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.

 

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.

 

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.

 

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.

 

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

 

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.

 

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.

 

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

 

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.

 

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.

 

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

 

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.

 

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

 

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.

 

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.

 

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

 

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.

 

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.

 

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

 

(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.

 

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.

 

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