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Section 1: 10-Q (FORM 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For Quarter Ended March 31, 2018  Commission File Number 000-06253

 

(Exact name of registrant as specified in its charter)

 

Arkansas 71-0407808
(State or other jurisdiction of (I.R.S. Employer
 incorporation or organization) Identification No.)
   
 501 Main Street, Pine Bluff, Arkansas 71601
 (Address of principal executive offices) (Zip Code)

 

(870) 541-1000

(Registrant's telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒ Yes   ☐ No

 

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

☒ Yes   ☐ No

 

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

 

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

 

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

 

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

 

The number of shares outstanding of the Registrant’s Common Stock as of April 25, 2018, was 92,243,103.

 

 

 

Simmons First National Corporation

Quarterly Report on Form 10-Q

March 31, 2018

 

 

Table of Contents

 

      Page
Part I: Financial Information    
Item 1. Financial Statements (Unaudited)    
  Consolidated Balance Sheets   3
  Consolidated Statements of Income   4
  Consolidated Statements of Comprehensive Income   5
  Consolidated Statements of Cash Flows   6
  Consolidated Statements of Stockholders' Equity   7
  Condensed Notes to Consolidated Financial Statements   8-50
  Report of Independent Registered Public Accounting Firm   51
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   52-74
Item 3. Quantitative and Qualitative Disclosure About Market Risk   75-76
Item 4. Controls and Procedures   77
       
Part II: Other Information    
Item 1A. Risk Factors   77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   77
Item 6. Exhibits   77-79
       
Signatures     80

 

 

 

 

 

 

 

Part I:Financial Information
Item 1. Financial Statements (Unaudited)

 

Simmons First National Corporation

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

 

(In thousands, except share data)  March 31,
2018
  December 31,
2017
   (Unaudited)   
ASSETS          
Cash and non-interest bearing balances due from banks  $170,811   $205,025 
Interest bearing balances due from banks and federal funds sold   688,853    393,017 
Cash and cash equivalents   859,664    598,042 
Interest bearing balances due from banks - time   3,069    3,314 
Investment securities:          
Held-to-maturity   352,756    368,058 
Available-for-sale   1,830,113    1,589,517 
Total investments   2,182,869    1,957,575 
Mortgage loans held for sale   17,708    24,038 
Other assets held for sale   24,784    165,780 
Loans:          
Legacy loans   6,290,383    5,705,609 
Allowance for loan losses   (47,207)   (41,668)
Loans acquired, net of discount and allowance   4,696,945    5,074,076 
Net loans   10,940,121    10,738,017 
Premises and equipment   289,355    287,249 
Foreclosed assets and other real estate owned   29,140    32,118 
Interest receivable   42,129    43,528 
Bank owned life insurance   186,473    185,984 
Goodwill   845,687    842,651 
Other intangible assets   99,504    106,071 
Other assets   76,806    71,439 
Total assets  $15,597,309   $15,055,806 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Deposits:          
Non-interest bearing transaction accounts  $2,734,287   $2,665,249 
Interest bearing transaction accounts and savings deposits   6,720,754    6,494,896 
Time deposits   2,201,874    1,932,730 
Total deposits   11,656,915    11,092,875 
Federal funds purchased and securities sold under agreements to repurchase   120,909    122,444 
Other borrowings   1,140,986    1,380,024 
Subordinated notes and debentures   468,465    140,565 
Other liabilities held for sale   2,781    157,366 
Accrued interest and other liabilities   98,202    77,968 
Total liabilities   13,488,258    12,971,242 
           
Stockholders’ equity:          
Common stock, Class A, $0.01 par value; 120,000,000 shares authorized (1); 92,242,389 and 92,029,118 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively   922    920 
Surplus   1,590,086    1,586,034 
Undivided profits   552,105    514,874 
Accumulated other comprehensive loss   (34,062)   (17,264)
Total stockholders’ equity   2,109,051    2,084,564 
Total liabilities and stockholders’ equity  $15,597,309   $15,055,806 

 

(1)On April 19, 2018, shareholders of the Company approved an increase in the number of authorized shares from 120,000,000 to 175,000,000.

 

See Condensed Notes to Consolidated Financial Statements.

 

 3 

 

Simmons First National Corporation

Consolidated Statements of Income

Three Months Ended March 31, 2018 and 2017

 

   Three Months Ended
March 31,
(In thousands, except per share data (1))  2018  2017
   (Unaudited)
INTEREST INCOME          
Loans  $143,350   $68,728 
Interest bearing balances due from banks and federal funds sold   1,009    122 
Investment securities   12,622    9,451 
Mortgage loans held for sale   158    126 
TOTAL INTEREST INCOME   157,139    78,427 
           
INTEREST EXPENSE          
Deposits   15,597    4,204 
Federal funds purchased and securities sold under agreements to repurchase   110    75 
Other borrowings   5,139    1,194 
Subordinated notes and debentures   1,327    574 
TOTAL INTEREST EXPENSE   22,173    6,047 
           
NET INTEREST INCOME   134,966    72,380 
Provision for loan losses   9,150    4,307 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   125,816    68,073 
           
NON-INTEREST INCOME          
Trust income   5,249    4,212 
Service charges on deposit accounts   10,345    8,102 
Other service charges and fees   2,750    2,197 
Mortgage and SBA lending income   4,445    2,423 
Investment banking income   834    690 
Debit and credit card fees   8,796    7,934 
Bank owned life insurance income   1,103    818 
Gain on sale of securities, net   6    63 
Other income   4,007    3,621 
TOTAL NON-INTEREST INCOME   37,535    30,060 
           
NON-INTEREST EXPENSE          
Salaries and employee benefits   56,357    35,536 
Occupancy expense, net   6,960    4,663 
Furniture and equipment expense   4,403    4,443 
Other real estate and foreclosure expense   1,020    589 
Deposit insurance   2,128    680 
Merger related costs   1,711    524 
Other operating expenses   25,494    19,887 
TOTAL NON-INTEREST EXPENSE   98,073    66,322 
           
INCOME BEFORE INCOME TAXES   65,278    31,811 
Provision for income taxes   13,966    9,691 
           
NET INCOME  $51,312   $22,120 
BASIC EARNINGS PER SHARE  $0.56   $0.35 
DILUTED EARNINGS PER SHARE  $0.55   $0.35 

 

(1)All per share amounts have been restated to reflect the effect of the two-for-one stock split on February 8, 2018.

 

See Condensed Notes to Consolidated Financial Statements.

 

 4 

 

Simmons First National Corporation

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2018 and 2017

 

   Three Months Ended
March 31,
(In thousands)  2018  2017
   (Unaudited)
       
NET INCOME  $51,312   $22,120 
           
OTHER COMPREHENSIVE (LOSS) INCOME          
Unrealized holding (losses) gains arising during the period on available-for-sale securities   (22,735)   1,567 
Less: Reclassification adjustment for realized gains included in net income   6    63 
Other comprehensive (loss) gain, before tax effect   (22,741)   1,504 
Less: Tax effect of other comprehensive (loss) income   (5,943)   590 
           
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME   (16,798)   914 
           
COMPREHENSIVE INCOME  $34,514   $23,034 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 5 

 

Simmons First National Corporation

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2018 and 2017

 

(In thousands)  March 31,
2018
  March 31,
2017
   (Unaudited)
OPERATING ACTIVITIES          
Net income  $51,312   $22,120 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Depreciation and amortization   6,677    4,953 
Provision for loan losses   9,150    4,307 
Gain on sale of investments   (6)   (63)
Net accretion of investment securities and assets   (14,368)   (6,766)
Net (accretion) amortization on borrowings   (211)   106 
Stock-based compensation expense   2,585    2,329 
Loss on sale of premises and equipment, net of impairment   --    43 
Loss (gain) on sale of foreclosed assets held for sale   41    (326)
Gain on sale of mortgage loans held for sale   (2,610)   (2,360)
Deferred income taxes   3,921    3,090 
Increase in cash surrender value of bank owned life insurance   (1,103)   (818)
Originations of mortgage loans held for sale   (113,012)   (88,870)
Proceeds from sale of mortgage loans held for sale   121,952    109,264 
Changes in assets and liabilities:          
Interest receivable   1,582    1,699 
Assets held in trading accounts   --    (14)
Other assets   (5,648)   3,901 
Accrued interest and other liabilities   33,983    (16,913)
Income taxes payable   (13,955)   6,123 
Net cash provided by operating activities   80,290    41,805 
           
INVESTING ACTIVITIES          
Net originations of loans   (140,804)   (144,651)
Decrease in due from banks - time   245    -- 
Purchases of premises and equipment, net   (6,052)   (25,924)
Proceeds from sale of premises and equipment   --    1,394 
Proceeds from sale of foreclosed assets held for sale   4,359    2,844 
Proceeds from sale of available-for-sale securities   7,726    -- 
Proceeds from maturities of available-for-sale securities   58,548    26,373 
Purchases of available-for-sale securities   (320,798)   (123,787)
Proceeds from maturities of held-to-maturity securities   15,512    32,051 
Purchases of held-to-maturity securities   --    (860)
Proceeds from bank owned life insurance death benefits   616    -- 
Disposition of assets and liabilities held for sale   (75,586)   -- 
Net cash used in investing activities   (456,234)   (232,560)
           
FINANCING ACTIVITIES          
Net change in deposits   564,040    53,069 
Proceeds from issuance of subordinated notes   326,711    -- 
Dividends paid on common stock   (14,081)   (7,845)
Net change in other borrowed funds   (239,038)   167,915 
Net change in federal funds purchased and securities sold under agreements to repurchase   (1,535)   (5,022)
Net shares issued under stock compensation plans   1,469    2,260 
Net cash provided by financing activities   637,566    210,377 
           
INCREASE IN CASH AND CASH EQUIVALENTS   261,622    19,622 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   598,042    285,659 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $859,664   $305,281 

 

See Condensed Notes to Consolidated Financial Statements.

 

 6 

 

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2018 and 2017

 

(In thousands, except share data (1))  Common
Stock
  Surplus  Accumulated
Other
Comprehensive
Income (Loss)
  Undivided
Profits
  Total
                
Balance, December 31, 2016  $626   $711,663   $(15,212)  $454,034   $1,151,111 
                          
Comprehensive income   --    --    914    22,120    23,034 
Stock issued for employee stock purchase plan – 26,002 shares   --    618    --    --    618 
Stock-based compensation plans, net – 195,266   2    3,969    --    --    3,971 
Dividends on common stock – $0.125 per share   --    --    --    (7,845)   (7,845)
                          
Balance, March 31, 2017 (Unaudited)   628    716,250    (14,298)   468,309    1,170,889 
                          
Comprehensive income   --    --    50    70,820    70,870 
Reclassify stranded tax effects due to 2017 tax law changes   --    --    (3,016)   3,016    -- 
Stock-based compensation plans, net – 164,020   1    8,969    --    --    8,970 
Stock issued for Hardeman acquisition – 1,599,940 common shares   16    42,622    --    --    42,638 
Stock issued for OKSB acquisition – 14,488,604 common shares   145    431,253    --    --    431,398 
Stock issued for First Texas acquisition – 12,999,840 common shares   130    386,940    --    --    387,070 
Cash dividends – $0.375 per share   --    --    --    (27,271)   (27,271)
                          
Balance, December 31, 2017   920    1,586,034    (17,264)   514,874    2,084,564 
                          
Comprehensive income   --    --    (16,798)   51,312    34,514 
Stock issued for employee stock purchase plan – 39,782 shares   --    1,026    --    --    1,026 
Stock-based compensation plans, net – 173,489   2    3,026    --    --    3,028 
Dividends on common stock – $0.15 per share   --    --    --    (14,081)   (14,081)
                          
Balance, March 31, 2018 (Unaudited)  $922   $1,590,086   $(34,062)  $552,105   $2,109,051 

 

(1)All share and per share amounts have been restated to reflect the effect of the two-for-one stock split on February 8, 2018.

 

 

 

 

 

 

 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 7 

 

SIMMONS FIRST NATIONAL CORPORATION

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS

 

Organizational Structure

 

Simmons First National Corporation (the “Company”) is a publicly traded financial holding company that trades on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “SFNC” and the parent of Simmons Bank, an Arkansas state-chartered bank that began as a community bank in 1903, and Bank SNB, an Oklahoma state-chartered bank that was acquired in October 2017 through the Company’s merger with Southwest Bancorp, Inc. Simmons Bank is also the parent of Simmons First Investment Group, Inc. (a dually registered broker-dealer and investment adviser), Simmons First Insurance Services, Inc. (an insurance company), and Simmons First Insurance Services of TN, LLC (an insurance agency).

 

Description of Business

 

The Company is headquartered in Pine Bluff, Arkansas and conducts banking operations in communities throughout Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company offers consumer, real estate and commercial loans, checking, savings and time deposits from 200 financial centers conveniently located throughout its market areas. Additionally, the Company offers specialized products and services such as credit cards, trust and fiduciary services, investments, agricultural finance lending, equipment lending, insurance and small business administration (“SBA”) lending.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosures for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2017, was derived from audited financial statements. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of interim results of operations, including normal recurring accruals. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 28, 2018.

 

The preparation of financial statements, in accordance with accounting principles generally accepted in the United States (“US GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income items and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements and actual results may differ from these estimates. Such estimates include, but are not limited to, the Company’s allowance for loan losses.

 

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.

 

Recently Adopted Accounting Standards

 

Reporting Comprehensive Income – In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”), that allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the tax reform legislation signed into law in December 2017 (“2017 Act”). Current US GAAP requires the remeasurement of deferred tax assets and liabilities as a result of a change in tax laws or rates to be presented in net income from continuing operations. Consequently, the original deferred tax amount recorded through AOCI at the old rate will remain in AOCI despite the fact that its related deferred tax asset/liability will be reduced through continuing operations to reflect the new rate, resulting in “stranded” tax effects in AOCI. ASU 2018-02 requires a reclassification from AOCI to retained earnings for those stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of reclassification would be the difference between 1) the amount initially charged or credited directly to other comprehensive income at the previous enacted federal corporate income tax rate that remains in AOCI and 2) the amount that would have been charged or credited using the newly enacted federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As permitted, the Company elected to early adopt the provisions of ASU 2018-02 during the fourth quarter 2017, which resulted in a reclassification from AOCI to retained earnings in the amount of $3.0 million related to the change in federal corporate tax rate.

 

 8 

 

Stock Compensation: Scope of Modification Accounting – In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), that provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. The guidance clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting and the guidance should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. Currently, the Company has not modified any existing awards nor has any plans to do so, therefore the adoption of ASU 2017-09 has not had a material effect on the Company’s results of operations, financial position or disclosures.

 

Premium Amortization on Purchased Callable Debt Securities – In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), that amends the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments shorten the amortization period by requiring that the premium be amortized to the earliest call date. Under previous US GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As permitted, the Company elected to early adopt the provisions of ASU 2017-08 during the first quarter 2017. The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or disclosures.

 

Statement of Cash Flows – In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), designed to address the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The amendments also provide guidance on when an entity should separate or aggregate cash flows based on the predominance principle. The effective date is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard is required to be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The adoption of 2016-15 did not have a material impact on the Company’s results of operations, financial position or disclosures since the amendment applies to the classification of cash flows. The adoption did not have a material impact on the consolidated statement of cash flows.

 

Financial Assets and Financial Liabilities – In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), that makes changes primarily affecting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In February 2018, the FASB issued 2018-03 that clarified certain guidance and contained narrow scope amendments. The effective date is for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 did not have a material impact on the Company’s results of operations or financial position. However, this new guidance requires the disclosed estimated fair value of the Company’s loan portfolio to be based on an exit price calculation, which considers liquidity, credit and nonperformance risk of its loans. The adoption of 2016-01 did not have a material impact on the Company’s fair value disclosures.

 

Revenue Recognition – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), that outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers. The core principle of this revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, deferring the effective date to annual and interim periods beginning after December 15, 2017. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other US GAAP, which comprises a significant portion of the Company’s revenue stream. However, the updated guidance affects the revenue recognition pattern for certain revenue streams, including service charges on deposit accounts, gains/losses on sale of other real estate owned (“OREO”), and trust income. The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or disclosures. See below “Revenue from Contracts with Customers” for additional information.

 

 9 

 

Recently Issued Accounting Standards

 

Derivatives and Hedging: Targeted Improvements – In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), that changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in order to better align a company’s risk management activities and financial reporting for hedging relationships. In summary, this amendment 1) expands the types of transactions eligible for hedge accounting; 2) eliminates the separate measurement and presentation of hedge ineffectiveness; 3) simplifies the requirements around the assessment of hedge effectiveness; 4) provides companies more time to finalize hedge documentation; and 5) enhances presentation and disclosure requirements. The effective date is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. All transition requirements and elections should be applied to existing hedging relationships on the date of adoption and the effects should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact this standard will have on its results of operations, financial position or disclosures, but it is not expected to have a material impact.

 

Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), that eliminates Step 2 from the goodwill impairment test which required entities to compare the implied fair value of goodwill to its carrying amount. Under the amendments, the goodwill impairment will be measured as the excess of the reporting unit’s carrying amount over its fair value. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The effective date is for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual impairment tests beginning in 2017. ASU 2017-04 is not expected to have a material effect on the Company’s results of operations, financial position or disclosures.

 

Credit Losses on Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The effective date for these amendments is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a cross functional team that is assessing its data and system needs and evaluating the potential impact of adopting the new guidance. The Company anticipates a significant change in the processes and procedures to calculate the 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 expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact on its results of operations, financial position or disclosures. However, the Company has begun developing processes and procedures to ensure it is fully compliant 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 developing asset quality forecast models in preparation for the implementation of this standard.

 

Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance results in a more consistent representation of the rights and obligations arising from leases by requiring lessees to recognize the lease asset and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Based upon leases that were outstanding as of March 31, 2018, the Company does not expect the new standard to have a material impact on its results of operations, but anticipates increases in its assets and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact the level of materiality.

 

 10 

 

There have been no other significant changes to the Company’s accounting policies from the 2017 Form 10-K. Presently, the Company is not aware of any other changes to the Accounting Standards Codification that will have a material impact on its present or future financial position or results of operations.

 

Revenue from Contracts with Customers

 

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, applies to all contracts with customers to provide goods or services in the ordinary course of business. However, Topic 606 specifically does not apply to revenue related to financial instruments, guarantees, insurance contracts, leases, or nonmonetary exchanges. Given these scope exceptions, interest income recognition and measurement related to loans and investments securities, the Company’s two largest sources of revenue, are not accounted for under Topic 606. Also, the Company does not use Topic 606 to account for gains or losses on its investments in securities, loans, and derivatives due to the scope exceptions.

 

Certain revenue streams, such as service charges on deposit accounts, gains or losses on the sale of OREO, and trust income, fall under the scope of Topic 606 and the Company must recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 is applied using five steps: 1) identify the contract with the customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company has evaluated the nature of all contracts with customers that fall under the scope of Topic 606 and determined that further disaggregation of revenue from contracts with customers into categories was not necessary. There has not been significant revenue recognized in the current reporting period resulting from performance obligations satisfied in previous periods. In addition, there has not been a significant change in timing of revenues received from customers.

 

A description of performance obligations for each type of contract with customers is as follows:

 

Service charges on deposit accounts – The Company’s primary source of funding comes from deposit accounts with its customers. Customers pay certain fees to access their cash on deposit including, but not limited to, non-transactional fees such as account maintenance, dormancy or statement rendering fees, and certain transaction-based fees such as ATM, wire transfer, overdraft or returned check fees. The Company generally satisfies its performance obligations as services are rendered. The transaction prices are fixed, and are charged either on a periodic basis or based on activity.

 

Sale of OREO – In the normal course of business, the Company will enter into contracts with customers to sell OREO, which has generally been foreclosed upon by the Company. The Company generally satisfies its performance obligation upon conveyance of property from the Company to the customer, generally by way of an executed agreement. The transaction price is fixed, and on occasion the Company will finance a portion of the proceeds the customers uses to purchase the property. These properties are generally sold without recourse or warranty.

 

Trust Income – The Company enters into contracts with its customers to manage assets for investment, and/or transact on their accounts. The Company generally satisfies its performance obligations as services are rendered. The management fee is a fixed percentage-based fee calculated upon the average balance of assets under management and is charged to customers on a monthly basis.

 

Acquisition Accounting, Loans Acquired

 

The Company accounts for its acquisitions under 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 loans acquired 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 ASC Topic 820, Fair Value Measurement. 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.

 

 11 

 

The Company evaluates non-impaired loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. The Company evaluates purchased impaired loans in accordance with the provisions of 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.

 

For impaired loans accounted for under ASC Topic 310-30, the Company continues to estimate cash flows expected to be collected on purchased credit impaired loans. The Company evaluates, at each balance sheet date, whether the present value of the purchased credit impaired loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in the 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 remaining life of the purchased credit impaired loan.

 

For further discussion of acquisition and loan accounting, see Note 2, Acquisitions, and Note 6, Loans Acquired.

 

NOTE 2: ACQUISITIONS

 

Southwest Bancorp, Inc.

 

On October 19, 2017, the Company completed the acquisition of Southwest Bancorp, Inc. (“OKSB”) headquartered in Stillwater, Oklahoma, including its wholly-owned bank subsidiary, Bank SNB. The Company issued 14,488,604 shares of its common stock valued at approximately $431.4 million as of October 19, 2017, plus $94.9 million in cash in exchange for all outstanding shares of OKSB common stock.

 

Prior to the acquisition, OKSB conducted banking business from 29 branches located in Texas, Oklahoma, Kansas and Colorado. In addition, OKSB owned a loan production office in Denver, Colorado. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $2.7 billion in assets, including approximately $2.0 billion in loans (inclusive of loan discounts) and approximately $2.0 billion in deposits. The systems conversion is planned to occur late May 2018, at which time the subsidiary bank will be merged into Simmons Bank.

 

Goodwill of $229.1 million was recorded as a result of the transaction. The acquisition allowed the Company to enter the Texas, Oklahoma, and Colorado banking markets and it also strengthened the Company’s Kansas franchise and its product offerings in the healthcare and real estate industries, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

 

A summary, at fair value, of the assets acquired and liabilities assumed in the OKSB transaction, as of the acquisition date, is as follows:

 

(In thousands)  Acquired from
OKSB
  Fair Value
Adjustments
  Fair
Value
          
Assets Acquired               
Cash and due from banks  $79,517   $--   $79,517 
Investment securities   485,468    (1,295)   484,173 
Loans acquired   2,039,524    (43,071)   1,996,453 
Allowance for loan losses   (26,957)   26,957    -- 
Foreclosed assets   6,284    (1,127)   5,157 
Premises and equipment   21,210    5,457    26,667 
Bank owned life insurance   28,704    --    28,704 
Goodwill   13,545    (13,545)   -- 
Core deposit intangible   1,933    40,191    42,124 
Other intangibles   3,806    --    3,806 
Other assets   33,455    (9,141)   24,314 
Total assets acquired  $2,686,489   $4,426   $2,690,915 

 

 12 

 

Liabilities Assumed         
Deposits:         
Non-interest bearing transaction accounts  $485,971   $--   $485,971 
Interest bearing transaction accounts and savings deposits   869,252    --    869,252 
Time deposits   613,345    (2,213)   611,132 
Total deposits   1,968,568    (2,213)   1,966,355 
Securities sold under agreement to repurchase   11,256    --    11,256 
Other borrowings   347,000    --    347,000 
Subordinated debentures   46,393    --    46,393 
Accrued interest and other liabilities   17,440    5,364    22,804 
Total liabilities assumed   2,390,657    3,151    2,393,808 
Equity   295,832    (295,832)   -- 
Total equity assumed   295,832    (295,832)   -- 
Total liabilities and equity assumed  $2,686,489   $(292,681)  $2,393,808 
Net assets acquired             297,107 
Purchase price             526,251 
Goodwill            $229,144 

 

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. Management will continue to review the estimated fair values and evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction over the next few months, within one year of the acquisition. Therefore, adjustments to the estimated amounts and carrying values may occur.

 

The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of OKSB subsequent to the acquisition date.

 

First Texas BHC, Inc.

 

On October 19, 2017, the Company completed the acquisition of First Texas BHC, Inc. (“First Texas”) headquartered in Fort Worth, Texas, including its wholly-owned bank subsidiary, Southwest Bank. The Company issued 12,999,840 shares of its common stock valued at approximately $387.1 million as of October 19, 2017, plus $70.0 million in cash in exchange for all outstanding shares of First Texas common stock.

 

Prior to the acquisition, First Texas operated 15 banking centers, a trust office and a limited service branch in north Texas and a loan production office in Austin, Texas. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $2.4 billion in assets, including approximately $2.2 billion in loans (inclusive of loan discounts) and approximately $1.9 billion in deposits. The Company completed the systems conversion and merged First Texas into Simmons Bank in February 2018.

 

Goodwill of $240.8 million was recorded as a result of the transaction. The acquisition allowed the Company to enter the Texas banking markets and it also strengthened the Company’s specialty product offerings in the area of SBA lending and trust services, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

 

 13 

 

A summary, at fair value, of the assets acquired and liabilities assumed in the First Texas transaction, as of the acquisition date, is as follows:

 

(In thousands)  Acquired from
First Texas
  Fair Value
Adjustments
  Fair
Value
          
Assets Acquired               
Cash and due from banks  $59,277   $--   $59,277 
Investment securities   81,114    (596)   80,518 
Loans acquired   2,246,212    (37,834)   2,208,378 
Allowance for loan losses   (20,864)   20,664    (200)
Premises and equipment   24,864    10,123    34,987 
Bank owned life insurance   7,190    --    7,190 
Goodwill   37,227    (37,227)   -- 
Core deposit intangible   --    7,328    7,328 
Other assets   18,263    11,485    29,748 
Total assets acquired  $2,453,283   $(26,057)  $2,427,226 
                
Liabilities Assumed               
Deposits:               
Non-interest bearing transaction accounts  $74,410   $--   $74,410 
Interest bearing transaction accounts and savings deposits   1,683,298    --    1,683,298 
Time deposits   124,233    (283)   123,950 
Total deposits   1,881,941    (283)   1,881,658 
Securities sold under agreement to repurchase   50,000    --    50,000 
Other borrowings   235,000    --    235,000 
Subordinated debentures   30,323    589    30,912 
Accrued interest and other liabilities   11,727    1,669    13,396 
Total liabilities assumed   2,208,991    1,975    2,210,966 
Equity   244,292    (244,292)   -- 
Total equity assumed   244,292    (244,292)   -- 
Total liabilities and equity assumed  $2,453,283   $(242,317)  $2,210,966 
Net assets acquired             216,260 
Purchase price             457,103 
Goodwill            $240,843 

 

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. Management will continue to review the estimated fair values and evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction over the next few months, within one year of the acquisition. Therefore, adjustments to the estimated amounts and carrying values may occur.  

 

The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of First Texas subsequent to the acquisition date.

 

 14 

 

Summary of Unaudited Pro forma Information

 

The unaudited pro forma information below for the years ended December 31, 2017 and 2016 gives effect to the OKSB and First Texas acquisitions as if the acquisitions had occurred on January 1, 2016. Pro forma earnings for the year ended December 31, 2017 were adjusted to exclude $9.4 million of acquisition-related costs, net of tax, incurred by Simmons during 2017. The pro forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.

 

(In thousands, except per share data)  2017  2016
Revenue (1)  $654,358   $620,461 
Net income  $130,947   $136,199 
Diluted earnings per share  $1.43   $1.52 

_________________________________________

(1) Net interest income plus noninterest income.

 

Consolidated year-to-date 2017 results included approximately $29.2 million of revenue and $10.5 million of net income attributable to the OKSB acquisition and $27.6 million of revenue and $5.7 million of net income attributable to the First Texas acquisition.

 

Hardeman County Investment Company, Inc.

 

On May 15, 2017, the Company completed the acquisition of Hardeman County Investment Company, Inc. (“Hardeman”), headquartered in Jackson, Tennessee, including its wholly-owned bank subsidiary, First South Bank. The Company issued 1,599,940 shares of its common stock valued at approximately $42.6 million as of May 15, 2017, plus $30.0 million in cash in exchange for all outstanding shares of Hardeman common stock.

 

Prior to the acquisition, Hardeman conducted banking business from 10 branches located in western Tennessee. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $462.9 million in assets, including approximately $251.6 million in loans (inclusive of loan discounts) and approximately $389.0 million in deposits. The Company completed the systems conversion and merged Hardeman into Simmons Bank in September 2017. As part of the systems conversion, five existing Simmons Bank and First South Bank branches were consolidated or closed.

 

Goodwill of $29.4 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the western Tennessee market, and the Company will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

 

A summary, at fair value, of the assets acquired and liabilities assumed in the Hardeman transaction, as of the acquisition date, is as follows:

 

(In thousands)  Acquired from
Hardeman
  Fair Value
Adjustments
  Fair
Value
          
Assets Acquired               
Cash and due from banks  $8,001   $--   $8,001 
Interest bearing balances due from banks - time   1,984    --    1,984 
Investment securities   170,654    (285)   170,369 
Loans acquired   257,641    (5,992)   251,649 
Allowance for loan losses   (2,382)   2,382    -- 
Foreclosed assets   1,083    (452)   631 
Premises and equipment   9,905    1,258    11,163 
Bank owned life insurance   7,819    --    7,819 
Goodwill   11,485    (11,485)   -- 
Core deposit intangible   --    7,840    7,840 
Other intangibles   --    830    830 
Other assets   2,639    (1)   2,638 
Total assets acquired  $468,829   $(5,905)  $462,924 

 

 15 

 

Liabilities Assumed         
Deposits:         
Non-interest bearing transaction accounts  $76,555   $--   $76,555 
Interest bearing transaction accounts and savings deposits   214,872    --    214,872 
Time deposits   97,917    (368)   97,549 
Total deposits   389,344    (368)   388,976 
Securities sold under agreement to repurchase   17,163    --    17,163 
Other borrowings   3,000    --    3,000 
Subordinated debentures   6,702    --    6,702 
Accrued interest and other liabilities   1,891    1,924    3,815 
Total liabilities assumed   418,100    1,556    419,656 
Equity   50,729    (50,729)   -- 
Total equity assumed   50,729    (50,729)   -- 
Total liabilities and equity assumed  $468,829   $(49,173)  $419,656 
Net assets acquired             43,268 
Purchase price             72,639 
Goodwill            $29,371 

 

During 2018, the Company finalized its analysis of the loans acquired along with other acquired assets and assumed liabilities.

 

The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of Hardeman subsequent to the acquisition date.

 

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

 

Cash and due from banks and time deposits 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.

 

Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

 

Loans acquired – 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 discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

 

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

 

Premises and equipment – Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.

 

Bank owned life insurance – Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value.

 

Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill. Goodwill established prior to the acquisitions, if applicable, was written off.

 

Core deposit intangible – This intangible asset represents the value of the relationships that the acquired banks had with their 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. Core deposit intangible established prior to the acquisitions, if applicable, was written off.

 

 16 

 

Other intangibles – Other intangible assets represent the value of the relationships that Hardeman had with its insurance customers and the mortgage servicing rights acquired with OKSB. The fair value of Hardeman’s insurance customer relationships was estimated based on a combination of discounted cash flow methodology and a market valuation approach. Other intangibles established prior to the acquisitions, if applicable, were written off.

 

Other assets – The fair value adjustment results from certain assets whose value was estimated to be less than book value, such as certain prepaid assets, receivables and other miscellaneous assets. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

 

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 Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material.

 

Securities sold under agreement to repurchase – The carrying amount of securities sold under agreement to repurchase is a reasonable estimate of fair value based on the short-term nature of these liabilities.

 

FHLB and other borrowings – The fair value of Federal Home Loan Bank and other borrowings is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

 

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. Due to the floating rate nature of the debenture, the fair value approximates book value as of the date acquired.

 

Accrued interest and other liabilities – The adjustment establishes a liability for unfunded commitments equal to the fair value of that liability at the date of acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 17 

 

NOTE 3: INVESTMENT SECURITIES

 

The amortized cost and fair value of investment securities that are classified as held-to-maturity (“HTM”) and available-for-sale (“AFS”) are as follows:

 

   March 31, 2018  December 31, 2017
(In thousands)  Amortized
Cost
  Gross
Unrealized
Gains
  Gross Unrealized
(Losses)
  Estimated
Fair
Value
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross Unrealized
(Losses)
  Estimated
Fair
Value
                         
Held-to-Maturity                                        
U.S. Government agencies  $46,961   $1   $(259)  $46,703   $46,945   $7   $(228)  $46,724 
Mortgage-backed securities   15,404    --    (444)   14,960    16,132    8    (287)   15,853 
State and political subdivisions   286,901    3,701    (1,106)   289,496    301,491    5,962    (222)   307,231 
Other securities   3,490    --    --    3,490    3,490    --    --    3,490 
Total HTM  $352,756   $3,702   $(1,809)  $354,649   $368,058   $5,977   $(737)  $373,298 
                                         
Available-for-Sale                                        
U.S. Government agencies  $152,855   $15   $(3,066)  $149,804   $141,559   $116   $(1,951)  $139,724 
Mortgage-backed securities   1,394,138    155    (38,114)   1,356,179    1,208,017    246    (20,946)   1,187,317 
State and political subdivisions   191,018    100    (5,230)   185,888    144,642    532    (2,009)   143,165 
Other securities   136,911    1,332    (1)   138,242    118,106    1,206    (1)   119,311 
Total AFS  $1,874,922   $1,602   $(46,411)  $1,830,113   $1,612,324   $2,100   $(24,907)  $1,589,517 

 

Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other AFS securities in the table above.

 

Certain investment securities are valued at less than their historical cost. Total fair value of these investments at March 31, 2018 and December 31, 2017, was $1.8 billion and $1.4 billion, which is approximately 82.1% and 73.5%, respectively, of the Company’s combined AFS and HTM investment portfolios.

 

 18 

 

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018:

 

   Less Than 12 Months  12 Months or More  Total
(In thousands)  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
                   
Held-to-Maturity                              
U.S. Government agencies  $12,957   $(17)  $32,758   $(242)  $45,715   $(259)
Mortgage-backed securities   5,897    (110)   8,479    (334)   14,376    (444)
State and political subdivisions   100,221    (1,070)   1,595    (36)   101,816    (1,106)
Total HTM  $119,075   $(1,197)  $42,832   $(612)  $161,907   $(1,809)
                               
Available-for-Sale                              
U.S. Government agencies  $120,100   $(1,617)  $25,326   $(1,449)  $145,426   $(3,066)
Mortgage-backed securities   725,518    (12,950)   589,543    (25,164)   1,315,061    (38,114)
State and political subdivisions   95,659    (1,603)   73,293    (3,627)   168,952    (5,230)
Other securities   --    --    99    (1)   99    (1)
Total AFS  $941,277   $(16,170)  $688,261   $(30,241)  $1,629,538   $(46,411)

 

These declines primarily resulted from 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. Management does not have the intent to sell these securities and management believes it is more likely than not the Company will not have to sell these securities before recovery of their amortized cost basis less any current period credit losses.

 

Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Management has the ability and intent to hold the securities classified as HTM until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of March 31, 2018, management also had the ability and intent to hold the securities classified as AFS for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2018, management believes the impairments detailed in the table above are temporary. 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.

 

Income earned on securities for the three months ended March 31, 2018 and 2017, is as follows:

 

(In thousands)  2018  2017
       
Taxable:          
Held-to-maturity  $567   $661 
Available-for-sale   9,032    5,816 
           
Non-taxable:          
Held-to-maturity   1,936    2,283 
Available-for-sale   1,087    691 
Total  $12,622   $9,451 

 

 19 

 

The amortized cost and estimated fair value by maturity of securities are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.

 

   Held-to-Maturity  Available-for-Sale
(In thousands)  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
             
One year or less  $48,493   $48,335   $370   $370 
After one through five years   75,993    75,842    35,843    35,100 
After five through ten years   92,585    92,633    22,926    22,342 
After ten years   120,281    122,879    284,834    277,981 
Securities not due on a single maturity date   15,404    14,960    1,394,138    1,356,179 
Other securities (no maturity)   --    --    136,811    138,141 
Total  $352,756   $354,649   $1,874,922   $1,830,113 

 

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $1.4 billion at March 31, 2018 and $1.2 billion at December 31, 2017.

 

There were approximately $6,000 of gross realized gains and no realized losses from the sale of securities during the three months ended March 31, 2018. There were approximately $63,000 of gross realized gains and no realized losses from the sale of securities during the three months ended March 31, 2017.

 

The state and political subdivision debt obligations are predominately non-rated bonds representing small issuances, primarily in Arkansas, Missouri, Oklahoma, Tennessee and Texas issues, which are evaluated on an ongoing basis.

 

NOTE 4: OTHER ASSETS AND OTHER LIABILITIES HELD FOR SALE

 

In August 2017, the Company, through its bank subsidiary, Simmons Bank, acquired the stock of Heartland Bank (“Heartland”) at a public auction held to satisfy certain indebtedness of Heartland’s former holding company, Rock Bancshares, Inc.

 

In March 2018, Heartland sold $141.0 million of branches and loans, as well as $154.6 million of deposits and other liabilities. At the end of the first quarter 2018, other assets held for sale of $24.8 million and other liabilities held for sale of $2.8 million related to Heartland, both recorded at fair value, remained at the Company. The Company will continue to work through the disposition of Heartland’s few remaining assets and expects to be complete within one year of the acquisition.

 

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the Heartland transaction.

 

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.

 

Investment securities – The carrying amount of these assets was deemed to be a reasonable estimate of fair value, as there were no material differences to fair value based upon quoted market prices.

 

Loans acquired – 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 discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

 

Premises and equipment – Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.

 

 20 

 

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

 

At March 31, 2018, the Company’s loan portfolio was $10.99 billion, compared to $10.78 billion at December 31, 2017. The various categories of loans are summarized as follows:

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Consumer:          
Credit cards  $176,602   $185,422 
Other consumer   284,285    280,094 
Total consumer   460,887    465,516 
Real Estate:          
Construction   786,077    614,155 
Single family residential   1,193,464    1,094,633 
Other commercial   2,611,358    2,530,824 
Total real estate   4,590,899    4,239,612 
Commercial:          
Commercial   971,704    825,217 
Agricultural   128,247    148,302 
Total commercial   1,099,951    973,519 
Other   138,646    26,962 
Loans   6,290,383    5,705,609 
Loans acquired, net of discount and allowance (1)   4,696,945    5,074,076 
Total loans  $10,987,328   $10,779,685 

______________________                  

(1)See Note 6, Loans Acquired, for segregation of loans acquired by loan class.

 

Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; providing an adequate allowance for loans losses by regularly reviewing loans through the internal loan review process.  The loan portfolio is diversified by borrower, purpose and industry.  The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers.  Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. Furthermore, a factor that influenced the Company’s judgment regarding the allowance for loan losses consists of an eight-year historical loss average segregated by each primary loan sector. On an annual basis, historical loss rates are calculated for each sector.

 

Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment. Other consumer loans include direct and indirect installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

 

Real estate – The real estate loan portfolio consists of construction loans, single family residential loans and commercial loans. Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate. Commercial real estate cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length. The Company monitors these loans closely.

 

 21 

 

Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on all commercial loans for closely-held or limited liability entities.

 

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless if such loans are considered past due. When interest accrual 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.

 

Nonaccrual loans, excluding loans acquired, segregated by class of loans, are as follows:

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Consumer:          
Credit cards  $298   $170 
Other consumer   4,711    4,605 
Total consumer   5,009    4,775 
Real estate:          
Construction   1,923    2,242 
Single family residential   13,616    13,431 
Other commercial   16,707    16,054 
Total real estate   32,246    31,727 
Commercial:          
Commercial   8,003    6,980 
Agricultural   2,137    2,160 
Total commercial   10,140    9,140 
Total  $47,395   $45,642 

 

 22 

 

An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:

 

(In thousands)  Gross
30-89 Days
Past Due
  90 Days
or More
Past Due
  Total
Past Due
  Current  Total
Loans
  90 Days
Past Due &
Accruing
                   
March 31, 2018                              
Consumer:                              
Credit cards  $707   $672   $1,379   $175,223   $176,602   $233 
Other consumer   3,407    3,176    6,583    277,702    284,285    33 
Total consumer   4,114    3,848    7,962    452,925    460,887    266 
Real estate:                              
Construction   640    703    1,343    784,734    786,077    -- 
Single family residential   6,937    6,163    13,100    1,180,364    1,193,464    71 
Other commercial   4,796    9,488    14,284    2,597,074    2,611,358    -- 
Total real estate   12,373    16,354    28,727    4,562,172    4,590,899    71 
Commercial:                              
Commercial   3,674    4,134    7,808    963,896    971,704    -- 
Agricultural   107    2,075    2,182    126,065    128,247    -- 
Total commercial   3,781    6,209    9,990    1,089,961    1,099,951    -- 
Other   --    --    --    138,646    138,646    -- 
Total  $20,268   $26,411   $46,679   $6,243,704   $6,290,383   $337 
                               
December 31, 2017                              
Consumer:                              
Credit cards  $707   $672   $1,379   $184,043   $185,422   $332 
Other consumer   5,009    3,298    8,307    271,787    280,094    10 
Total consumer   5,716    3,970    9,686    455,830    465,516    342 
Real estate:                              
Construction   411    1,210    1,621    612,534    614,155    -- 
Single family residential   8,071    6,460    14,531    1,080,102    1,094,633    1 
Other commercial   2,388    8,031    10,419    2,520,405    2,530,824    -- 
Total real estate   10,870    15,701    26,571    4,213,041    4,239,612    1 
Commercial:                              
Commercial   1,523    6,125    7,648    817,569    825,217    -- 
Agricultural   50    2,120    2,170    146,132    148,302    -- 
Total commercial   1,573    8,245    9,818    963,701    973,519    -- 
Other   --    --    --    26,962    26,962    -- 
Total  $18,159   $27,916   $46,075   $5,659,534   $5,705,609   $343 

 

Impaired Loans – A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loans, including scheduled principal and interest payments. This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management. Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if the loan is collateral dependent.

 

Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

 

 23 

 

Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:

 

(In thousands)  Unpaid
Contractual
Principal
Balance
  Recorded Investment
With No
Allowance
  Recorded
Investment
With Allowance
  Total
Recorded
Investment
  Related
Allowance
  Average
Investment in
Impaired
Loans
  Interest
Income
Recognized
                   
March 31, 2018                 Three Months Ended
March 31, 2018
Consumer:                     
Credit cards  $298   $298   $--   $298   $--   $234   $15 
Other consumer   4,849    4,711    --    4,711    --    4,658    34 
Total consumer   5,147    5,009    --    5,009    --    4,892    49 
Real estate:                                   
Construction   2,392    1,220    702    1,922    249    2,082    16 
Single family residential   14,605    13,057    559    13,616    32    13,523    100 
Other commercial   22,500    8,135    8,573    16,708    145    16,287    120 
Total real estate   39,497    22,412    9,834    32,246    426    31,892    236 
Commercial:                                   
Commercial   8,480    7,119    758    7,877    18    7,226    53 
Agricultural   3,256    2,137    --    2,137    --    1,586    12 
Total commercial   11,736    9,256    758    10,014    18    8,812    65 
Total  $56,380   $36,677   $10,592   $47,269   $444   $45,596   $350 
                                    
December 31, 2017                 Three Months Ended
March 31, 2017
Consumer:                     
Credit cards  $170   $170   $--   $170   $--   $302   $5 
Other consumer   4,755    4,605    --    4,605    --    2,107    13 
Total consumer   4,925    4,775    --    4,775    --    2,409    18 
Real estate:                                   
Construction   2,522    1,347    895    2,242    249    3,074    20 
Single family residential   14,347    12,725    706    13,431    53    12,667    81 
Other commercial   22,308    6,732    9,133    15,865    36    19,321    123 
Total real estate   39,177    20,804    10,734    31,538    338    35,062    224 
Commercial:                                   
Commercial   9,954    4,306    2,269    6,575    --    11,344    72 
Agricultural   3,278    1,035    --    1,035    --    1,726    11 
Total commercial   13,232    5,341    2,269    7,610    --    13,070    83 
Total  $57,334   $30,920   $13,003   $43,923   $338   $50,541   $325 

 

At March 31, 2018, and December 31, 2017, impaired loans, net of government guarantees and excluding loans acquired, totaled $47.3 million and $43.9 million, respectively. Allocations of the allowance for loan losses relative to impaired loans were $444,000 and $338,000 at March 31, 2018 and December 31, 2017, respectively. Approximately $350,000 of interest income was recognized on average impaired loans of $45.6 million for the three months ended March 31, 2018. Interest income recognized on impaired loans on a cash basis during the three months ended March 31, 2018 and 2017 was not material.

 

Included in certain impaired loan categories are troubled debt restructurings (“TDRs”). When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

 

Under ASC Topic 310-10-35 – Subsequent Measurement, a TDR is considered to be impaired, and an impairment analysis must be performed. The Company assesses the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determines if a specific allocation to the allowance for loan losses is needed.

 

Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.

 

 24 

 

The following table presents a summary of troubled debt restructurings, excluding loans acquired, segregated by class of loans.

 

   Accruing TDR Loans  Nonaccrual TDR Loans  Total TDR Loans
(Dollars in thousands)  Number  Balance  Number  Balance  Number  Balance
                   
March 31, 2018                  
Consumer:                              
Other consumer   1   $91    --   $--    1   $91 
Total consumer   1    91    --    --    1    91 
Real estate:                              
Construction   --    --    1    408    1    408 
Single-family residential   5    201    13    802    18    1,003 
Other commercial   4    4,270    4    3,350    8    7,620 
Total real estate   9    4,471    18    4,560    27    9,031 
Commercial:                              
Commercial   4    1,897    6    738    10    2,635 
Total commercial   4    1,897    6    738    10    2,635 
Total   14   $6,459    24   $5,298    38   $11,757 
                               
December 31, 2017                              
Real estate:                              
Construction   --   $--    1   $420    1   $420 
Single-family residential   4    141    15    954    19    1,095 
Other commercial   4    4,322    5    3,712    9    8,034 
Total real estate   8    4,463    21    5,086    29    9,549 
Commercial:                              
Commercial   5    2,644    6    745    11    3,389 
Total commercial   5    2,644    6    745    11    3,389 
Total   13   $7,107    27   $5,831    40   $12,938 

 

 25 

 

The following table presents loans that were restructured as TDRs during the three months ended March 31, 2018 and 2017, excluding loans acquired, segregated by class of loans.

 

            Modification Type   
(Dollars in thousands)  Number of
Loans
  Balance Prior
to TDR
  Balance at
March 31
  Change in
Maturity
Date
  Change in
Rate
  Financial Impact
on Date of
Restructure
                   
Three Months Ended March 31, 2018                  
Consumer:                              
Other consumer   1   $91   $91   $91   $--   $-- 
Total consumer   1    91    91    91    --    -- 
Real estate:                              
Single-family residential   1    61    62    62    --    -- 
Total real estate   1    61    62    62    --    -- 
Total   2   $152   $153   $153   $--   $-- 
                               
Three Months Ended March 31, 2017                              
Real estate:                              
Construction   1   $456   $456   $456   $--   $-- 
Other commercial   2    7,362    7,362    7,362    --    33 
Total real estate   3    7,818    7,818    7,818    --    33 
Commercial:                              
Commercial   5    770    760    760    --    -- 
Total commercial   5    770    760    760    --    -- 
Total   8   $8,588   $8,578   $8,578   $--   $33 

 

During the three months ended March 31, 2018, the Company modified 2 loans with a recorded investment of $152,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of up to 12 months. A specific reserve was not considered necessary for these loans based upon the fair value of the collateral. Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

 

During the three months ended March 31, 2017, the Company modified 8 loans with a recorded investment of $8.6 million prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments and requiring interest only payments for a period of up to 12 months. Based on the fair value of the collateral, a specific reserve of $26,000 was determined necessary for these loans. Also, the financial impact from the restructuring of these loans was $33,000 from the charge-off interest on the date of restructure.

 

There was one commercial real estate loan for which a payment default occurred during the three months ended March 31, 2018. A charge-off of $66,300 was recorded for this loan and $294,300 was transferred to OREO. There was one commercial real estate loan for which a payment default occurred during the three months ended March 31, 2017. The Company defines a payment default as a payment received more than 90 days after its due date.

 

In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $294,300 and $242,300 at March 31, 2018 and 2017, respectively, for which OREO was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate and residential real estate. At March 31, 2018 and December 31, 2017, the Company had $6,809,000 and $5,057,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At March 31, 2018 and December 31, 2017, the Company had $3,767,000 and $3,828,000, respectively, of OREO secured by residential real estate properties.

 

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 weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the States of Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas.

 

 26 

 

The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Loans are rated on a scale of 1 to 8. A description of the general characteristics of the 8 risk ratings is as follows:

 

·Risk Rate 1 – Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.

 

·Risk Rate 2 – Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).

 

·Risk Rate 3 – Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.

 

·Risk Rate 4 – Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.

 

·Risk Rate 5 – Special Mention - A loan in this category 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. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

 

·Risk Rate 6 – Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.

 

·Risk Rate 7 – Doubtful – A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity, or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.

 

·Risk Rate 8 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.

 

 27 

 

Loans acquired are evaluated using this internal grading system. Loans acquired are evaluated individually and include purchased credit impaired loans of $17.6 million and $17.1 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of March 31, 2018 and December 31, 2017, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $78.7 million and $76.3 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at March 31, 2018 and December 31, 2017, respectively.

 

Purchased credit impaired loans are loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their fair value was initially based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the undiscounted cash flows expected at acquisition and the fair value at acquisition is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment.

 

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8. 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. Loans rated 6 – 8 that fall under the threshold amount are not 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. Total classified loans, excluding loans accounted for under ASC Topic 310-30, were $177.8 million and $175.6 million, as of March 31, 2018 and December 31, 2017, respectively.

 

The following table presents a summary of loans by credit risk rating as of March 31, 2018 and December 31, 2017, segregated by class of loans. Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
March 31, 2018                              
Consumer:                              
Credit cards  $176,071   $--   $531   $--   $--   $176,602 
Other consumer   279,414    --    4,871    --    --    284,285 
Total consumer   455,485    --    5,402    --    --    460,887 
Real estate:                              
Construction   778,757    2,344    4,960    16    --    786,077 
Single family residential   1,168,255    1,790    23,197    222    --    1,193,464 
Other commercial   2,572,032    7,076    32,250    --    --    2,611,358 
Total real estate   4,519,044    11,210    60,407    238    --    4,590,899 
Commercial:                              
Commercial   953,138    6,140    12,426    --    --    971,704 
Agricultural   124,938    325    2,961    23    --    128,247 
Total commercial   1,078,076    6,465    15,387    23    --    1,099,951 
Other   138,646    --    --    --    --    138,646 
Loans acquired   4,545,941    54,664    95,842    498    --    4,696,945 
Total  $10,737,192   $72,339   $177,038   $759   $--   $10,987,328 

 

 28 

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
December 31, 2017                              
Consumer:                              
Credit cards  $184,920   $--   $502   $--   $--   $185,422 
Other consumer   275,160    --    4,934    --    --    280,094 
Total consumer   460,080    --    5,436    --    --    465,516 
Real estate:                              
Construction   603,126    5,795    5,218    16    --    614,155 
Single family residential   1,066,902    3,954    23,490    287    --    1,094,633 
Other commercial   2,480,293    19,581    30,950    --    --    2,530,824 
Total real estate   4,150,321    29,330    59,658    303    --    4,239,612 
Commercial:                              
Commercial   736,377    74,254    14,402    50    134    825,217 
Agricultural   146,065    24    2,190    23    --    148,302 
Total commercial   882,442    74,278    16,592    73    134    973,519 
Other   26,962    --    --    --    --    26,962 
Loans acquired   4,782,384    198,314    93,378    --    --    5,074,076 
Total  $10,302,189   $301,922   $175,064   $376   $134   $10,779,685 

 

Allowance for Loan Losses

 

Allowance for Loan Losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310-10, Receivables, and allowance allocations calculated in accordance with ASC Topic 450-20, Loss Contingencies. Accordingly, the methodology is based on the Company’s internal grading system, specific impairment analysis, qualitative and quantitative factors.

 

As mentioned above, allocations to the allowance for loan losses are categorized as either specific allocations or general allocations.

 

A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loan, including scheduled principal and interest payments. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for loan losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.

 

The general allocation is calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that will affect specific loans and categories of loans. The Company establishes general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans.

 

 29 

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
Three Months Ended March 31, 2018                         
Balance, beginning of period  $7,007   $27,281   $3,784   $3,596   $41,668 
Provision for loan losses (1)   4,286    3,286    751    759    9,082 
Charge-offs   (1,761)   (455)   (999)   (1,056)   (4,271)
Recoveries   69    302    263    94    728 
Net charge-offs   (1,692)   (153)   (736)   (962)   (3,543)
Balance, March 31, 2018(2)  $9,601   $30,414   $3,799   $3,393   $47,207 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $18   $426   $--   $--   $444 
Loans collectively evaluated for impairment   9,583    29,988    3,799    3,393    46,763 
Balance, March 31, 2018 (2)  $9,601   $30,414   $3,799   $3,393   $47,207 

 

Activity in the allowance for loan losses for the three months ended March 31, 2017 was as follows:

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                
Three Months Ended March 31, 2017                         
Balance, beginning of period  $7,739   $21,817   $3,779   $2,951   $36,286 
Provision for loan losses (1)   696    860    758    1,243    3,557 
Charge-offs   (292)   (656)   (1,044)   (1,174)   (3,166)
Recoveries   30    232    236    690    1,188 
Net charge-offs   (262)   (424)   (808)   (484)   (1,978)
Balance, March 31, 2017 (2)  $8,173   $22,253   $3,729   $3,710   $37,865 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $708   $837   $--   $1   $1,546 
Loans collectively evaluated for impairment   7,465    21,416    3,729    3,709    36,319 
Balance, March 31, 2017 (2)  $8,173   $22,253   $3,729   $3,710   $37,865 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $--   $338   $--   $--   $338 
Loans collectively evaluated for impairment   7,007    26,943    3,784    3,596    41,330 
Balance, December 31, 2017 (2)  $7,007   $27,281   $3,784   $3,596   $41,668 

 

(1)Provision for loan losses of $68,000 attributable to loans acquired was excluded from this table for the three months ended March 31, 2018 (total provision for loan losses for the three months ended March 31, 2018 was $9,150,000). There were $79,000 in charge-offs for loans acquired during the three months ended March 31, 2018, resulting in an ending balance in the allowance related to loans acquired of $407,000. Provision for loan losses of $750,000 attributable to loans acquired was excluded from this table for the three months ended March 31, 2017 (total provision for loan losses for the three months ended March 31, 2017 was $4,307,000). There were $1.3 million in charge-offs for loans acquired during the first three months of 2017, resulting in an ending balance in the allowance related to loans acquired of $435,000.
(2)Allowance for loan losses at March 31, 2018 includes $407,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at December 31, 2017 and March 31, 2017 includes $418,000 and $435,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at March 31, 2018 was $47,614,000 and total allowance for loan losses at December 31, 2017 and March 31, 2017 was $42,086,000 and $38,300,000, respectively.

 

 30 

 

The Company’s recorded investment in loans, excluding loans acquired, related to each balance in the allowance for loan losses by portfolio segment on the basis of the Company’s impairment methodology was as follows:

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                
March 31, 2018                         
Loans individually evaluated for impairment  $10,014   $32,246   $298   $4,711   $47,269 
Loans collectively evaluated for impairment   1,089,937    4,558,653    176,304    418,220    6,243,114 
Balance, end of period  $1,099,951   $4,590,899   $176,602   $422,931   $6,290,383 
                          
December 31, 2017                         
Loans individually evaluated for impairment  $7,610   $31,538   $170   $4,605   $43,923 
Loans collectively evaluated for impairment   965,909    4,208,074    185,252    302,451    5,661,686 
Balance, end of period  $973,519   $4,239,612   $185,422   $307,056   $5,705,609 

 

NOTE 6: LOANS ACQUIRED

 

During the fourth quarter of 2017, the Company evaluated $1.985 billion of net loans ($2.021 billion gross loans less $36.3 million discount) purchased in conjunction with the acquisition of OKSB, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $11.4 million of net loans ($18.1 million gross loans less $6.7 million discount) purchased in conjunction with the acquisition of OKSB for impairment in accordance with the provisions of 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.

 

Also during the fourth quarter of 2017, the Company evaluated $2.208 billion of net loans ($2.246 billion gross loans less $37.8 million discount) purchased in conjunction with the acquisition of First Texas, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans.

 

During the second quarter of 2017, the Company evaluated $249.2 million of net loans ($254.2 million gross loans less $5.0 million discount) purchased in conjunction with the acquisition of Hardeman, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $2.4 million of net loans ($3.4 million gross loans less $990,000 discount) purchased in conjunction with the acquisition of Hardeman for impairment in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

See Note 2, Acquisitions, for further discussion of loans acquired.

 

 

 

 31 

 

The following table reflects the carrying value of all loans acquired as of March 31, 2018 and December 31, 2017:

 

   Loans Acquired
(In thousands)  March 31,
2018
  December 31,
2017
       
Consumer:          
Other consumer  $43,090   $51,467 
Real estate:          
Construction   591,533    637,032 
Single family residential   747,597    793,228 
Other commercial   2,420,121    2,387,777 
Total real estate   3,759,251    3,818,037 
Commercial:          
Commercial   891,261    995,587 
Agricultural   3,343    66,576 
Total commercial   894,604    1,062,163 
Other   --    142,409 
Total loans acquired (1)  $4,696,945   $5,074,076 

_____________________________________________________________________________________

(1)Loans acquired are reported net of a $407,000 and $418,000 allowance at March 31, 2018 and December 31, 2017, respectively.

 

Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 5, Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Consumer:          
Other consumer  $570   $334 
Real estate:          
Construction   241    1,767 
Single family residential   8,072    12,151 
Other commercial   19,626    7,401 
Total real estate   27,939    21,319 
Commercial:          
Commercial   1,518    1,748 
Agricultural   152    84 
Total commercial   1,670    1,832 
Total  $30,179   $23,485 

 

 

 

 32 

 

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note 5, Loans and Allowance for Loan Losses, for discussion of past due loans):

 

(In thousands)  Gross
30-89 Days
Past Due
  90 Days
or More
Past Due
  Total
Past Due
  Current  Total
Loans
  90 Days
Past Due &
Accruing
                   
March 31, 2018                              
Consumer:                              
Other consumer  $444   $152   $596   $42,494   $43,090   $-- 
Real estate:                              
Construction   162    1,504    1,666    589,867    591,533    -- 
Single family residential   7,938    5,353    13,291    734,306    747,597    -- 
Other commercial   1,480    3,940    5,420    2,414,701    2,420,121    -- 
Total real estate   9,580    10,797    20,377    3,738,874    3,759,251    -- 
Commercial:                              
Commercial   1,697    569    2,266    888,995    891,261    -- 
Agricultural   43    119    162    3,181    3,343    -- 
Total commercial   1,740    688    2,428    892,176    894,604    -- 
                               
Total  $11,764   $11,637   $23,401   $4,673,544   $4,696,945   $-- 
                               
December 31, 2017                              
Consumer:                              
Other consumer  $889   $260   $1,149   $50,318   $51,467   $108 
Real estate:                              
Construction   2,577    1,448    4,025    633,007    637,032    279 
Single family residential   12,936    3,302    16,238    776,990    793,228    126 
Other commercial   17,176    5,647    22,823    2,364,954    2,387,777    2,565 
Total real estate   32,689    10,397    43,086    3,774,951    3,818,037    2,970 
Commercial:                              
Commercial   2,344    1,039    3,383    992,204    995,587    67 
Agricultural   51    --    51    66,525    66,576    -- 
Total commercial   2,395    1,039    3,434    1,058,729    1,062,163    67 
                               
Other   15    --    15    142,394    142,409    -- 
Total  $35,988   $11,696   $47,684   $5,026,392   $5,074,076   $3,145 

 

 

 

 

 

 33 

 

The following table presents a summary of loans acquired by credit risk rating, segregated by class of loans (see Note 5, Loans and Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
March 31, 2018                              
Consumer:                              
Other consumer  $41,995   $14   $1,081   $--   $--   $43,090 
Real estate:                              
Construction   570,334    19,624    1,575    --    --    591,533 
Single family residential   726,224    1,917    18,958    498    --    747,597 
Other commercial   2,374,014    12,663    33,444    --    --    2,420,121 
Total real estate   3,670,572    34,204    53,977    498    --    3,759,251 
Commercial:                              
Commercial   830,225    20,446    40,590    --    --    891,261 
Agricultural   3,149    --    194    --    --    3,343 
Total commercial   833,374    20,446    40,784    --    --    894,604 
                               
Total  $4,545,941   $54,664   $95,842   $498   $--   $4,696,945 
                               
December 31, 2017                              
Consumer:                              
Other consumer  $50,625   $21   $821   $--   $--   $51,467 
Real estate:                              
Construction   604,796    30,524    1,712    --    --    637,032 
Single family residential   770,954    2,618    19,656    --    --    793,228 
Other commercial   2,337,097    15,064    35,616    --    --    2,387,777 
Total real estate   3,712,847    48,206    56,984    --    --    3,818,037 
Commercial:                              
Commercial   946,322    13,901    35,364    --    --    995,587 
Agricultural   66,367    --    209    --    --    66,576 
Total commercial   1,012,689    13,901    35,573    --    --    1,062,163 
                               
Other   142,409    --    --    --    --    142,409 
Total  $4,918,570   $62,128   $93,378   $--   $--   $5,074,076 

 

Loans acquired were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans are systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Company’s legacy loan portfolio, with most focus being placed on those loans which include the larger loan relationships and those loans which exhibit higher risk characteristics.

 

In addition to the accretable yield on loans acquired not considered to be impaired, the amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments may or may not be required. This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans.

 

 

 34 

 

The impact of these adjustments on the Company’s financial results for the three months ended March 31, 2018 and 2017 is shown below:

 

   Three Months Ended
March 31,
(In thousands)  2018  2017
       
Impact on net interest income and pre-tax income  $450   $1,184 
           
Impact, net of taxes  $331   $720 

 

These adjustments will be recognized over the remaining lives of the purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

 

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three months ended March 31, 2018 and 2017.

 

   Three Months Ended
March 31, 2018
  Three Months Ended
March 31, 2017
(In thousands)  Accretable
Yield
  Carrying
Amount of
Loans
  Accretable
Yield
  Carrying
Amount of
Loans
             
Beginning balance  $620   $17,116   $1,655   $17,802 
Additions   --    --    --    -- 
Accretable yield adjustments   1,134    --    1,228    -- 
Accretion   (385)   385    (1,666)   1,666 
Payments and other reductions, net   --    104    --    (10,773)
Balance, ending  $1,369   $17,605   $1,217   $8,695 

 

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan loss for loans acquired resulting in a total allowance on loans acquired of $407,000 at March 31, 2018 and $418,000 at December 31, 2017. The provision on loans acquired for the three months ended March 31, 2018 and 2017 was $68,000 and $750,000, respectively.

 

 

 

 35 

 

NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is tested annually, or more often than annually, if circumstances warrant, for impairment. 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 financial statements. Goodwill totaled $845.7 million at March 31, 2018 and $842.7 million at December 31, 2017.

 

The Company recorded $229.1 million, $240.8 million and $29.4 million of goodwill as a result of its acquisitions of OKSB, First Texas and Hardeman, respectively. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2018 or the year ended December 31, 2017.

 

Core deposit premiums are amortized over periods ranging from 10 to 15 years and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $42.1 million, $7.3 million, and $7.8 million were recorded during 2017 as part of the OKSB, First Texas and Hardeman acquisitions, respectively.

 

Intangible assets are being amortized over various periods ranging from 10 to 15 years. The Company recorded $830,000 of intangible assets during 2017 related to the insurance operations in the Hardeman acquisition. The Company recorded $3.8 million of other intangible assets during 2017 as part of the OKSB acquisition which were subsequently sold in first quarter 2018.

 

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at March 31, 2018 and December 31, 2017, were as follows: 

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Goodwill  $845,687   $842,651 
Core deposit premiums:          
Gross carrying amount   105,984    105,984 
Accumulated amortization   (19,009)   (16,659)
Core deposit premiums, net   86,975    89,325 
Books of business intangible:          
Gross carrying amount   15,234    15,414 
Accumulated amortization   (2,912)   (2,827)
Books of business intangible, net   12,322    12,587 
Other intangibles:          
Gross carrying amount   2,068    6,037 
Accumulated amortization   (1,861)   (1,878)
Other intangibles, net   207    4,159 
Other intangible assets, net   99,504    106,071 
Total goodwill and other intangible assets  $945,191   $948,722 

 

The Company’s estimated remaining amortization expense on intangibles as of March 31, 2018 is as follows:

 

(In thousands)  Year  Amortization
Expense
   Remainder of 2018  $8,171 
   2019   10,565 
   2020   10,552 
   2021   10,490 
   2022   10,438 
   Thereafter   49,288 
   Total  $99,504 

 

 36 

 

NOTE 8: TIME DEPOSITS

 

Time deposits include approximately $1.035 billion and $736.0 million of certificates of deposit of $100,000 or more at March 31, 2018, and December 31, 2017, respectively. Of this total approximately $664,732,000 and $396,771,000 of certificates of deposit were over $250,000 at March 31, 2018 and December 31, 2017, respectively.

 

NOTE 9: INCOME TAXES

 

The provision for income taxes is comprised of the following components:

 

(In thousands)  March 31,
2018
  March 31,
2017
Income taxes currently payable  $10,045   $6,601 
Deferred income taxes   3,921    3,090 
Provision for income taxes  $13,966   $9,691 

 

The tax effects 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 appropriate tax effects, are as follows:

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Deferred tax assets:          
Loans acquired  $18,418   $19,885 
Allowance for loan losses   12,294    10,773 
Valuation of foreclosed assets   2,852    2,852 
Tax NOLs from acquisition   7,727    7,821 
Deferred compensation payable   2,534    2,433 
Accrued equity and other compensation   4,472    5,302 
Acquired securities   578    578 
Unrealized loss on available-for-sale securities   12,217    6,107 
Other   7,279    8,813 
Gross deferred tax assets   68,371    64,564 
           
Deferred tax liabilities:          
Goodwill and other intangible amortization   (32,579)   (32,572)
Accumulated depreciation   (9,317)   (8,945)
Other   (4,103)   (4,413)
Gross deferred tax liabilities   (45,999)   (45,930)
           
Net deferred tax asset, included in other assets  $22,372   $18,634 

 

 

 

 37 

 

A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:

 

(In thousands)  March 31,
2018
  March 31,
2017
       
Computed at the statutory rate (1)   $13,708   $11,134 
Increase (decrease) in taxes resulting from:          
State income taxes, net of federal tax benefit   1,822    539 
Discrete items related to ASU 2016-09   (273)   (1,082)
Tax exempt interest income   (677)   (1,071)
Tax exempt earnings on BOLI   (186)   (218)
Other differences, net   (428)   389 
Actual tax provision  $13,966   $9,691 

 

________________________

(1)The statutory rate was 21% for the three months ended March 31, 2018, compared to 35% for the three months ended March 31, 2017.

 

The Company follows ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in 2018 and in future years. The Company expects to fully realize its deferred tax assets in the future.

 

On December 22, 2017, the President signed tax reform legislation (the “2017 Act”) which includes a broad range of tax reform proposals affecting businesses, including corporate tax rates, business deductions, and international tax provisions. The 2017 Act reduces the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Under US GAAP, deferred tax assets and liabilities are required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled and the effect of a change in tax law is recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. As a result, the Company was required to remeasure its deferred taxes as of December 22, 2017 based upon the new 21% tax rate and the change was recorded in the 2017 income tax provision.

 

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. As such, the company’s 2017 financial results reflect the income tax effects for the 2017 Act for which the accounting under ASC 740 is complete and provisional amounts for those specific income tax effects of the 2017 Act for which the accounting under ASC 740 is incomplete but a reasonable estimate could be determined. The company did not identify items for which the income tax effects of the 2017 Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. The tax expense recorded in 2017 is a reasonable estimate based on published guidance available at this time and is considered provisional. The ultimate impact of the 2017 Act may differ from these estimates due to changes in interpretations and assumptions made by the Company, as well as additional regulatory guidance. Any adjustments will be reflected in the Company’s financial statements in future periods.

 

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

 

Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company closed a stock acquisition in a prior year that invoked the Section 382 annual limitation. Approximately $35.6 million of federal net operating losses subject to the IRC Sec 382 annual limitation are expected to be utilized by the Company. The net operating loss carryforwards expire between 2028 and 2035.

 

 38 

 

The Company files income tax returns in the U.S. federal jurisdiction. The Company’s U.S. federal income tax returns are open and subject to examinations from the 2014 tax year and forward. The Company’s various state income tax returns are generally open from the 2014 and later tax return years based on individual state statute of limitations.

 

NOTE 10: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

The Company utilizes securities sold under agreements to repurchase to facilitate the needs of its customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents.

 

The gross amount of recognized liabilities for repurchase agreements was $114.6 million and $122.0 million at March 31, 2018 and December 31, 2017, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of March 31, 2018 and December 31, 2017 is presented in the following tables.

 

   Remaining Contractual Maturity of the Agreements
(In thousands)  Overnight and
Continuous
  Up to 30 Days  30-90 Days  Greater than
90 Days
  Total
March 31, 2018               
Repurchase agreements:                         
U.S. Government agencies  $114,634   $--   $--   $--   $114,634 
                          
December 31, 2017                         
Repurchase agreements:                         
U.S. Government agencies  $122,019   $--   $--   $--   $122,019 

 

 

 

 39 

 

NOTE 11: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

 

Debt at March 31, 2018 and December 31, 2017 consisted of the following components:

 

(In thousands)  March 31,
2018
  December 31,
2017
       
Other Borrowings          
FHLB advances, net of discount, due 2018 to 2033, 1.33% to 7.37% secured by residential real estate loans  $1,140,986   $1,261,642 
Revolving credit agreement, due 10/5/2018, floating rate of 1.50% above the one month LIBOR rate, unsecured   --    75,000 
Notes payable, due 10/15/2020, 3.85%, fixed rate, unsecured   --    43,382 
Total other borrowings   1,140,986    1,380,024 
           
Subordinated Notes and Debentures          
Subordinated notes payable, due 4/1/2028, fixed-to-floating rate (fixed rate of 5.00% through 3/31/2023, floating rate of 2.15% above the three month LIBOR rate, reset quarterly)   330,000    -- 
Trust preferred securities, due 12/30/2033, floating rate of 2.80% above the three month LIBOR rate, reset quarterly, callable without penalty   20,620    20,620 
Trust preferred securities, net of discount, due 6/30/2035, floating rate of 1.75% above the three month LIBOR rate, reset quarterly, callable without penalty   9,344    9,327 
Trust preferred securities, net of discount, due 9/15/2037, floating rate of 1.37% above the three month LIBOR rate, reset quarterly   10,310    10,284 
Trust preferred securities, net of discount, due 12/5/2033, floating rate of 2.88% above the three month LIBOR rate, reset quarterly, callable without penalty   5,155    5,156 
Trust preferred securities, net of discount, due 10/18/2034, floating rate of 2.00% above the three month LIBOR rate, reset quarterly, callable without penalty   5,155    5,148 
Trust preferred securities, net of discount, due 6/6/2037, floating rate of 1.57% above the three month LIBOR rate, reset quarterly, callable without penalty   10,310    10,288 
Trust preferred securities, due 12/15/2035, floating rate of 1.45% above the three month LIBOR rate, reset quarterly, callable without penalty   6,702    6,702 
Trust preferred securities, due 6/26/2033, floating rate of 3.10% above the three month LIBOR rate, reset quarterly, callable without penalty   20,619    20,619 
Trust preferred securities, due 10/7/2033, floating rate of 2.85% above the three month LIBOR rate, reset quarterly, callable without penalty   25,774    25,774 
Trust preferred securities, due 9/15/2037, floating rate of 2.00% above the three month LIBOR rate, reset quarterly, callable without penalty   8,248    8,248 
Other subordinated debentures, net of discount, due 9/30/2023, floating rate equal to daily average of prime rate, reset quarterly   19,517    18,399 
Unamortized debt issuance costs   (3,289)   -- 
Total subordinated notes and debentures   468,465    140,565 
Total other borrowings and subordinated debt  $1,609,451   $1,520,589 

 

In March 2018, the Company issued $330.0 million in aggregate principal amount, of 5.00% Fixed-to-Floating Rate Subordinated Notes (“the Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.3 million in debt issuance costs related to the offering during March. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 215 basis points, payable quarterly in arrears. The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its general creditors. The Notes are obligations of Simmons First National Corporation only and are not obligations of, and are not guaranteed by, any of its subsidiaries. During the first quarter of 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Revolving Credit Agreement (the “Credit Agreement”) discussed below and the unsecured debt from correspondent banks. The subordinated notes qualify for Tier 2 capital treatment.

 

 40 

 

In October 2017, the Company entered into the Credit Agreement with U.S. Bank National Association and executed an unsecured Revolving Credit Note pursuant to which the Company may borrow, prepay and re-borrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. The Credit Agreement contains customary representations, warranties, and covenants of the Company, including, among other things, covenants that impose various financial ratio requirements. The line of credit available to the Company under the Credit Agreement expires on October 5, 2018, at which time all amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company shall be due and payable.

 

At March 31, 2018, the Company had $653.0 million of Federal Home Loan Bank (“FHLB”) advances outstanding with original maturities of one year or less.

 

The Company had total FHLB advances of $1.1 billion at March 31, 2018, with approximately $2.2 billion of additional advances available from the FHLB. The FHLB advances are secured by mortgage loans and investment securities totaling approximately $3.7 billion at March 31, 2018.

 

The trust preferred securities are tax-advantaged issues that qualified for Tier 1 capital treatment until December 31, 2017, when the Company reached $15 billion in assets. They still qualify for inclusion as Tier 2 capital at March 31, 2018. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The 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 junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payments on the related junior subordinated debentures. The Company’s obligations under the junior 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 Company’s long-term debt includes subordinated debt, notes payable and FHLB advances with an original maturity of greater than one year. Aggregate annual maturities of long-term debt at March 31, 2018, are as follows:

 

(In thousands)  Year  Annual
Maturities
         
   2018  $102,899 
   2019   2,577 
   2020   2,474 
   2021   2,165 
   2022   1,314 
   Thereafter   845,022 
   Total  $956,451 

 

NOTE 12: CONTINGENT LIABILITIES

 

The Company and/or its subsidiaries have various unrelated legal proceedings, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries.

 

NOTE 13: COMMON STOCK

 

On January 18, 2018, the board of directors of the Company approved a two-for-one stock split of the Corporation’s outstanding Class A common stock (“Common Stock”) in the form of a 100% stock dividend for shareholders of record as of the close of business on January 30, 2018 (“Record Date”). The new shares were distributed by the Company’s transfer agent, Computershare, and the Company’s common stock began trading on a split-adjusted basis on the NASDAQ Global Select Market on February 9, 2018. All previously reported share and per share data included in filings subsequent to February 8, 2018 are restated to reflect the retroactive effect of this two-for-one stock split.

 

On April 19, 2018, shareholders of the Company approved an increase in the number of authorized shares from 120,000,000 to 175,000,000.

 

 41 

 

On July 23, 2012, the Company approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares (split adjusted) of Class A common stock, or approximately 2% of the shares outstanding. Under the current plan, the Company can repurchase an additional 308,272 shares. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes.

 

NOTE 14: UNDIVIDED PROFITS

 

The Company’s subsidiary banks are subject to legal limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. For the lead subsidiary bank, Simmons Bank, the approval of the Commissioner of the Arkansas State Bank Department is required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent (75%) of the total of its net profits, as defined, for that year combined with seventy-five percent (75%) of its retained net profits of the preceding year. Bank SNB is limited by the regulations of the state of Oklahoma. Under these regulations, the total amount of dividends that may be paid by Bank SNB without regulatory approval is limited to the current year net profits, combined with the retained earnings of the preceding two years. At March 31, 2018, the Company’s subsidiary banks had approximately $1.6 million available for payment of dividends to the Company, without prior regulatory approval.

 

The risk-based capital guidelines of the Federal Reserve Board and the Arkansas State Bank Department include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. Under the Basel III Rules effective January 1, 2015, the criteria for a well-capitalized institution are: a 5% “Tier l leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, 10% “total risk-based capital” ratio; and a 6.50% “common equity Tier 1 (CET1)” ratio.

 

The Company and Banks must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019). As of March 31, 2018, the Company and its subsidiary banks met all capital adequacy requirements under the Basel III Capital Rules, and management believes the Company and subsidiary banks would meet all Capital Rules on a fully phased-in basis if such requirements were currently effective. The Company's CET1 ratio was 9.64% at March 31, 2018.

 

NOTE 15: STOCK BASED COMPENSATION

 

The Company’s Board of Directors has adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of bonus shares granted to directors, officers and other key employees.

 

 

 

 42 

 

Share and per share information regarding Stock-Based Compensation Plans has been adjusted to reflect the effects of the Company’s two-for-one stock split which became effective on February 8, 2018. The table below summarizes the transactions under the Company’s active stock compensation plans for the three months ended March 31, 2018:

 

   Stock Options
Outstanding
  Non-vested
Stock Awards
Outstanding
  Non-vested
Stock Units
Outstanding
   Number
of Shares
(000)
  Weighted
Average
Exercise
Price
  Number
of Shares
(000)
  Weighted
Average
Exercise
Price
  Number
of Shares
(000)
  Weighted
Average
Exercise
Price
                   
Balance, January 1, 2018   812   $21.98    162   $20.86    652   $27.92 
Granted   --    --    --    --    280    29.16 
Stock Options Exercised   (83)   20.67    --    --    --    -- 
Stock Awards/Units Vested   --    --    (40)   17.89    (144)   27.87 
Forfeited/Expired   (3)   23.51    (9)   19.67    (46)   28.22 
                               
Balance, March 31, 2018   726   $22.12    113   $22.01    742   $28.38 
                               
Exercisable, March 31, 2018   693   $22.06                     

 

The following table summarizes information about stock options under the plans outstanding at March 31, 2018:

 

      Options Outstanding     Options Exercisable  

Range of

Exercise Prices

 

Number

of Shares

(000)

   

Weighted

Average

Remaining

Contractual

Life (Years)

   

Weighted

Average

Exercise

Price

   

Number

of Shares

(000)

   

Weighted

Average

Exercise

Price

 
$8.78 - $9.46     3       1.97     $ 9.22       3     $ 9.22  
10.65 - 10.65     5       3.90       10.65       5       10.65  
10.76 - 10.76     2       1.80       10.76       2       10.76  
15.16 - 15.16     25       0.16       15.16       25       15.16  
20.29 - 20.29     70       6.75       20.29       70       20.29  
20.36 - 20.36     3       6.63       20.36       2       20.36  
22.20 - 22.20     76       6.98       22.20       76       22.20  
22.75 - 22.75     436       7.36       22.75       436       22.75  
23.51 - 23.51     99       7.66       23.51       67       23.51  
24.07 - 24.07     7       7.46       24.07       7       24.07  
$8.78   $24.07     726       6.99     $ 22.12       693     $ 22.06  

 

Stock-based compensation expense was $2,621,000 and $2,599,000 during the three months ended March 31, 2018 and 2017, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was $169,000 of unrecognized stock-based compensation expense related to stock options at March 31, 2018. Unrecognized stock-based compensation expense related to non-vested stock awards was $24,932,000 at March 31, 2018. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.4 years.

 

The intrinsic value of stock options outstanding and stock options exercisable at March 31, 2018 was $4,600,000 and $4,430,000. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $28.45 as of March 31, 2018, and the exercise price multiplied by the number of options outstanding. The total intri