HOME BANCSHARES INC

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

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

The Company leases land and office facilities under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2042 and do not include renewal options based on economic factors that would have implied that continuation of the lease was reasonably certain. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally include real estate taxes and common area maintenance (“CAM”) charges in the rental payments. Upon adoption of ASU 2016-02, the Company recorded a $47.1 million right-of-use (“ROU”) asset and $49.0 million lease liability within bank premises and equipment, net, and other liabilities, respectively, within the Company’s balance sheets. No cumulative adjustment to the opening balance of retained earnings was considered necessary due to the nature of the Company’s leases. Short-term leases are leases having a term of twelve months or less. As part of the standard adoption, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU 2018-11, the Company also elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company recognizes short term leases on a straight-line basis and does not record a related ROU asset and liability for such leases. In addition, equipment leases were determined to be immaterial and a related ROU asset and liability for such leases is not recorded. As of March 31, 2019, the balances of the right-of-use asset and lease liability was $46.0 million and $48.0 million, respectively. The right-of-use asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842) Codification Improvements. The amendments in this Update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820. In addition, the amendments in this Update address the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities. Finally, the amendments in this Update clarify the Board’s original intent by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. The effective date for the amendments in this update is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Our net interest margin decreased from 4.46% for the three-month period ended March 31, 2018 to 4.30% for the three-month period ended March 31, 2019. The yield on interest earning assets was 5.52% and 5.27% for the three months ended March 31, 2019 and 2018, respectively, as average interest earning assets increased from $12.49 billion to $13.30 billion. The increase in earning assets is primarily the result of our acquisition of $376.2 million in loans from our purchase of Shore Premier Finance (“SPF”) in the second quarter of 2018 and organic loan growth of $277.0 million. The acquisition of SPF in the second quarter of 2018 resulted in a 3 basis point decline to our net interest margin due to lower interest rates on the acquired loans. The rate on interest bearing liabilities was 1.59% and 1.05% for the three months ended March 31, 2019 and 2018, respectively, as average interest-bearing liabilities increased from $9.60 billion to $10.18 billion. The growth of average interest earning assets and the increase in yield were offset by the increase in interest bearing liabilities and the rate on interest bearing liabilities plus the acquisition of SPF, which led to a decrease in net interest margin for the quarter ended March 31, 2019.