,188

Total earning assets		4,937,988			618,228			701,671			1,303,572			1,574,642			2,562,758			1,013,729			12,712,588

Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	1,109,280		$	546,748		$	820,123		$	1,640,245		$	811,588		$	580,421		$	968,414		$	6,476,819
Time deposits		176,901			194,764			339,928			355,143			337,453			120,263			1,979			1,526,431
Securities sold under repurchase agreements		147,789			—			—			—			—			—			—			147,789
FHLB borrowed funds		655,022			204,026			15,030			135,252			143,067			146,791			—			1,299,188
Subordinated debentures		70,698			—			—			—			—			297,333			—			368,031

Total interest-bearing liabilities		2,159,690			945,538			1,175,081			2,130,640			1,292,108			1,144,808			970,393			9,818,258

Interest rate sensitivity gap	$	2,778,298		$	(327,310	)	$	(473,410	)	$	(827,068	)	$	282,534		$	1,417,950		$	43,336		$	2,894,330

Cumulative interest rate sensitivity gap	$	2,778,298		$	2,450,988		$	1,977,578		$	1,150,510		$	1,433,044		$	2,850,994		$	2,894,330
Cumulative rate sensitive assets to rate sensitive liabilities		228.6	%		178.9	%		146.2	%		117.9	%		118.6	%		132.2	%		129.5	%
Cumulative gap as a % of total earning assets		21.9	%		19.3	%		15.6	%		9.1	%		11.3	%		22.4	%		22.8	%

101

Item 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control Over Financial Reporting

The management of Home BancShares, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth in Internal Control – Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As permitted by SEC guidance, management excluded from its assessment the operations of the Stonegate 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 20.7% of the Company’s total consolidated assets as of December 31, 2017. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2017 is effective based on the specified criteria.

BKD, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, is included herein.

102

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Home BancShares, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BKD, LLP

We have served as the Company’s auditor since 2005.

Little Rock, Arkansas

February 27, 2018

103

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Opinion on the Internal Control Over Financial Reporting

We have audited Home BancShares, Inc.’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated February 27, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definitions and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

104

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

As permitted, the Company excluded the operations of the acquisition of Stonegate Bank (Stonegate) acquired during 2017, which is described in Note 2 of the consolidated financial statements, from the scope of management’s report on internal control over financial reporting. As such, Stonegate has also been excluded from the scope of our audit of internal control over financial reporting.

/s/ BKD, LLP

Little Rock, Arkansas

February 27, 2018

105

Home BancShares, Inc.

Consolidated Balance Sheets


	December 31,
(In thousands, except share data)	2017			2016
Assets
Cash and due from banks	$	166,915		$	123,758
Interest-bearing deposits with other banks		469,018			92,891

Cash and cash equivalents		635,933			216,649
Federal funds sold		24,109			1,550
Investment securities – available-for-sale		1,663,517			1,072,920
Investment securities – held-to-maturity		224,756			284,176
Loans receivable		10,331,188			7,387,699
Allowance for loan losses		(110,266	)		(80,002	)

Loans receivable, net		10,220,922			7,307,697
Bank premises and equipment, net		237,439			205,301
Foreclosed assets held for sale		18,867			15,951
Cash value of life insurance		146,866			86,491
Accrued interest receivable		45,708			30,838
Deferred tax asset, net		76,564			61,298
Goodwill		927,949			377,983
Core deposit and other intangibles		49,351			18,311
Other assets		177,779			129,300

Total assets	$	14,449,760		$	9,808,465

Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	2,385,252		$	1,695,184
Savings and interest-bearing transaction accounts		6,476,819			3,963,241
Time deposits		1,526,431			1,284,002

Total deposits		10,388,502			6,942,427
Securities sold under agreements to repurchase		147,789			121,290
FHLB and other borrowed funds		1,299,188			1,305,198
Accrued interest payable and other liabilities		41,959			51,234
Subordinated debentures		368,031			60,826

Total liabilities		12,245,469			8,480,975

Stockholders’ equity:
Common stock, par value $0.01; shares authorized 200,000,000 in 2017 and 2016; shares issued and outstanding 173,632,983 in 2017 and 140,472,205 in 2016		1,736			1,405
Capital surplus		1,675,318			869,737
Retained earnings		530,658			455,948
Accumulated other comprehensive (loss) income		(3,421	)		400

Total stockholders’ equity		2,204,291			1,327,490

Total liabilities and stockholders’ equity	$	14,449,760		$	9,808,465

See accompanying notes.

106

Home BancShares, Inc.

Consolidated Statements of Income


	Year Ended December 31,
(In thousands, except per share data)	2017			2016			2015
Interest income:
Loans	$	479,189		$	403,394		$	344,290
Investment securities
Taxable		26,776			21,246			21,695
Tax-exempt		11,967			11,417			11,194
Deposits – other banks		2,309			471			233
Federal funds sold		10			9			24

Total interest income		520,251			436,537			377,436

Interest expense:
Interest on deposits		33,777			15,926			12,971
Federal funds purchased		1			2			4
FHLB and other borrowed funds		14,513			12,484			6,774
Securities sold under agreements to repurchase		918			574			621
Subordinated debentures		15,137			1,593			1,354

Total interest expense		64,346			30,579			21,724

Net interest income		455,905			405,958			355,712
Provision for loan losses		44,250			18,608			25,164

Net interest income after provision for loan losses		411,655			387,350			330,548

Non-interest income:
Service charges on deposit accounts		24,922			25,049			24,252
Other service charges and fees		36,127			30,200			26,186
Trust fees		1,678			1,457			2,381
Mortgage lending income		13,286			14,399			10,423
Insurance commissions		1,948			2,296			2,268
Increase in cash value of life insurance		1,989			1,412			1,199
Dividends from FHLB, FRB, Bankers’ bank & other		3,485			3,091			1,698
Gain on acquisitions		3,807			—			1,635
Gain on sale of SBA loans		738			1,088			541
Gain (loss) on sale of branches, equipment and other assets, net		(960	)		700			(214	)
Gain (loss) on OREO, net		1,025			(554	)		(317	)
Gain (loss) on securities, net		2,132			669			4
FDIC indemnification accretion/(amortization), net		—			(772	)		(9,391	)
Other income		9,459			8,016			4,833

Total non-interest income		99,636			87,051			65,498

Non-interest expense:
Salaries and employee benefits		119,369			101,962			87,512
Occupancy and equipment		30,611			26,129			25,967
Data processing expense		11,998			10,499			10,774
Other operating expenses		78,230			53,165			53,302

Total non-interest expense		240,208			191,755			177,555

Income before income taxes		271,083			282,646			218,491
Income tax expense		136,000			105,500			80,292

Net income	$	135,083		$	177,146		$	138,199

Basic earnings per common share	$	0.90		$	1.26		$	1.01

Diluted earnings per common share	$	0.89		$	1.26		$	1.01

See accompanying notes.

107

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income


	Year Ended December 31,
(In thousands)	2017			2016			2015
Net income available to all stockholders	$	135,083		$	177,146		$	138,199
Net unrealized gain (loss) on available-for-sale securities		(3,419	)		(5,546	)		(4,656	)
Less: reclassification adjustment for realized (gains) losses included in income		(2,132	)		(669	)		(4	)
Effect of tax rate change on unrealized gain (loss) on available-for-sale securities		(737	)		—			—

Other comprehensive income (loss), before tax effect		(6,288	)		(6,215	)		(4,660	)
Tax effect on other comprehensive (loss) income		2,467			2,438			1,828

Other comprehensive income (loss)		(3,821	)		(3,777	)		(2,832	)

Comprehensive income	$	131,262		$	173,369		$	135,367

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017, 2016 and 2015


(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2015	$	676		$	781,328		$	226,279		$	7,009		$	1,015,292
Comprehensive income:
Net income		—			—			138,199			—			138,199
Other comprehensive income (loss)		—			—			—			(2,832	)		(2,832	)
Net issuance of 409,072 shares of common stock from exercise of stock options		2			387			—			—			389
Issuance of 4,159,708 shares of common stock from acquisition of FBBI, net of issuance costs of approximately $60		21			83,753			—			—			83,774
Repurchase of 134,664 shares of common stock		(1	)		(2,014	)		—			—			(2,015	)
Tax benefit from stock options exercised		—			605			—			—			605
Share-based compensation net issuance of 665,668 shares of restricted common stock		3			3,922			—			—			3,925
Cash dividends - Common Stock, $0.2750 per share		—			—			(37,580	)		—			(37,580	)

Balances at December 31, 2015		701			867,981			326,898			4,177			1,199,757
Comprehensive income:
Net income		—			—			177,146			—			177,146
Other comprehensive income (loss)		—			—			—			(3,777	)		(3,777	)
Net issuance of 492,739 shares of common stock from exercise of stock options plus issuance of 10,000 bonus shares of unrestricted common stock		3			1,492			—			—			1,495
Issuance of common stock – 2-for-1 stock split		702			(702	)		—			—			—
Repurchase of 510,608 shares of common stock		(3	)		(9,814	)		—			—			(9,817	)
Tax benefit from stock options exercised		—			4,154			—			—			4,154
Share-based compensation net issuance of 243,734 shares of restricted common stock		2			6,626			—			—			6,628
Cash dividends – Common Stock, $0.3425 per share		—			—			(48,096	)		—			(48,096	)

Balances at December 31, 2016		1,405			869,737			455,948			400			1,327,490
Comprehensive income:
Net income		—			—			135,083			—			135,083
Other comprehensive income (loss)		—			—			—			(3,821	)		(3,821	)
Net issuance of 185,116 shares of common stock from exercise of stock options		2			1,080			—			—			1,082
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 857,800 shares of common stock		(9	)		(20,816	)		—			—			(20,825	)
Share-based compensation net issuance of 231,766 shares of restricted common stock		2			6,703			—			—			6,705
Cash dividends – Common Stock, $0.4000 per share		—			—			(60,373	)		—			(60,373	)

Balances at December 31, 2017	$	1,736		$	1,675,318		$	530,658		$	(3,421	)	$	2,204,291

See accompanying notes.

108

Home BancShares, Inc.

Consolidated Statements of Cash Flows


	Year Ended December 31,
(In thousands)	2017			2016			2015
Operating Activities
Net income	$	135,083		$	177,146		$	138,199
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		11,995			10,644			10,296
Amortization/(accretion)		17,638			15,495			21,783
Share-based compensation		6,705			6,628			3,925
Tax benefits from stock options exercised		—			(4,154	)		(605	)
(Gain) loss on assets		(4,223	)		1,978			(6	)
Gain on acquisitions		(3,807	)		—			(1,635	)
Provision for loan losses		44,250			18,608			25,164
Deferred income tax effect		34,084			12,705			7,168
Increase in cash value of life insurance		(1,989	)		(1,412	)		(1,199	)
Originations of mortgage loans held for sale		(333,558	)		(354,481	)		(280,858	)
Proceeds from sales of mortgage loans held for sale		345,501			337,128			272,107
Changes in assets and liabilities:
Accrued interest receivable		(6,451	)		(1,706	)		(3,615	)
Indemnification and other assets		(37,285	)		(11,520	)		(10,312	)
Accrued interest payable and other liabilities		(31,033	)		10,985			24,651

Net cash provided by (used in) operating activities		176,910			218,044			205,063

Investing Activities
Net (increase) decrease in federal funds sold		(21,044	)		—			(1,300	)
Net (increase) decrease in loans, excluding loans acquired		(172,935	)		(764,665	)		(874,092	)
Purchases of investment securities – available-for-sale		(692,482	)		(253,458	)		(382,631	)
Proceeds from maturities of investment securities – available-for-sale		184,280			284,392			290,506
Proceeds from sale of investment securities – available-for-sale		32,732			87,157			4,034
Purchases of investment securities – held-to-maturity		(281	)		(25,933	)		(6,563	)
Proceeds from maturities of investment securities – held-to-maturity		58,162			49,231			52,127
Proceeds from qualified sale of investment securities – held-to-maturity		491			—			—
Proceeds from foreclosed assets held for sale		18,734			13,978			20,928
Proceeds from sale of SBA loans		13,630			17,910			8,256
Proceeds from sale of insurance book of business		—			—			2,938
Purchases of premises and equipment, net		(5,191	)		(3,082	)		(10,536	)
Return of investment on cash value of life insurance		592			57			27
Net cash proceeds (paid) received – market acquisitions		227,842			—			144,097
Cash (paid) on FDIC loss share buy-out		—			(6,613	)		—

Net cash provided by (used in) investing activities		(355,470	)		(601,026	)		(752,209	)

Financing Activities
Net increase (decrease) in deposits, excluding deposits acquired		476,623			503,918			74,992
Net increase (decrease) in securities sold under agreements to repurchase		336			(7,099	)		(48,076	)
Net increase (decrease) in FHLB and other borrowed funds		(95,375	)		(100,747	)		702,186
Proceeds from exercise of stock options		1,082			1,495			389
Proceeds from issuance of subordinated debentures		297,201			—			—
Repurchase of common stock		(20,825	)		(9,817	)		(2,015	)
Common stock issuance costs – market acquisitions		(825	)		—			(60	)
Tax benefits from stock options exercised		—			4,154			605
Dividends paid on common stock		(60,373	)		(48,096	)		(37,580	)

Net cash provided by (used in) financing activities		597,844			343,808			690,441

Net change in cash and cash equivalents		419,284			(39,174	)		143,295
Cash and cash equivalents – beginning of year		216,649			255,823			112,528

Cash and cash equivalents – end of year	$	635,933		$	216,649		$	255,823

See accompanying notes.

109

Home BancShares, Inc.

Notes to Consolidated Financial Statements

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.

110

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, cash held as demand deposits at various banks and the Federal Reserve Bank (“FRB”) and interest-bearing deposits with other banks. The Bank is required to maintain an average reserve balance with either the FRB or in the form of cash on hand. The required reserve balance at December 31, 2017 was $103.2 million.

Investment Securities

Interest on investment securities is recorded as income as earned. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains or losses on the sale of securities are determined using the specific identification method.

Management determines the classification of securities as available-for-sale, held-to-maturity, or trading at the time of purchase 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 Company has no trading securities.

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, net of taxes. Securities that are held as available-for-sale are used as a part of HBI’s 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.

Securities held-to-maturity include any security for which the Company has the positive intent and ability to hold until maturity, are reported at historical cost and are 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

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans.

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 existing loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions to the allowance for loan losses are based on management’s analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and classified loans less than $2.0 million 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 accounted for under FASB ASC 310-30, Loans Acquired with Deteriorated Credit Quality, after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

111

Loans considered impaired, under FASB ASC 310-10-35, are loans for which, based on current information and events, it is probable that the Company 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 borrower may be unable to meet payments as they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.

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, but payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status after being current for a period of at least six months. An exception to this six-month period can be made if it can be proven that the borrower has historically demonstrated repayment performance consistent with the terms of the loan and the Company expects to collect all principal and interest.

Acquisition Accounting and Acquired Loans

The Company accounts for its acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the purchase 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 loans acquired incorporates assumptions regarding credit risk. Loans acquired 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 loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics and are treated in the aggregate when applying various valuation techniques. The Company evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has significantly decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s weighted-average life.

For further discussion of the Company’s acquisitions, see Note 2 to the Notes to Consolidated Financial Statements.

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 less cost to sell 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.

112

Bank Premises and Equipment

Bank premises and equipment are carried at cost or fair market value at the date of acquisition less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are used for tax purposes. Leasehold improvements are capitalized and amortized using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements whichever is shorter. The assets’ estimated useful lives for book purposes are as follows:


Bank premises		15-40 years
Furniture, fixtures, and equipment		3-15 years

Cash value of life insurance

The Company has purchased life insurance policies on certain key employees. Life insurance owned by the Company is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

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. The Company performed its annual impairment test of goodwill and core deposit intangibles during 2017, 2016 and 2015, as required by FASB ASC 350, Intangibles - Goodwill and Other. The 2017, 2016 and 2015 tests indicated no impairment of the Company’s goodwill or core deposit intangibles.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase consist of obligations of the Company to other parties. At the point funds deposited by customers become investable, those funds are used to purchase securities owned by the Company and held in its general account with the designation of Customers’ Securities. A third party maintains control over the securities underlying overnight repurchase agreements. The securities involved in these transactions are generally U.S. Treasury or Federal Agency issues. Securities sold under agreements to repurchase generally mature on the banking day following that on which the investment was initially purchased and are treated as collateralized financing transactions which are recorded at the amounts at which the securities were sold plus accrued interest. Interest rates and maturity dates of the securities involved vary and are not intended to be matched with funds from customers.

Derivative Financial Instruments

The Company may enter into derivative contracts for the purposes of managing exposure to interest rate risk. The Company records all derivatives on the consolidated balance sheet at fair value. Historically the Company’s policy has been not to invest in derivative type investments.

During 2017, the Company acquired standalone derivative financial instruments from Stonegate. These derivative financial instruments consist of interest rate swaps and are recognized as assets and liabilities in the consolidated statements of financial condition at fair value. The Bank’s derivative instruments have not been designated as hedging instruments. These undesignated derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value recorded in other noninterest income. As of December 31, 2017, these derivative instruments are not considered to be material to the Company’s financial position and results of operations. In addition, as of December 31, 2017, the Company had derivative contracts outstanding associated with the mortgage loans held for sale portfolio.

As of December 31, 2016, the Company had no derivative contracts outstanding except for commitments associated with the mortgage loans held for sale portfolio.

113

Stock Options

The Company accounts for stock options in accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, which establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods and services, or (ii) incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. FASB ASC 718 requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant.

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 share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not yet been issued, and all amendments in the ASU that apply must be adopted in the same period. The Company adopted the new guidance in the first quarter of 2017. Under the new guidance, excess tax benefits related to equity compensation has been recognized in the income tax expense in the consolidated statements of income rather than in capital surplus in the consolidated balance sheets and has been applied on a prospective basis. Changes to the statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-based payment arrangements has been implemented on a retrospective basis. 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 operations as a result of the adoption and implementation of ASU 2016-09. For additional information on the stock-based compensation plan, see Note 14.

Termination of Remaining Loss-Share Agreements

Effective July 27, 2016, we reached an agreement terminating our remaining loss-share agreements with the FDIC. As a result, $57.4 million of the loans, previously under loss-share agreements including their associated discounts which were previously classified as covered loans, migrated to non-covered loans status during 2016. 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.

Income Taxes

The Company accounts 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. The Company determines 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.

114

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 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.

The Company and its subsidiaries file consolidated tax returns. Its subsidiary provides for income taxes on a separate return basis, and remits to the Company amounts determined to be currently payable.

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 years ended December 31:


	2017		2016		2015
	(In thousands, except per share data)
Net income	$	135,083	$	177,146	$	138,199
Average common shares outstanding		150,806		140,418		136,615
Effect of common stock options		722		295		515

Diluted common shares outstanding		151,528		140,713		137,130

Basic earnings per common share	$	0.90	$	1.26	$	1.01
Diluted earnings per common share	$	0.89	$	1.26	$	1.01

2. Business Combinations

Acquisition of Stonegate Bank

115

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


	Stonegate Bank
	Acquired from Stonegate			Fair Value Adjustments			As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	100,958		$	—		$	100,958
Interest-bearing deposits with other banks		135,631			—			135,631
Federal funds sold		1,515			—			1,515
Investment securities		103,041			474			103,515
Loans receivable		2,446,149			(74,067	)		2,372,082
Allowance for loan losses		(21,507	)		21,507			—

Loans receivable, net		2,424,642			(52,560	)		2,372,082
Bank premises and equipment, net		38,868			(3,572	)		35,296
Foreclosed assets held for sale		4,187			(801	)		3,386
Cash value of life insurance		48,000			—			48,000
Accrued interest receivable		7,088			—			7,088
Deferred tax asset, net		27,340			11,990			39,330
Goodwill		81,452			(81,452	)		—
Core deposit and other intangibles		10,505			20,364			30,869
Other assets		9,598			255			9,853

Total assets acquired	$	2,992,825		$	(105,302	)	$	2,887,523

Liabilities
Deposits
Demand and non-interest-bearing	$	585,959		$	—		$	585,959
Savings and interest-bearing transaction accounts		1,776,256			—			1,776,256
Time deposits		163,567			(85	)		163,482

Total deposits		2,525,782			(85	)		2,525,697
FHLB borrowed funds		32,667			184			32,851
Securities sold under agreements to repurchase		26,163			—			26,163
Accrued interest payable and other liabilities		8,100			(484	)		7,616
Subordinated debentures		8,345			1,489			9,834

Total liabilities assumed		2,601,057			1,104			2,602,161

Equity
Total equity assumed		391,768			(391,768	)		—

Total liabilities and equity assumed	$	2,992,825		$	(390,664	)		2,602,161

Net assets acquired								285,362
Purchase price								792,370

Goodwill							$	507,008

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

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

Investment securities – Investment securities were acquired from Stonegate with an approximately $474,000 adjustment to market value based upon quoted market prices.

116

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 – The fair value used represents the adjustments of certain estimated liabilities from Stonegate.

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.

117

The unaudited pro-forma combined consolidated financial information presents how the combined financial information of HBI and Stonegate might have appeared had the businesses actually been combined. The following schedule represents the unaudited pro forma combined financial information as of the years ended December 31, 2017 and 2016, assuming the acquisition was completed as of January 1, 2017 and 2016, respectively:


	Years Ended December 31,
	2017		2016
	(In thousands, except per share data)
Total interest income	$	610,697	$	538,258
Total non-interest income		107,179		95,555
Net income available to all shareholders		143,979		206,081

Basic earnings per common share	$	0.79	$	1.20
Diluted earnings per common share		0.79		1.20

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

Acquisition of The Bank of Commerce

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

118

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.

119

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

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

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

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

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

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

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

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

The Company’s operating results for the period ended December 31, 2017, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Due to the fair value adjustments recorded and the fact BOC total assets acquired are less than 5% of total assets as of December 31, 2017 excluding BOC as recorded by HBI as of acquisition date, historical results are not believed to be material to the Company’s results, and thus no pro-forma information is presented.

Acquisition of Giant Holdings, Inc.

120

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


	Giant Holdings, Inc.
	Acquired from GHI			Fair Value Adjustments			As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	41,019		$	—		$	41,019
Interest-bearing deposits with other banks		4,057			1			4,058
Investment securities		1,961			(5	)		1,956
Loans receivable		335,886			(6,517	)		329,369
Allowance for loan losses		(4,568	)		4,568			—

Loans receivable, net		331,318			(1,949	)		329,369
Bank premises and equipment, net		2,111			608			2,719
Cash value of life insurance		10,861			—			10,861
Accrued interest receivable		850			—			850
Deferred tax asset, net		2,286			1,807			4,093
Core deposit and other intangibles		172			3,238			3,410
Other assets		254			(489	)		(235	)

Total assets acquired	$	394,889		$	3,211		$	398,100

Liabilities
Deposits
Demand and non-interest-bearing	$	75,993		$	—		$	75,993
Savings and interest-bearing transaction accounts		139,459			—			139,459
Time deposits		88,219			324			88,543

Total deposits		303,671			324			303,995
FHLB borrowed funds		26,047			431			26,478
Accrued interest payable and other liabilities		14,552			18			14,570

Total liabilities assumed		344,270			773			345,043

Equity
Total equity assumed		50,619			(50,619	)		—

Total liabilities and equity assumed	$	394,889		$	(49,846	)		345,043

Net assets acquired								53,057
Purchase price								96,015

Goodwill							$	42,958

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

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

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

121

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

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

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

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

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

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

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

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

The Company’s operating results for the period ended December 31, 2017, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Due to the fair value adjustments recorded and the fact GHI total assets acquired are less than 5% of total assets as of December 31, 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.

Acquisition of Florida Business BancGroup, Inc.

On October 1, 2015, the Company completed its acquisition of Florida Business BancGroup, Inc. (“FBBI”), parent company of Bay Cities Bank (“Bay Cities”). The Company paid a purchase price to the FBBI shareholders of $104.1 million for the FBBI acquisition. Under the terms of the agreement, shareholders of FBBI received 4,159,708 shares of its common stock valued at approximately $83.8 million as of October 1, 2015, plus approximately $20.3 million in cash in exchange for all outstanding shares of FBBI common stock. A portion of the cash consideration, $2.0 million, was placed into escrow with the FBBI shareholders having a contingent right to receive their pro-rata portions of such amount. The amount, if any, of such escrowed funds to be released to FBBI shareholders would depend upon the amount of losses that the Company incurred in the two years following the completion of the merger related to two class action lawsuits pending against Bay Cities. In August 2017, the Company distributed the contingent cash consideration to the former FBBI shareholders, less $10,000 for compensation paid to a representative designated by FBBI who acted on behalf of the FBBI shareholders in connection with the escrow arrangements.

122

FBBI formerly operated six branch locations and a loan production office in the Tampa Bay area and in Sarasota, Florida. Including the effects of any purchase accounting adjustments, as of October 1, 2015, FBBI had approximately $529.6 million in total assets, $408.3 million in loans after $14.1 million of loan discounts, and $472.0 million in deposits.

The Company has determined that the acquisition of the net assets of FBBI 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:


	Florida Business BancGroup, Inc.
	Acquired from FBBI			Fair Value Adjustments			As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	23,597		$	—		$	23,597
Investment securities		61,384			611			61,995
Loans		422,363			(14,096	)		408,267
Allowance for loan losses		(5,714	)		5,714			—

Total loans receivable		416,649			(8,382	)		408,267
Bank premises and equipment, net		6,922			(1,697	)		5,225
Foreclosed assets held for sale		205			(43	)		162
Cash value of life insurance		9,540			—			9,540
Accrued interest receivable		1,442			—			1,442
Deferred tax asset		10,608			1,070			11,678
Core deposit intangible		—			3,477			3,477
Other assets		1,289			2,890			4,179

Total assets acquired	$	531,636		$	(2,074	)	$	529,562

Liabilities
Deposits
Demand and non-interest-bearing	$	150,625		$	—		$	150,625
Savings and interest-bearing transaction accounts		166,990			—			166,990
Time deposits		153,230			1,127			154,357

Total deposits		470,845			1,127			471,972
FHLB borrowed funds		5,000			802			5,802
Accrued interest payable and other liabilities		3,208			(319	)		2,889

Total liabilities assumed		479,053			1,610			480,663

Equity
Total equity assumed		52,583			(52,583	)		—

Total liabilities and equity assumed	$	531,636		$	(50,973	)		480,663

Net assets acquired								48,899
Purchase Price								104,154

Goodwill							$	55,255

123

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 – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. The $20.3 million adjustment primarily consists of the cash settlement paid to FBBI shareholders on the closing date and cash-in-lieu of fractional shares.

Investment securities – Investment securities were acquired from FBBI with a $611,000 adjustment to market value based upon quoted market prices.

The Company evaluated $390.9 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 $7.0 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 $31.5 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 $7.1 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 FBBI with a $1.7 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 to sell.

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

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

Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired; therefore, the Company recorded $55.3 million of goodwill.

Core deposit intangible – This intangible asset represents the value of the relationships that FBBI 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 $3.5 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 $1.1 million fair value adjustment applied for time deposits was because the weighted-average interest rate of FBBI’s certificates of deposits were estimated to be above the current market rates.

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

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

124

The Company’s operating results for the period ended December 31, 2015, 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 FBBI total assets acquired are less than 5% of total assets as of December 31, 2015 excluding FBBI as recorded by HBI as of acquisition date, historical results are not believed to be material to the Company’s results, and thus no pro-forma information is presented.

Acquisition of Pool of National Commercial Real Estate Loans

On April 1, 2015, Centennial entered into an agreement with AM PR LLC, an affiliate of J.C. Flowers & Co. (collectively, the “Seller”) to purchase a pool of national commercial real estate loans totaling approximately $289.1 million for a purchase price of 99% of the total principal value of the acquired loans. The purchase of the loans was completed on April 1, 2015. The acquired loans were originated by the former Doral Bank of San Juan, Puerto Rico within its Doral Property Finance portfolio and were transferred to the Seller by Banco Popular of Puerto Rico (“Popular”) upon its acquisition of the assets and liabilities of Doral Bank from FDIC, as receiver for the failed Doral Bank. This pool of loans is now managed by a division of Centennial known as the Centennial Commercial Finance Group (“Centennial CFG”), which is responsible for servicing the acquired loan pool and originating new loan production.

In connection with this acquisition of loans, the Company opened a loan production office on April 23, 2015 in New York City, which became a branch on September 1, 2016. Through this branch office, Centennial CFG is building out a national lending platform focusing on commercial real estate plus commercial and industrial loans.

Acquisition of Doral Bank’s Florida Panhandle operations

On February 27, 2015, Centennial acquired all the deposits and substantially all the assets of Doral Bank’s Florida Panhandle operations (“Doral Florida”) through an alliance agreement with Popular who was the successful lead bidder to acquire the assets and liabilities of the failed Doral Bank from the FDIC. Including the effects of the purchase accounting adjustments, the acquisition provided the Company with loans of approximately $37.9 million net of loan discounts, deposits of approximately $467.6 million, plus a $428.2 million cash settlement to balance the transaction. The FDIC in did not provide loss-sharing with respect to the acquired assets.

125

The Company has determined that the acquisition of the net assets of Doral Florida constitutes a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. 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:


	Doral Bank’s Florida Panhandle operations
	Acquired from FDIC		Fair Value Adjustments			As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	1,688	$	—		$	1,688
Loans receivable		42,244		(4,300	)		37,944

Total loans receivable		42,244		(4,300	)		37,944
Core deposit intangible		—		1,363			1,363

Total assets acquired	$	43,932	$	(2,937	)	$	40,995

Liabilities
Deposits
Demand and non-interest-bearing	$	3,130	$	—		$	3,130
Savings and interest-bearing transaction accounts		119,865		—			119,865
Time deposits		343,271		1,308			344,579

Total deposits		466,266		1,308			467,574

Total liabilities assumed	$	466,266	$	1,308			467,574

Net assets acquired (liabilities assumed)							(426,579	)
Cash settlement received							(428,214	)

Pre-tax gain on acquisition						$	1,635

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 – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.

The Company evaluated $36.9 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, and were recorded with a $3.4 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 approximately $5.3 million of loans evaluated were considered purchased credit impaired loans with in the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $950,000 discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

Core deposit intangible – This intangible asset represents the value of the relationships that Doral Florida 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 $1.4 million of core deposit intangible.

126

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 Bank was able to reset deposit rates. However, the Bank did not lower the deposit rates as low as the market rates currently offered. As a result, a $1.3 million fair value adjustment was applied for time deposits because the estimated weighted-average interest rate of Doral Florida’s certificates of deposits were still estimated to be above the current market rates after the rate reset.

The Company’s operating results for the period ended December 31, 2015, 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 Doral Florida total assets acquired excluding the cash settlement received is less than 1% of total assets 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.

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:


	December 31, 2017
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	407,387	$	899	$	(1,982	)	$	406,304
Residential mortgage-backed securities		481,981		538		(4,919	)		477,600
Commercial mortgage-backed securities		497,870		332		(4,430	)		493,772
State and political subdivisions		247,292		3,783		(774	)		250,301
Other securities		34,617		1,225		(302	)		35,540

Total	$	1,669,147	$	6,777	$	(12,407	)	$	1,663,517


	Held-to-Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	5,791	$	15	$	(15	)	$	5,791
Residential mortgage-backed securities		56,982		107		(402	)		56,687
Commercial mortgage-backed securities		16,625		114		(40	)		16,699
State and political subdivisions		145,358		3,031		(27	)		148,362

Total	$	224,756	$	3,267	$	(484	)	$	227,539

127


	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

Assets, principally investment securities, having an amortized cost of approximately $1.18 billion and $1.07 billion at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $147.8 million and $121.3 million at December 31, 2017 and 2016, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale and held-to-maturity at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(In thousands)
Due in one year or less	$	366,341	$	365,526	$	72,364	$	74,079
Due after one year through five years		922,178		918,743		89,265		90,262
Due after five years through ten years		286,130		284,935		12,422		12,488
Due after ten years		94,498		94,313		50,705		50,710

Total	$	1,669,147	$	1,663,517	$	224,756	$	227,539

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 year ended December 31, 2017, approximately $30.6 million in available-for-sale securities were sold. The gross realized gains and losses on the sales for the year ended December 31, 2017 totaled approximately $2.3 million and $127,000, respectively. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

128

During the year ended December 31, 2016, approximately $87.2 million, in available-for-sale securities were sold. There were approximately $795,000 in gains and $126,000 in losses on the available-for-sale securities sold. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

During the year ended December 31, 2015, approximately $4.0 million, in available-for-sale securities were sold. The gross realized gains on these sales totaled approximately $4,000. There were no losses on the available-for-sale securities sold. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

During 2015 and 2016, no held-to-maturity securities were sold. During 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 year ended December 31, 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.

For the year ended December 31, 2017, the Company had approximately $5.3 million in unrealized losses, which were in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 76.6% 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.

For the year ended December 31, 2016, the Company had approximately $1.6 million in unrealized losses, which were in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 78.5% 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 December 31, 2017 and 2016:


	December 31, 2017
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
U.S. government-sponsored enterprises	$	234,213	$	(1,288	)	$	40,122	$	(709	)	$	274,335	$	(1,997	)
Residential mortgage-backed securities		389,541		(3,656	)		99,989		(1,665	)		489,530		(5,321	)
Commercial mortgage-backed securities		314,301		(2,343	)		120,365		(2,127	)		434,666		(4,470	)
State and political subdivisions		41,299		(331	)		20,980		(470	)		62,279		(801	)
Other securities		—		—			9,852		(302	)		9,852		(302	)

Total	$	979,354	$	(7,618	)	$	291,308	$	(5,273	)	$	1,270,662	$	(12,891	)

129


	December 31, 2016
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
U.S. government-sponsored enterprises	$	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 years ended is as follows:


	December 31,
	2017		2016		2015
	(In thousands)
Taxable:
Available-for-sale	$	24,231	$	17,880	$	17,881
Held-to-maturity		2,545		3,366		3,814
Tax-exempt:
Available-for-sale		6,441		6,238		5,767
Held-to-maturity		5,526		5,179		5,427

Total	$	38,743	$	32,663	$	32,889

4. Loans Receivable

The various categories of loans receivable are summarized as follows:


	December 31,
	2017		2016
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,600,117	$	3,153,121
Construction/land development		1,700,491		1,135,843
Agricultural		82,229		77,736
Residential real estate loans
Residential 1-4 family		1,970,311		1,356,136
Multifamily residential		441,303		340,926

Total real estate		8,794,451		6,063,762
Consumer		46,148		41,745
Commercial and industrial		1,297,397		1,123,213
Agricultural		49,815		74,673
Other		143,377		84,306

Loans receivable	$	10,331,188	$	7,387,699

During the year ended December 31, 2017, the Company sold $12.9 million of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $738,000. During the year ended December 31, 2016, the Company sold $16.8 million of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $1.1 million. During the year ended December 31, 2015, the Company sold $7.7 million of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $541,000.

130

Mortgage loans held for sale of approximately $44.3 million and $56.2 million at December 31, 2017 and 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 December 31, 2017 and 2016 were not material.

The Company had $3.46 billion of purchased loans, which includes $146.6 million of discount for credit losses on purchased loans, at December 31, 2017. The Company had $51.9 million and $94.7 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2017. 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.

5. Allowance for Loan Losses, Credit Quality and Other

The Company’s 2017 allowance for loan loss was significantly impacted by Hurricane Irma which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10, 2017. Based on initial assessments of the potential credit impact and damage to the approximately $2.41 billion in legacy loans receivable we have in the disaster area, the Company established a $32.9 million storm-related provision for loan losses as of December 31, 2017. 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. As of December 31, 2017, charge-offs of $2.2 million have been taken against the storm-related provision for loan losses.

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


	December 31, 2017
	(In thousands)
Allowance for loan losses:
Beginning balance	$	80,002
Loans charged off		(17,471	)
Recoveries of loans previously charged off		3,485

Net loans recovered (charged off)		(13,986	)

Provision for loan losses		44,250

Balance, December 31, 2017	$	110,266

131

The following tables present the balance in the allowance for loan losses for the year ended December 31, 2017, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of December 31, 2017. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.


	Year Ended December 31, 2017
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Beginning balance	$	11,522		$	28,188		$	16,517		$	12,756		$	4,188		$	6,831		$	80,002
Loans charged off		(1,632	)		(3,749	)		(3,980	)		(5,578	)		(2,532	)		—			(17,471	)
Recoveries of loans previously charged off		462			1,042			676			464			841			—			3,485

Net loans recovered (charged off)		(1,170	)		(2,707	)		(3,304	)		(5,114	)		(1,691	)		—			(13,986	)
Provision for loan losses		9,991			18,458			11,293			7,650			837			(3,979	)		44,250

Balance, December 31	$	20,343		$	43,939		$	24,506		$	15,292		$	3,334		$	2,852		$	110,266


	As of December 31, 2017
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Period end amount allocated to:
Loans individually evaluated for impairment	$	1,378		$	768		$	188		$	843		$	7		$	—		$	3,184
Loans collectively evaluated for impairment		18,954			42,824			23,341			14,290			3,310			2,852			105,571

Loans evaluated for impairment balance, December 31		20,332			43,592			23,529			15,133			3,317			2,852			108,755

Purchased credit impaired loans		11			347			977			159			17			—			1,511

Balance, December 31	$	20,343		$	43,939		$	24,506		$	15,292		$	3,334		$	2,852		$	110,266


Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	26,860		$	124,124		$	20,431		$	21,867		$	500		$	—		$	193,782
Loans collectively evaluated for impairment		1,658,519			4,442,201			2,341,081			1,261,161			236,392			—			9,939,354

Loans evaluated for impairment balance, December 31		1,685,379			4,566,325			2,361,512			1,283,028			236,892			—			10,133,136

Purchased credit impaired loans		15,112			116,021			50,102			14,369			2,448			—			198,052

Balance, December 31	$	1,700,491		$	4,682,346		$	2,411,614		$	1,297,397		$	239,340		$	—		$	10,331,188

132

The following tables present the balance in the allowance for loan losses for the loan portfolio for the year ended December 31, 2016, and the allowance for loan losses and recorded investment in loans 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
Allowance for loan losses:	(In thousands)
Beginning balance	$	10,782		$	26,798		$	14,818		$	9,324		$	5,016		$	2,486	$	69,224
Loans charged off		(382	)		(3,586	)		(5,597	)		(5,778	)		(2,158	)		—		(17,501	)
Recoveries of loans previously charged off		1,125			857			1,152			5,533			1,004			—		9,671

Net loans recovered (charged off)		743			(2,729	)		(4,445	)		(245	)		(1,154	)		—		(7,830	)
Provision for loan losses		(3	)		4,119			6,144			3,677			326			4,345		18,608

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
Allowance for loan losses:	(In thousands)
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

133

The following tables present the balance in the allowance for loan losses for the loan portfolio for the year ended December 31, 2015, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of December 31, 2015. 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, 2015
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
Allowance for loan losses:	(In thousands)
Beginning balance	$	8,548		$	18,157		$	14,607		$	5,966		$	5,799		$	1,934	$	55,011
Loans charged off		(644	)		(4,878	)		(4,717	)		(2,638	)		(3,075	)		—		(15,952	)
Recoveries of loans previously charged off		236			762			915			802			827			—		3,542

Net loans recovered (charged off)		(408	)		(4,116	)		(3,802	)		(1,836	)		(2,248	)		—		(12,410	)
Provision for loan losses		2,273			11,862			3,818			5,204			1,455			552		25,164
Increase in FDIC indemnification asset		369			895			195			(10	)		10			—		1,459

Balance, December 31	$	10,782		$	26,798		$	14,818		$	9,324		$	5,016		$	2,486	$	69,224


	As of December 31, 2015
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
Allowance for loan losses:	(In thousands)
Period end amount allocated to:
Loans individually evaluated for impairment	$	1,149		$	2,115		$	186		$	921		$	—		$	—	$	4,371
Loans collectively evaluated for impairment		9,506			24,511			12,157			8,383			5,006			2,486		62,049

Loans evaluated for impairment balance, December 31		10,655			26,626			12,343			9,304			5,006			2,486		66,420

Purchased credit impaired loans		127			172			2,475			20			10			—		2,804

Balance, December 31	$	10,782		$	26,798		$	14,818		$	9,324		$	5,016		$	2,486	$	69,224


Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	21,215		$	55,858		$	18,240		$	6,290		$	1,053		$	—	$	102,656
Loans collectively evaluated for impairment		901,147			2,887,880			1,490,866			825,640			179,391			—		6,284,924

Loans evaluated for impairment balance, December 31		922,362			2,943,738			1,509,106			831,930			180,444			—		6,387,580

Purchased credit impaired loans		22,425			99,624			111,429			18,657			1,856			—		253,991

Balance, December 31	$	944,787		$	3,043,362		$	1,620,535		$	850,587		$	182,300		$	—	$	6,641,571

134

The following is an aging analysis for loans receivable for the years ended December 31, 2017 and 2016:


	December 31, 2017
	Loans Past Due 30-59 Days		Loans Past Due 60-89 Days		Loans Past Due 90 Days or More		Total Past Due		Current Loans		Total Loans Receivable		Accruing Loans Past Due 90 Days or More
Real estate:	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	6,331	$	1,480	$	12,719	$	20,530	$	4,579,587	$	4,600,117	$	3,119
Construction/land development		834		13		8,258		9,105		1,691,386		1,700,491		3,247
Agricultural		—		221		19		240		81,989		82,229		—
Residential real estate loans
Residential 1-4 family		9,066		2,013		16,612		27,691		1,942,620		1,970,311		2,175
Multifamily residential		—		—		253		253		441,050		441,303		100

Total real estate		16,231		3,727		37,861		57,819		8,736,632		8,794,451		8,641
Consumer		252		51		171		474		45,674		46,148		26
Commercial and industrial		2,073		1,030		6,528		9,631		1,287,766		1,297,397		1,944
Agricultural and other		288		113		137		538		192,654		193,192		54

Total	$	18,844	$	4,921	$	44,697	$	68,462	$	10,262,726	$	10,331,188	$	10,665


	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
Real estate:	(In thousands)
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 December 31, 2017 and 2016 were $34.0 million and $47.2 million, respectively.

135

The following is a summary of the impaired loans as of December 31, 2017, 2016 and 2015:


	December 31, 2017
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Year Ended
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Average Recorded Investment		Interest Recognized
Loans without a specific valuation allowance	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	29	$	29	$	—	$	23	$	2
Construction/land development		64		64		—		31		3
Agricultural		19		—		—		—		1
Residential real estate loans
Residential 1-4 family		115		115		—		135		7
Multifamily residential		—		—		—		—		—

Total real estate		227		208		—		189		13
Consumer		18		—		—		—		1
Commercial and industrial		105		105		—		85		7
Agricultural and other		—		—		—		—		—

Total loans without a specific valuation allowance		350		313		—		274		21
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		29,666		29,040		757		41,772		1,498
Construction/land development		12,976		12,157		1,378		10,556		262
Agricultural		281		303		11		268		11
Residential real estate loans
Residential 1-4 family		19,770		18,689		124		22,347		363
Multifamily residential		1,627		1,627		64		1,412		81

Total real estate		64,320		61,816		2,334		76,355		2,215
Consumer		179		191		—		163		—
Commercial and industrial		16,777		13,007		843		9,726		121
Agricultural and other		297		309		7		644		8

Total loans with a specific valuation allowance		81,573		75,323		3,184		86,888		2,344
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		29,695		29,069		757		41,795		1,500
Construction/land development		13,040		12,221		1,378		10,587		265
Agricultural		300		303		11		268		12
Residential real estate loans
Residential 1-4 family		19,885		18,804		124		22,482		370
Multifamily residential		1,627		1,627		64		1,412		81

Total real estate		64,547		62,024		2,334		76,544		2,228
Consumer		197		191		—		163		1
Commercial and industrial		16,882		13,112		843		9,811		128
Agricultural and other		297		309		7		644		8

Total impaired loans	$	81,923	$	75,636	$	3,184	$	87,162	$	2,365

Note: Purchased credit impaired loans are accounted for on a pooled basis under ASC 310-30. All of these pools are currently considered to be performing resulting in none of the purchased credit impaired loans being classified as impaired loans as of December 31, 2017.

136


	December 31, 2016
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Year Ended
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Average Recorded Investment		Interest Recognized
Loans without a specific valuation allowance	(In thousands)
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

137


	December 31, 2015
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Year Ended
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Average Recorded Investment		Interest Recognized
Loans without a specific valuation allowance	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	29	$	29	$	—	$	6	$	2
Construction/land development		—		—		—		—		—
Agricultural		—		—		—		—		—
Residential real estate loans
Residential 1-4 family		80		80		—		21		6
Multifamily residential		—		—		—		—		—

Total real estate		109		109		—		27		8
Consumer		—		—		—		—		—
Commercial and industrial		12		12		—		2		1
Agricultural and other		—		—		—		—		—

Total loans without a specific valuation allowance		121		121		—		29		8
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		47,861		44,872		2,115		43,900		1,139
Construction/land development		17,025		15,077		1,149		16,026		303
Agricultural		583		561		—		153		—
Residential real estate loans
Residential 1-4 family		18,454		17,373		168		16,947		390
Multifamily residential		1,160		1,160		18		3,281		34

Total real estate		85,083		79,043		3,450		80,307		1,866
Consumer		306		286		—		570		7
Commercial and industrial		13,385		11,169		921		6,542		191
Agricultural and other		1,034		1,034		—		614		4

Total loans with a specific valuation allowance		99,808		91,532		4,371		88,033		2,069
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		47,890		44,887		2,115		43,906		1,141
Construction/land development		17,025		15,077		1,149		16,026		303
Agricultural		583		561		—		153		—
Residential real estate loans
Residential 1-4 family		18,534		17,413		168		16,968		396
Multifamily residential		1,160		1,160		18		3,281		34

Total real estate		85,192		79,098		3,450		80,334		1,874
Consumer		306		286		—		570		7
Commercial and industrial		13,397		11,175		921		6,544		192
Agricultural and other		1,034		1,034		—		614		4

Total impaired loans	$	99,929	$	91,593	$	4,371	$	88,062	$	2,077

Interest recognized on impaired loans during the years ended December 31, 2017, 2016 and 2015 was approximately $2.4 million, $2.3 million and $2.1 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

138

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.

139

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 December 31, 2017 and 2016:


	December 31, 2017
	Risk Rated 6		Risk Rated 7		Risk Rated 8		Classified Total
Real estate:	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	20,933	$	518	$	—	$	21,451
Construction/land development		24,013		204		—		24,217
Agricultural		321		—		—		321
Residential real estate loans
Residential 1-4 family		23,420		564		—		23,984
Multifamily residential		939		—		—		939

Total real estate		69,626		1,286		—		70,912
Consumer		159		9		—		168
Commercial and industrial		12,818		80		—		12,898
Agricultural and other		136		—		—		136

Total	$	82,739	$	1,375	$	—	$	84,114


	December 31, 2016
	Risk Rated 6		Risk Rated 7		Risk Rated 8		Classified Total
Real estate:	(In thousands)
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	$	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.

140

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


	December 31, 2017
	Risk Rated 1		Risk Rated 2		Risk Rated 3		Risk Rated 4		Risk Rated 5		Classified Total		Total
Real estate:	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	1,015	$	558	$	2,595,844	$	1,745,778	$	119,656	$	21,451	$	4,484,302
Construction/land development		28		583		280,980		1,373,133		6,438		24,217		1,685,379
Agricultural		—		19		53,018		27,515		1,150		321		82,023
Residential real estate loans
Residential 1-4 family		1,140		969		1,414,849		475,619		11,658		23,984		1,928,219
Multifamily residential		—		—		329,070		103,071		213		939		433,293

Total real estate		2,183		2,129		4,673,761		3,725,116		139,115		70,912		8,613,216
Consumer		13,106		808		22,479		8,532		70		168		45,163
Commercial and industrial		20,870		7,543		627,316		592,088		22,313		12,898		1,283,028
Agricultural and other		1,986		3,914		147,323		38,370		—		136		191,729

Total risk rated loans	$	38,145	$	14,394	$	5,470,879	$	4,364,106	$	161,498	$	84,114		10,133,136

Purchased credit impaired loans														198,052

Total loans receivable													$	10,331,188


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

141

The following is a presentation of troubled debt restructurings (“TDRs”) by class as of December 31, 2017, 2016 and 2015:


	December 31, 2017
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
Real estate:	(Dollars in thousands)
Commercial real estate loans
Non-farm/non-residential		16	$	16,853	$	8,815	$	250	$	5,513	$	14,578
Construction/land development		5		782		689		75		—		764
Agricultural		2		345		282		22		—		304
Residential real estate loans
Residential 1-4 family		21		5,607		1,926		81		1,238		3,245
Multifamily residential		3		1,701		1,340		—		287		1,627

Total real estate		47		25,288		13,052		428		7,038		20,518
Consumer		3		19		—		18		—		18
Commercial and industrial		11		951		445		50		1		496
Agricultural and other		1		166		166		—		—		166

Total		62	$	26,424	$	13,663	$	496	$	7,039	$	21,198


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


	December 31, 2015
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
Real estate:	(Dollars in thousands)
Commercial real estate loans
Non-farm/non-residential		13	$	14,422	$	9,189	$	273	$	4,626	$	14,088
Construction/land development		2		1,026		1,018		—		—		1,018
Residential real estate loans
Residential 1-4 family		8		2,813		811		1,925		—		2,736
Multifamily residential		1		295		—		—		290		290

Total real estate		24		18,556		11,018		2,198		4,916		18,132
Commercial and industrial		2		69		—		69		—		69

Total		26	$	18,625	$	11,018	$	2,267	$	4,916	$	18,201

142

The following is a presentation of TDRs on non-accrual status as of December 31, 2017, 2016 and 2015 because they are not in compliance with the modified terms:


	December 31, 2017				December 31, 2016				December 31, 2015
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Real estate:	(Dollars in thousands)
Commercial real estate loans
Non-farm/non-residential		2	$	1,161		2	$	696		3	$	1,604
Agricultural		1		22		2		123		—		—
Residential real estate loans
Residential 1-4 family		8		850		13		2,240		2		1,812
Multifamily residential		1		153		—		—		—		—

Total real estate		12		2,186		17		3,059		5		3,416

Commercial and industrial		1		—		—		—		—		—

Total		13	$	2,186		17	$	3,059		5	$	3,416

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


	December 31, 2017		December 31, 2016
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	9,766	$	9,423
Construction/land development		5,920		4,009
Agricultural		—		—
Residential real estate loans
Residential 1-4 family		2,654		2,076
Multifamily residential		527		443

Total foreclosed assets held for sale	$	18,867	$	15,951

The following is a summary of the purchased credit impaired loans acquired in the GHI, BOC and Stonegate acquisitions during 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

143

Changes in the carrying amount of the accretable yield for purchased credit impaired loans were as follows for the year ended December 31, 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		5,586			—
Accretion recorded to interest income		(19,886	)		19,886
Acquisitions		14,875			93,964
Adjustment to yield		3,016			—
Transfers to foreclosed assets held for sale		—			(13,957	)
Payments received, net		—			(61,405	)

Balance at end of period	$	41,803		$	198,052

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 $5.6 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 $3.0 million as an additional adjustment to yield over the weighted-average life of the loans.

6. Goodwill and Core Deposits and Other Intangibles

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


	December 31, 2017			December 31, 2016
Goodwill	(In thousands)
Balance, beginning of period	$	377,983		$	377,983
Acquisitions		549,966			—

Balance, end of period	$	927,949		$	377,983


	December 31, 2017			December 31, 2016
Core Deposit and Other Intangibles	(In thousands)
Balance, beginning of period	$	18,311		$	21,443
Acquisitions		35,247			—
Amortization expense		(4,207	)		(3,132	)

Balance, end of year	$	49,351		$	18,311

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


	December 31, 2017			December 31, 2016
	(In thousands)
Gross carrying amount	$	86,625		$	51,378
Accumulated amortization		(37,274	)		(33,067	)

Net carrying amount	$	49,351		$	18,311

144

Core deposit and other intangible amortization expense for the years ended December 31, 2017, 2016 and 2015 was approximately $4.2 million, $3.1 million and $4.1 million, respectively. Core deposit and other intangibles are tested annually for impairment during the fourth quarter. During the 2017 review, no impairment was found. Including all of the mergers completed as of December 31, 2017, HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 2018 through 2022 is approximately: 2018 – $6.6 million; 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million.

The carrying amount of the Company’s goodwill was $927.9 million and $378.0 million at December 31, 2017 and 2016, respectively. Goodwill is tested annually for impairment during the fourth quarter. During the 2017 review, no impairment was found. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

7. Other Assets

Other assets consists primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of December 31, 2017 and 2016 other assets were $177.8 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 $156.0 million and $112.4 million at December 31, 2017 and 2016, respectively, and are accounted for at cost.

8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $636.9 million and $569.1 million at December 31, 2017 and 2016, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $998.3 million and $842.9 million at December 31, 2017 and 2016, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $8.3 million, $4.4 million and $5.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, brokered deposits were $1.03 billion and $502.5 million, respectively.

The following is a summary of the scheduled maturities of all time deposits at December 31, 2017 (in thousands):


One month or less	$	176,900
Over 1 month to 3 months		194,764
Over 3 months to 6 months		339,928
Over 6 months to 12 months		355,144
Over 12 months to 2 years		337,453
Over 2 years to 3 years		63,217
Over 3 years to 5 years		57,046
Over 5 years		1,979

Total time deposits	$	1,526,431

Deposits totaling approximately $1.51 billion and $1.23 billion at December 31, 2017 and 2016, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

145

9. Securities Sold Under Agreements to Repurchase

At December 31, 2017 and 2016, securities sold under agreements to repurchase totaled $147.8 million and $121.3 million, respectively. For the years ended December 31, 2017 and 2016, securities sold under agreements to repurchase daily weighted-average totaled $134.7 million and $120.6 million, respectively.

The gross amount of recognized liabilities for securities sold under agreements to repurchase was $147.8 million and $121.3 million at December 31, 2017 and 2016, respectively. The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of December 31, 2017 and 2016 is presented in the following tables:


	December 31, 2017
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	11,525	$	—	$	—	$	10,000	$	21,525
Mortgage-backed securities		21,255		—		—		—		21,255
State and political subdivisions		85,428		—		—		—		85,428
Other securities		19,581		—		—		—		19,581

Total borrowings	$	137,789	$	—	$	—	$	10,000	$	147,789


	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

146

10. FHLB Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $1.30 billion and $1.31 billion at December 31, 2017 and 2016, respectively. At December 31, 2017, $525.0 million and $774.2 million of the outstanding balance were issued as short-term and long-term advances, respectively. 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 2025 with fixed interest rates ranging from 0.636% to 5.96% and are secured by loans and investments securities. Expected maturities will differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations.

Additionally, the Company had $695.3 million and $516.2 million at December 31, 2017 and 2016, respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at December 31, 2017 and 2016, respectively.

Maturities of borrowings with original maturities exceeding one year at December 31, 2017, are as follows (in thousands):


	By Contractual Maturity		By Call Date
2018	$	984,279	$	984,279
2019		143,070		143,070
2020		146,428		146,428
2021		—		—
2022		—		—
Thereafter		25,411		25,411

	$	1,299,188	$	1,299,188

11. Other Borrowings

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

12. Subordinated Debentures

Subordinated debentures consists of subordinated debt securities and guaranteed payments on trust preferred securities. As of December 31, 2017 and 2016, subordinated debentures were $368.0 million and $60.8 million, respectively.

147

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


	As of December 31,		As of December 31,
	2017		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		4,304		—
Subordinated debentures, issued in 2006, due 2036, fixed rate of 7.38% during the first five years and at a floating rate of 1.62% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		5,569		—
Subordinated debt securities
Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed rate of 5.625% during the first five years and at a floating rate of 3.575% above the then three-month LIBOR rate, reset quarterly, thereafter, callable in 2022 without penalty		297,332		—

Total	$	368,031	$	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.

148

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

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21%. The TCJA also establishes new tax laws that will affect 2018.

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

The following is a summary of the components of the provision (benefit) for income taxes for the years ended December 31, 2017, 2016 and 2015:


	Year Ended December 31,
	2017		2016		2015
	(In thousands)
Current:
Federal	$	76,569	$	77,418	$	61,007
State		25,347		15,377		12,117

Total current		101,916		92,795		73,124

Deferred:
Federal		25,607		10,600		5,980
State		8,477		2,105		1,188

Total deferred		34,084		12,705		7,168

Income tax expense	$	136,000	$	105,500	$	80,292

149

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the years ended December 31, 2017, 2016 and 2015:


	Year Ended December 31,
	2017			2016			2015
Statutory federal income tax rate		35.00	%		35.00	%		35.00	%
Effect of non-taxable interest income		(1.57	)		(1.52	)		(1.91	)
Effect of gain on acquisitions		(0.49	)		—			(0.26	)
Stock compensation		(0.67	)		—			—
State income taxes, net of federal benefit		4.05			4.08			4.02
Effect of tax rate change		13.62			—			—
Other		0.23			(0.23	)		(0.10	)

Effective income tax rate		50.17	%		37.33	%		36.75	%

As of December 31, 2017, the Company performed an analysis to determine the impact of the revaluation of the deferred tax asset of approximately $113.5 million. The impact as of December 31, 2017 of this was a one-time non-cash charge to the income statement of approximately $36.9 million that reduced the Company’s 2017 earnings.

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:


	December 31, 2017		December 31, 2016
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	29,515	$	31,381
Deferred compensation		1,142		3,925
Stock compensation		2,731		669
Real estate owned		1,731		2,296
Unrealized loss on securities available-for-sale		1,471		—
Loan discounts		32,784		9,157
Tax basis premium/discount on acquisitions		8,802		14,757
Investments		1,155		1,957
Other		11,663		8,361

Gross deferred tax assets		90,994		72,503

Deferred tax liabilities:
Accelerated depreciation on premises and equipment		291		2,154
Unrealized gain on securities available-for-sale		—		258
Core deposit intangibles		11,258		4,950
FHLB dividends		1,625		1,926
Other		1,256		1,917

Gross deferred tax liabilities		14,430		11,205

Net deferred tax assets	$	76,564	$	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 Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any significant interest or penalties. The Company did not have any interest or penalties accrued at December 31, 2017, 2016 and 2015.

150

14. Common Stock, Compensation Plans and Other

Common Stock

The Company’s Restated Articles of Incorporation, as amended, authorize the issuance of up to 200,000,000 shares of common stock, par value $0.01 per share.

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

Stock Repurchases

On 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 2017, the Company utilized a portion of this stock repurchase program.

During 2017, the Company repurchased a total of 857,800 shares with a weighted-average stock price of $24.29 per share. The 2017 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of December 31, 2017 total 4,524,864 shares. The remaining balance available for repurchase is 5,227,136 shares at December 31, 2017. Additionally, on February 21, 2018, the Board of Directors of the Company authorized the repurchase of up to an additional 5,000,000 shares of Company’s common stock under this repurchase program.

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. The Plan provides for the granting of incentive and non-qualified stock options and other equity awards, including the issuance of restricted shares. As of December 31, 2017, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 11,288,000. At December 31, 2017, the Company had approximately 2,319,000 shares of common stock remaining available for future grants and approximately 4,593,000 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

The intrinsic value of the stock options outstanding at December 31, 2017, 2016, and 2015 was $16.2 million, $30.2 million and $21.1 million, respectively. The intrinsic value of the stock options vested at December 31, 2017, 2016 and 2015 was $9.9 million, $12.1 million and $14.5 million, respectively.

The intrinsic value of the stock options exercised during 2017, 2016 and 2015 was $3.7 million, $8.0 million, and $7.2 million, respectively.

Total unrecognized compensation cost, net of income tax benefit, related to non-vested awards, which are expected to be recognized over the vesting periods, was approximately $4.8 million as of December 31, 2017.

151

The table below summarized the stock option transactions under the Plan at December 31, 2017, 2016 and 2015 and changes during the years then ended:


	2017					2016					2015
	Shares (000)			Weighted- average Exercisable Price		Shares (000)			Weighted- average Exercisable Price		Shares (000)			Weighted- average Exercisable Price
Outstanding, beginning of year		2,397		$	15.19		2,794		$	12.71		1,810		$	5.90
Granted		80			25.96		140			21.25		1,486			18.15
Forfeited/Expired		—			—		(14	)		17.28		(40	)		20.16
Exercised		(203	)		7.82		(523	)		3.50		(462	)		2.90

Outstanding, end of year		2,274			16.23		2,397			15.19		2,794			12.71

Exercisable, end of year		1,016		$	13.55		639		$	8.88		960		$	5.13

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 year ended December 31, 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.

The assumptions used in determining the fair value of 2017, 2016 and 2015 stock option grants were as follows:


	For the Years Ended December 31,
	2017			2016			2015
Expected dividend yield		1.39	%		1.65	%		1.60	%
Expected stock price volatility		28.47	%		26.66	%		25.91	%
Risk-free interest rate		2.06	%		1.65	%		1.74	%
Expected life of options		6.5 years			6.5 years			6.5 years

152

The following is a summary of currently outstanding and exercisable options at December 31, 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		17		1.34	$	2.58		17	$	2.58
$ 4.27 to $ 4.30		81		0.04		4.27		81		4.27
$ 5.68 to $ 6.56		102		3.56		6.43		102		6.43
$ 8.62 to $ 9.54		279		5.17		9.08		219		9.07
$14.71 to $16.86		262		6.75		16.00		124		16.12
$17.12 to $17.40		203		6.91		17.19		93		17.25
$18.46 to $18.46		1,050		7.65		18.46		329		18.46
$20.16 to $20.58		80		7.76		20.37		27		20.34
$21.25 to $21.25		120		8.31		21.25		24		21.25
$25.96 to $25.96		80		9.30		25.96		—		—

		2,274						1,016

The table below summarizes the activity for the Company’s restricted stock issued and outstanding at December 31, 2017, 2016 and 2015 and changes during the years then ended:


	2017			2016			2015
	(In thousands)
Beginning of year		958			975			514
Issued		232			244			704
Vested		(45	)		(256	)		(204	)
Forfeited		—			(5	)		(39	)

End of year		1,145			958			975

Amount of expense for twelve months ended	$	5,237		$	4,049		$	2,511

Total unrecognized compensation cost, net of income tax benefit, related to non-vested restricted stock awards, which are expected to be recognized over the weighted-average remaining contractual life of 3.14 years, was approximately $12.9 million as of December 31, 2017.

153

15. Non-Interest Expense

The table below shows the components of non-interest expense for years ended December 31:


	2017		2016		2015
	(In thousands)
Salaries and employee benefits	$	119,369	$	101,962	$	87,512
Occupancy and equipment		30,611		26,129		25,967
Data processing expense		11,998		10,499		10,774
Other operating expenses:
Advertising		3,203		3,332		2,986
Merger and acquisition expenses		25,743		433		4,800
FDIC loss share buy-out expense		—		3,849		—
Amortization of intangibles		4,207		3,132		4,079
Electronic banking expense		6,662		5,742		5,166
Directors’ fees		1,259		1,150		1,071
Due from bank service charges		1,602		1,354		1,096
FDIC and state assessment		5,239		5,491		5,287
Insurance		2,512		2,193		2,542
Legal and accounting		2,993		2,206		2,028
Other professional fees		5,359		4,049		3,226
Operating supplies		1,978		1,758		1,880
Postage		1,184		1,084		1,196
Telephone		1,374		1,751		1,917
Other expense		14,915		15,641		16,028

Total other operating expenses		78,230		53,165		53,302

Total non-interest expense	$	240,208	$	191,755	$	177,555

16. Employee Benefit Plans

401(k) Plan

The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The Company matches employees’ contributions based on a percentage of salary contributed by participants. While the plan also allows for discretionary employer contributions, no discretionary contributions were made for the years ended 2017, 2016 and 2015. The Company’s expense for the plan was approximately $1.6 million, $1.4 million and $1.2 million in 2017, 2016 and 2015, respectively, which is included in salaries and employee benefits expense.

Chairman’s Retirement Plan

On April 20, 2007, the Company’s Board of Directors approved a Chairman’s Retirement Plan for John W. Allison, the Company’s Chairman. The Chairman’s Retirement Plan provides a supplemental retirement benefit of $250,000 a year for 10 consecutive years or until Mr. Allison’s death, whichever occurs later. During 2011, Mr. Allison reached the age of 65 and became 100% vested in the plan. Therefore, he began receiving the supplemental retirement benefit due to him. He received $250,000 of this benefit during 2017, 2016 and 2015, respectively. An expense of approximately $148,000, $155,000 and $163,000 was accrued for 2017, 2016 and 2015 for this plan, respectively.

154

17. Related Party Transactions

In the ordinary course of business, loans may be made to officers and directors and their affiliated companies at substantially the same terms as comparable transactions with other borrowers. At December 31, 2017 and 2016, related party loans were approximately $57.1 million and $51.6 million, respectively. New loans and advances on prior commitments made to the related parties were $12.0 million and $5.0 million for the years ended December 31, 2017 and 2016, respectively. Repayments of loans made by the related parties were $6.0 million and $4.7 million for the years ended December 31, 2017 and 2016, respectively.

At December 31, 2017 and 2016, directors, officers, and other related interest parties had demand, non-interest-bearing deposits of approximately $2.0 million and $849,000, respectively, savings and interest-bearing transaction accounts of approximately $10.3 million and $25.9 million, respectively, and time certificates of deposit of approximately $445,000 and $957,000, respectively.

During each of 2017, 2016 and 2015, rent expense totaling approximately $100,000 was paid to related parties.

In September 2017, the Company purchased a used airplane that was formerly owned by Capital Buyers, a company owned by the Company’s Chairman, John W. Allison, for a cash purchase price of $3.3 million. The purchase price paid by the Company was determined based on an independent third party appraisal.

In May 2017, the Company sold its 50% interest in the previous airplane to the unaffiliated third party with whom the Company co-owned that plane. Prior to such sale, the Company and the third party each contributed $50,000 annually, and our Chairman, Mr. Allison, contributed $25,000 annually, toward the fixed cost of the plane. Each of us, the Company, the third party and Mr. Allison, shared an aggregate time allotment for use of the plane, split 40%, 40% and 20%, respectively. Any user that went over its or his time allotment was billed at a rate of $600 per hour. The Company continues to lease a hangar from Mr. Allison for an aggregate annual rent of $9,000.

18. Leases

The Company leases certain premises and equipment under noncancelable operating leases with terms up to 21 years which are charged to expense over the lease term as it becomes payable. The Company’s leases do not have rent holidays. In addition, any rent escalations are tied to the consumer price index or contain nominal increases and are not included in the calculation of current lease expense due to the immaterial amount. At December 31, 2017, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):


2018	$	8,543
2019		7,811
2020		7,167
2021		5,685
2022		4,182
Thereafter		28,799

	$	62,187

19. 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.

155

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 December 31, 2017 and 2016, commercial real estate loans represented 61.8% and 59.1% of total loans receivable, respectively, and 289.6% and 328.9% of total stockholders’ equity, respectively. Residential real estate loans represented 23.3% and 23.0% of total loans receivable and 109.4% and 127.8% of total stockholders’ equity at December 31, 2017 and 2016, respectively.

Approximately 90.4% of the Company’s total loans and 90.8% of the Company’s real estate loans as of December 31, 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.

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.

20. 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 December 31, 2017 and 2016, commitments to extend credit of $2.38 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 December 31, 2017 and 2016, is $70.5 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.

156

21. 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 December 31, 2017 and 2016, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2017, 2016 and 2015.

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. Starting in 2016, the Company began using a third party comparison pricing vendor in order to reflect consistency in the fair values of the investment securities sampled by the Company each quarter.

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 $72.5 million and $91.5 million as of December 31, 2017 and 2016, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $662,000 and $954,000 of accrued interest receivable when impaired loans were put on non-accrual status during the years ended December 31, 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 December 31, 2017 and 2016, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $18.9 million and $16.0 million, respectively.

Foreclosed assets held for sale with a carrying value of approximately $1.2 million were remeasured during year ended December 31, 2017, resulting in a write-down of approximately $636,000.

Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets held for sale on at least an annual basis. The Company’s policy is to comply with the regulatory guidelines.

157

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.

158

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.


	December 31, 2017
	Carrying Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	635,933	$	635,933		1
Federal funds sold		24,109		24,109		1
Investment securities – held-to-maturity		224,756		227,539		2
Loans receivable, net of impaired loans and allowance		10,148,470		10,055,901		3
Accrued interest receivable		45,708		45,708		1
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	2,385,252	$	2,385,252		1
Savings and interest-bearing transaction accounts		6,476,819		6,476,819		1
Time deposits		1,526,431		1,514,670		3
Securities sold under agreements to repurchase		147,789		147,789		1
FHLB and other borrowed funds		1,299,188		1,299,961		2
Accrued interest payable		5,583		5,583		1
Subordinated debentures		368,031		379,146		3


	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

159

22. 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 2017, the Company requested approximately $86.7 million in regular dividends from its banking subsidiary. This dividend is equal to approximately 57.5% of the Company’s banking subsidiary’s year-to-date 2017 earnings.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, common Tier 1 equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 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 December 31, 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%, 9.98%, 11.48%, and 15.05%, respectively, as of December 31, 2017.

160

The Company’s actual capital amounts and ratios along with the Company’s bank subsidiary are presented in the following table.


	Actual					Minimum Capital Requirement – Basel III Phase-In Schedule					Minimum Capital Requirement – Basel III Fully Phased-In					Minimum To Be Well-Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of December 31, 2017
Common equity Tier 1 capital ratios:
Home BancShares	$	1,240,822		10.86	%	$	656,973		5.750	%	$	799,793		7.00	%	$	N/A		N/A	%
Centennial Bank		1,546,451		13.55			656,243		5.750			798,905		7.00			741,840		6.50
Leverage ratios:
Home BancShares	$	1,311,520		9.98	%	$	525,659		4.000	%	$	525,659		4.00	%	$	N/A		N/A	%
Centennial Bank		1,546,451		11.76			526,004		4.000			526,004		4.00			657,505		5.00
Tier 1 capital ratios:
Home BancShares	$	1,311,520		11.48	%	$	828,268		7.250	%	$	971,073		8.50	%	$	N/A		N/A	%
Centennial Bank		1,546,451		13.55			827,437		7.250			970,098		8.50			913,034		8.00
Total risk-based capital ratios:
Home BancShares	$	1,719,118		15.05	%	$	1,056,601		9.250	%	$	1,199,385		10.50	%	$	N/A		N/A	%
Centennial Bank		1,656,717		14.52			1,055,415		9.250			1,198,039		10.50			1,140,990		10.00
As of December 31, 2016
Common equity Tier 1 capital ratios:
Home BancShares	$	938,754		11.30	%	$	425,762		5.125	%	$	581,529		7.00	%	$	N/A		N/A	%
Centennial Bank		920,232		11.10			424,882		5.125			580,326		7.00			538,875		6.50
Leverage ratios:
Home BancShares	$	997,754		10.63	%	$	375,448		4.000	%	$	375,448		4.00	%	$	N/A		N/A	%
Centennial Bank		920,232		9.81			375,222		4.000			375,222		4.00			469,028		5.00
Tier 1 capital ratios:
Home BancShares	$	997,754		12.01	%	$	550,385		6.625	%	$	706,154		8.50	%	$	N/A		N/A	%
Centennial Bank		920,232		11.10			549,238		6.625			704,682		8.50			663,230		8.00
Total risk-based capital ratios:
Home BancShares	$	1,077,756		12.97	%	$	716,704		8.625	%	$	872,509		10.50	%	$	N/A		N/A	%
Centennial Bank		1,000,234		12.07			714,749		8.625			870,129		10.50			828,694		10.00

23. 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.

161

The following is summary of the Company’s additional cash flow information during the years ended December 31:


	2017		2016		2015
	(In thousands)
Interest paid	$	61,930	$	30,463	$	21,040
Income taxes paid		124,830		81,900		79,740
Assets acquired by foreclosure		10,318		10,957		19,874

24. Condensed Financial Information (Parent Company Only)

Condensed Balance Sheets


	December 31,
(In thousands)	2017			2016
Assets
Cash and cash equivalents	$	44,046		$	53,589
Investment securities		2,831			7,873
Investments in wholly-owned subsidiaries		2,509,375			1,307,811
Investments in unconsolidated subsidiaries		2,201			1,826
Premises and equipment		7,026			7,126
Other assets		12,530			12,107

Total assets	$	2,578,009		$	1,390,332

Liabilities
Subordinated debentures	$	368,031		$	60,826
Other liabilities		5,687			2,016

Total liabilities		373,718			62,842

Stockholders’ Equity
Common stock		1,736			1,405
Capital surplus		1,675,318			869,737
Retained earnings		530,658			455,948
Accumulated other comprehensive income (loss)		(3,421	)		400

Total stockholders’ equity		2,204,291			1,327,490

Total liabilities and stockholders’ equity	$	2,578,009		$	1,390,332

Condensed Statements of Income


	Years Ended December 31,
(In thousands)	2017		2016		2015
Income
Dividends from banking subsidiary	$	86,695	$	44,623	$	76,168
Other income		2,241		608		51

Total income		88,936		45,231		76,219
Expenses		26,634		12,514		8,387

Income before income taxes and equity in undistributed net income of subsidiaries		62,302		32,717		67,832
Tax benefit for income taxes		8,826		4,787		3,048

Income before equity in undistributed net income of subsidiaries		71,128		37,504		70,880
Equity in undistributed net income of subsidiaries		63,955		139,642		67,319

Net income	$	135,083	$	177,146	$	138,199

162

Condensed Statements of Cash Flows


	Years Ended December 31,
(In thousands)	2017			2016			2015
Cash flows from operating activities
Net income	$	135,083		$	177,146		$	138,199
Items not requiring (providing) cash
Depreciation		213			141			—
Amortization/(accretion)		612			176			—
Share-based compensation		6,705			6,628			3,925
Tax benefit from stock options exercised		—			(4,154	)		(605	)
(Gain) loss on assets		(2,393	)		(410	)
Equity in undistributed income of subsidiaries		(63,955	)		(139,642	)		(67,319	)
Changes in other assets		(10,748	)		5,888			5,308
Changes in other liabilities		14,202			(6,694	)		(576	)

Net cash provided by (used in) operating activities		79,719			39,079			78,932

Cash flows from investing activities
Purchases of premises and equipment, net		(4,075	)		(7,273	)		(5,927	)
Proceeds from sale of premises and equipment, net		3,957			3,293			—
Capital contribution to subsidiary		(250,000	)		(24	)		—
Purchase of Florida Business BancGroup, Inc.		—			—			(17,445	)
Purchase of Giant Holdings, Inc.		(16,591	)		—			—
Purchase of Bank of Commerce		(4,175	)		—			—
Disposition of RCA Air, LLC		382			—			—
Purchase of Stonegate Bank		(40,649	)		—			—
Proceeds from sale of investment securities		5,629			2,104			—
Purchase of investment securities		—			—			(6,946	)

Net cash provided by (used in) investing activities		(305,522	)		(1,900	)		(30,318	)

Cash flows from financing activities
Proceeds from exercise of stock options		1,082			1,495			389
Common stock issuance costs – market acquisitions		(825	)		—			(60	)
Tax benefit from stock options exercised		—			4,154			605
Repurchase of common stock		(20,825	)		(9,817	)		(2,015	)
Proceeds from issuance of subordinated debt		297,201			—			—
Dividends paid		(60,373	)		(48,096	)		(37,580	)

Net cash provided by (used in) financing activities		216,260			(52,264	)		(38,661	)

Increase (decrease) in cash and cash equivalents		(9,543	)		(15,085	)		9,953
Cash and cash equivalents, beginning of year		53,589			68,674			58,721

Cash and cash equivalents, end of year	$	44,046		$	53,589		$	68,674

163

25. 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 adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale securities. The new guidance is effective for annual reporting period and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company has adopted the new standard effective January 1, 2018. Management evaluated the impact of the adoption of this guidance to the Company’s financial statements, and 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. The current accounting policies and procedures have been adjusted to comply with the accounting changes mentioned above. For additional information on fair value of assets and liabilities, see Note 21.

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, 2017.

164

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 operations 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 adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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

165

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15’s amendments add or clarify guidance on eight cash flow issues including debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and the guidance must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, and, as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the new guidance must be applied retrospectively to all periods presented. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the “set”) is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The Company adopted the guidance effective January 1, 2018 and its adoption is not anticipated to have a significant impact on our financial position or financial statement disclosures.

166

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

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

In February 2017, the FASB issued ASU 2017-05, Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary under ASC 810 and (2) control of the asset is transferred in accordance with ASC 606. The entity therefore has to consider repurchase agreements (e.g., a call option to repurchase the ownership interest in a subsidiary) in its assessment and may not be able to derecognize the nonfinancial assets, even though it no longer has a controlling financial interest in a subsidiary in accordance with ASC 810. The ASU illustrates the application of this guidance in ASC 610-20-55-15 and 55-16. The effective date of the new guidance is aligned with the requirements in the new revenue standard, which is effective for public entities for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company adopted the guidance effective January 1, 2018 and its adoption is not anticipated to have a significant impact on our financial position or financial statement disclosures.

167

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU will shorten the amortization period for the premium to be amortized to the earliest call date. This ASU does not apply to securities held at a discount, which will continue to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted, including adoption in an interim period. The Company early adopted the guidance effective January 1, 2018 and its adoption is not anticipated to have a significant impact on our financial position or financial statement disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company adopted the guidance effective January 1, 2018. The Company does not anticipate any modifications to its existing awards and therefore the adoption of ASU 2017-09 is not expected to have a significant impact on the Company’s financial position, results of operations, or its financial statement disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact, if any, ASU 2017-11 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2019.

168

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model to provide better insight to risk management activities in the financial statements, reduces the complexity in cash flow hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument included in the assessment of the hedge effectiveness to be recorded in other comprehensive income, with amounts reclassified to earnings to be presented in the same line item used to present the earnings effect of the hedged item when the hedged item affects earnings and allows the initial prospective quantitative assessment of hedge effectiveness to be performed at any time after hedge designation, but no later than the first quarterly effectiveness testing date. This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The amendments in this standard must be applied using the modified retrospective approach for cash flow and net investment hedge relationships existing on the date of adoption. The Company is currently evaluating the impact, if any, ASU 2017-12 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company is currently evaluating the impact, if any, ASU 2018-02 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2019.

169

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No items are reportable.

Item 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

An evaluation as of the end of the period covered by this annual report was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods and that such information is accumulated and communicated to the company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. As a result of this evaluation, there were no significant changes in the Company’s disclosure controls or in other factors that could significantly affect those controls subsequent to the date of evaluation.

Management’s Report on Internal Control Over Financial Reporting

The information required by Item 308(a) and 308(b) of Regulation S-K regarding management’s annual report on internal control over financial reporting and the audit report of the independent registered public accounting firm is contained in “Item 8. Financial Statements and Supplementary Data” and is incorporated herein by this reference.

Changes in Internal Control Over Financial Reporting

The Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer regularly review our internal controls and procedures and make changes intended to ensure the quality of our 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 fourth quarter of 2017, to include the operations of Stonegate. Otherwise, there were no changes in our internal control over financial reporting during the Company’s fourth quarter of its 2017 fiscal year that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

OTHER INFORMATION

No items are reportable.

170

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held April 19, 2018, to be filed pursuant to Regulation 14A.

Item 11.

EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held April 19, 2018, to be filed pursuant to Regulation 14A.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held April 19, 2018, to be filed pursuant to Regulation 14A, except as set forth below.

We currently maintain a compensation plan, the Home BancShares, Inc. Amended and Restated 2006 Stock Option and Performance Incentive Plan, which provides for the issuance of stock-based compensation to directors, officers and other employees. This plan has been approved by the stockholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plan as of December 31, 2017:


Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) (c)
Equity compensation plans approved by the stockholders		2,274,081	$	16.23		2,318,850
Equity compensation plans not approved by the stockholders		—		—		—

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held April 19, 2018, to be filed pursuant to Regulation 14A.

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held April 19, 2018, to be filed pursuant to Regulation 14A.

171

PART IV

Item 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

(a)

1 and 2. Financial Statements and any Financial Statement Schedules

The financial statements and financial statement schedules listed in the accompanying index to the consolidated financial statements and financial statement schedules are filed as part of this report.

(b) Listing of Exhibits.


Exhibit No.

2.1		Agreement and Plan of Merger among Home Bancshares, Inc., Centennial Bank, Liberty Bancshares, Inc., Liberty Bank of Arkansas and Acquisition Sub dated June 25, 2013 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K/A filed on June 27, 2013)

2.2		First Amendment to Agreement and Plan of Merger among Home Bancshares, Inc., Centennial Bank, Liberty Bancshares, Inc., Liberty Bank of Arkansas and Acquisition Sub dated July 31, 2013 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on August 2, 2013)

2.3		Agreement and Plan of Merger among Home Bancshares, Inc., Centennial Bank, and Florida Traditions Bank dated April 25, 2014 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on April 28, 2014)

2.4		Agreement and Plan of Merger among Home Bancshares, Inc., Centennial Bank, Broward Financial Holdings, Inc., Broward Bank of Commerce and HOMB Acquisition Sub II, Inc. dated July 30, 2014 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on July 31, 2014)

2.5		Purchase and Assumption Agreement Between Banco Popular de Puerto Rico and Centennial Bank, dated as of February 18, 2015 (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K/A filed on March 4, 2015)

2.6		Purchase and Assumption Agreement all Deposits among Federal Deposit Insurance Corporation, Receiver of Doral Bank. San Juan Puerto Rico, Puerto Rico Federal Deposit Insurance Corporation and Banco Popular de Puerto Rico, dated as of February 27, 2015 (incorporated by reference to Exhibit 10.25 to Banco Popular de Puerto Rico’s Annual Report on Form 10-K for the year ended December 31, 2014, filed by Banco Popular de Puerto Rico on March 2, 2015 (Commission File No. 001-34084))

2.7		Agreement and Plan of Merger among Home Bancshares, Inc., Centennial Bank, Florida Business BancGroup, Inc. and Bay Cities Bank (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on June 22, 2015)

2.8		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)

2.9		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)

2.10		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)

2.11		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)

172



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

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

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

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

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

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

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

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

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

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

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

10.1		Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report on Form 8-K filed on March 30, 2012)

10.2		Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, filed on August 6, 2015)

10.3		Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report on Form 8-K filed on April 22, 2016)

12.1		Computation of Ratios of Earnings to Fixed Charges*

23.1		Consent of Independent Registered Public Accounting Firm*

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

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

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

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

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

173



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

174

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



By:		/s/ C. Randall Sims
		C. Randall Sims Chief Executive Officer

Date: February 27, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated as of February 27, 2018.


/s/ John W. Allison John W. Allison Chairman of the Board of Directors	/s/ C. Randall Sims C. Randall Sims Chief Executive Officer, President and Director (Principal Executive Officer)	/s/ Brian S. Davis Brian S. Davis Chief Financial Officer, Treasurer and Director (Principal Financial Officer)

/s/ Milburn Adams Milburn Adams Director	/s/ Robert H. Adcock, Jr. Robert H. Adcock, Jr. Vice Chairman of the Board of Directors	/s/ Richard H. Ashley Richard H. Ashley Director

/s/ Mike Beebe Mike Beebe Director	/s/ Jack E. Engelkes Jack E. Engelkes Director	/s/ Tracy M. French Tracy M. French Director

/s/ Karen Garrett Karen Garrett Director	/s/ James G. Hinkle James G. Hinkle Director	/s/ Alex R. Lieblong Alex R. Lieblong Director

/s/ Thomas J. Longe Thomas J. Longe Director	/s/ Jim Rankin, Jr. Jim Rankin, Jr. Director	/s/ Jennifer C. Floyd Jennifer C. Floyd Chief Accounting Officer and Investor Relations Officer (Principal Accounting Officer)

175

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company