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EX-32.1 - EXHIBIT 32.1 - SIMMONS FIRST NATIONAL CORPexh_321.htm
EX-31.2 - EXHIBIT 31.2 - SIMMONS FIRST NATIONAL CORPexh_312.htm
EX-32.3 - EXHIBIT 32.3 - SIMMONS FIRST NATIONAL CORPexh_323.htm
EX-31.1 - EXHIBIT 31.1 - SIMMONS FIRST NATIONAL CORPexh_311.htm
EX-15.1 - EXHIBIT 15.1 - SIMMONS FIRST NATIONAL CORPexh_151.htm
EX-32.2 - EXHIBIT 32.2 - SIMMONS FIRST NATIONAL CORPexh_322.htm
EX-31.3 - EXHIBIT 31.3 - SIMMONS FIRST NATIONAL CORPexh_313.htm
EX-12.1 - EXHIBIT 12.1 - SIMMONS FIRST NATIONAL CORPexh_121.htm

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 June 30, 2015  Commission File Number 000-06253

 

SIMMONS FIRST NATIONAL CORPORATION

(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.    S 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).   

S Yes   £ No

 

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

 

Large accelerated filer £      Accelerated filer S        Non-accelerated filer £   Smaller reporting company £

 

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

 

The number of shares outstanding of the Registrant’s Common Stock as of July 27, 2015, was 29,932,198.

 

 

 
 

Simmons First National Corporation

Quarterly Report on Form 10-Q

June 30, 2015

 

 

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   52-76
Item 3. Quantitative and Qualitative Disclosure About Market Risk   76-78
Item 4. Controls and Procedures   78
       
Part II: Other Information    
Item 1A. Risk Factors   78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   79
Item 6. Exhibits   79-84
       
Signatures     85

 

 
 

Part I:  Financial Information

Item 1.  Financial Statements (Unaudited)

 

Simmons First National Corporation

Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

 

(In thousands, except share data)  June 30,
2015
  December 31,
2014
   (Unaudited)   
ASSETS          
Cash and non-interest bearing balances due from banks  $69,770   $54,347 
Interest bearing balances due from banks   173,130    281,562 
Federal funds sold   49,570    - 
Cash and cash equivalents   292,470    335,909 
Interest bearing balances due from banks - time   24,189    - 
Investment securities:          
Held-to-maturity   861,596    777,587 
Available-for-sale   747,701    305,283 
Total investments   1,609,297    1,082,870 
Mortgage loans held for sale   48,094    21,265 
Assets held in trading accounts   6,481    6,987 
Loans:          
Legacy loans   2,611,229    2,053,721 
Allowance for loan losses   (30,567)   (29,028)
Loans acquired, not covered by FDIC loss share (net of discount)   2,108,306    575,980 
Loans acquired, covered by FDIC loss share (net of discount and allowance)   93,121    106,933 
Net loans   4,782,089    2,707,606 
FDIC indemnification asset   13,020    22,663 
Premises and equipment   191,335    122,246 
Premises held for sale   6,587    6,846 
Foreclosed assets not covered by FDIC loss share   42,666    44,856 
Foreclosed assets covered by FDIC loss share   12,833    11,793 
Interest receivable   24,129    16,774 
Bank owned life insurance   118,073    77,592 
Goodwill   314,282    108,095 
Other intangible assets   46,605    22,526 
Other assets   82,208    55,326 
Total assets  $7,614,358   $4,643,354 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Deposits:          
Non-interest bearing transaction accounts  $1,141,285   $889,260 
Interest bearing transaction accounts and savings deposits   3,581,049    2,006,271 
Time deposits   1,447,688    965,187 
Total deposits   6,170,022    3,860,718 
Federal funds purchased and securities sold under agreements to repurchase   111,792    110,586 
Other borrowings   171,321    114,682 
Subordinated debentures   61,794    20,620 
Accrued interest and other liabilities   74,324    42,429 
Total liabilities   6,589,253    4,149,035 
Stockholders’ equity:          
Preferred stock, 40,040,000 shares authorized; Series A, $0.01 par value, $1,000 liquidation value per share; 30,852 shares issued and outstanding at June 30, 2015   30,852    - 
Common stock, Class A, $0.01 par value; 60,000,000 shares authorized; 29,894,903 and 18,052,488 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively   299    181 
Surplus   640,895    156,568 
Undivided profits   354,459    338,906 

Accumulated other comprehensive loss

   (1,400)   (1,336)
Total stockholders’ equity   1,025,105    494,319 
Total liabilities and stockholders’ equity  $7,614,358   $4,643,354 

 

See Condensed Notes to Consolidated Financial Statements.

3
 

Simmons First National Corporation

Consolidated Statements of Income

Three and Six Months Ended June 30, 2015 and 2014

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(In thousands, except per share data)  2015  2014  2015  2014
   (Unaudited)  (Unaudited)
INTEREST INCOME                    
Loans  $70,438   $38,622   $121,424   $78,753 
Federal funds sold   73    2    102    3 
Investment securities   8,050    4,766    13,929    9,315 
Mortgage loans held for sale   375    168    522    237 
Assets held in trading accounts   4    5    8    10 
Interest bearing balances due from banks   229    279    439    558 
TOTAL INTEREST INCOME   79,169    43,842    136,424    88,876 
                     
INTEREST EXPENSE                    
Deposits   4,195    2,235    7,139    4,505 
Federal funds purchased and securities sold under agreements to repurchase   57    31    121    84 
Other borrowings   1,151    988    2,203    1,998 
Subordinated debentures   559    160    793    317 
TOTAL INTEREST EXPENSE   5,962    3,414    10,256    6,904 
                     
NET INTEREST INCOME   73,207    40,428    126,168    81,972 
Provision for loan losses   3,006    1,602    4,177    2,510 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   70,201    38,826    121,991    79,462 
                     
NON-INTEREST INCOME                    
Trust income   2,070    1,553    4,321    3,091 
Service charges on deposit accounts   8,031    6,792    14,394    12,860 
Other service charges and fees   3,130    859    4,955    1,684 
Mortgage lending income   3,449    1,262    5,710    2,074 
Investment banking income   593    154    1,487    336 
Debit and credit card fees   6,486    5,801    12,134    11,444 
Bank owned life insurance income   746    377    1,318    705 
Gain (loss) on sale of securities   -    38    (38)   38 
Net (loss) on assets covered by FDIC loss share agreements   (3,056)   (6,268)   (5,727)   (13,639)
Other income   3,863    4,820    5,253    5,984 
TOTAL NON-INTEREST INCOME   25,312    15,388    43,807    24,577 
                     
NON-INTEREST EXPENSE                    
Salaries and employee benefits   35,475    20,982    62,246    43,447 
Occupancy expense, net   5,051    3,285    8,627    7,155 
Furniture and equipment expense   3,241    2,215    6,420    4,229 
Other real estate and foreclosure expense   1,017    375    1,398    1,248 
Deposit insurance   1,096    1,085    1,966    1,753 
Merger related costs   1,247    1,354    11,666    2,627 
Other operating expenses   18,041    10,546    30,213    23,923 
TOTAL NON-INTEREST EXPENSE   65,168    39,842    122,536    84,382 
                     
INCOME BEFORE INCOME TAXES   30,345    14,372    43,262    19,657 
Provision for income taxes   10,250    4,464    14,432    5,396 
                     
NET INCOME   20,095    9,908    28,830    14,261 
Preferred stock dividends   77    -    103    - 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS  $20,018   $9,908   $28,727   $14,261 
BASIC EARNINGS PER SHARE  $0.67   $0.61   $1.10   $0.88 
DILUTED EARNINGS PER SHARE  $0.67   $0.60   $1.10   $0.87 

 

See Condensed Notes to Consolidated Financial Statements. 

4
 

Simmons First National Corporation

Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2015 and 2014

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(In thousands, except per share data)  2015  2014  2015  2014
   (Unaudited)  (Unaudited)
NET INCOME  $20,095   $9,908   $28,830   $14,261 
                     
OTHER COMPREHENSIVE INCOME                    
Unrealized holding (losses) gains arising during the period on available-for-sale securities   (5,356)   1,206    (143)   2,659 
Less: Reclassification adjustment for realized gains (losses) included in net income   -    38    (38)   38 
Other comprehensive (loss) gain, before tax effect   (5,356)   1,168    (105)   2,621 
Less: Tax effect of other comprehensive (loss) gain   (2,101)   458    (41)   1,028 
                     
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME   (3,255)   710    (64)   1,593 
                     
COMPREHENSIVE INCOME  $16,840   $10,618   $28,766   $15,854 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

5
 

Simmons First National Corporation

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

 

(In thousands)  June 30,
2015
  June 30,
2014
   (Unaudited)
OPERATING ACTIVITIES          
Net income  $28,830   $14,261 
Items not requiring (providing) cash:          
Depreciation and amortization   6,945    3,808 
Provision for loan losses   4,177    2,510 
Net (accretion) of investment securities and assets not covered by FDIC loss share   (9,829)   (1,994)
Net amortization on borrowings   150    - 
Stock-based compensation expense   1,077    655 
Net accretion on assets covered by FDIC loss share   (119)   (350)
Deferred income taxes   (1,772)   (3,143)

Loss (gain) on sale of available-for-sale securities

   38   (38)
Gain on sale of premises and equipment   -    (2,296)
Loss on premises and equipment of closed branches   1,958    - 
Bank owned life insurance income   (1,318)   (705)
Changes in:          
Interest receivable   2,377    1,400 
Mortgage loans held for sale   (26,829)   (10,915)
Assets held in trading accounts   506    2,097 
Other assets   (3,178)   (5,982)
Accrued interest and other liabilities   8,276    4,113 
Income taxes payable   6,846    (2,892)
Net cash provided by operating activities   

18,135

    529 
           
INVESTING ACTIVITIES          
Net originations of loans not covered by FDIC loss share   (176,400)   (34,126)
Net collections of loans covered by FDIC loss share   16,888    34,830 
Proceeds from sale of student loans   -    22,136 
Purchases (proceeds) from sale of premises and equipment, net   

(7,784

)   10,760 
Proceeds from sale of foreclosed assets held for sale   15,131    13,575 
Proceeds from sale of foreclosed assets held for sale, covered by FDIC loss share   1,859    7,677 
Proceeds from sale of available-for-sale securities   

1,662

    2,552 
Proceeds from maturities of available-for-sale securities   291,688    59,920 
Purchases of available-for-sale securities   (210,344)   (118,954)
Proceeds from maturities of held-to-maturity securities   116,439    130,682 
Purchases of held-to-maturity securities   (54,668)   (184,965)
Purchase of bank owned life insurance   (25)   (25)
Cash received on FDIC loss share   3,980    11,886 
Cash received in business combinations, net of cash paid   201,029    - 
Net cash provided by (used in) investing activities   

199,455

    (44,052)
           
FINANCING ACTIVITIES          
Net change in deposits   (101,472)   (55,842)
Dividends paid on preferred stock   (103)   - 
Dividends paid on common stock   (13,174)   (7,467)
Net change in other borrowed funds   (134,106)   (1,488)
Net change in federal funds purchased and securities sold under agreements to repurchase   (15,024)   (9,661)
Net shares issued under stock compensation plans   2,850    1,261 
Net cash used in financing activities   (261,029)   (73,197)
           
DECREASE IN CASH AND CASH EQUIVALENTS   (43,439)   (116,720)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   335,909    539,380 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $292,470   $422,660 

 

See Condensed Notes to Consolidated Financial Statements. 

6
 

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2015 and 2014

 

(In thousands, except share data) 

Preferred

Stock

  Common
Stock
  Surplus  Accumulated
Other
Comprehensive
Income (Loss)
  Undivided
Profits
  Total
                   
Balance, December 31, 2013  $-   $162   $88,095   $(3,002)  $318,577   $403,832 
Comprehensive income:                              
Net income   -    -    -    -    14,261    14,261 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $1,028   -    -    -    1,593    -    1,593 
Comprehensive income                            15,854 
Stock issued as bonus shares – 71,840 shares   -    1    441    -    -    442 
Vesting bonus shares, net of forfeitures – (1,560 shares)   -    -    655    -    -    655 
Stock issued for employee stock purchase plan – 4,897 shares   -    -    118    -    -    118 
Exercise of stock options – 33,360 shares   -    -    843    -    -    843 
Securities exchanged under stock option plan – (3,452 shares)   -    -    (142)   -    -    (142)
Cash dividends – $0.44 per share   -    -    -    -    (7,467)   (7,467)
                               
Balance, June 30, 2014 (Unaudited)   -    163    90,010    (1,409)   325,371    414,135 
Comprehensive income:                              
Net income   -    -    -    -    21,427    21,427 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $47   -    -    -    73    -    73 
Comprehensive income   -    -    -    -    -    21,500 
Stock issued as bonus shares – 62,040 shares   -    -    -    -    -    - 
Vesting bonus shares, net of forfeitures – (1,560 shares)   -    -    768    -    -    768 
Exercise of stock options – 31,360 shares   -    2    831    -    -    833 
Securities exchanged under stock option plan – (1,768 shares)   -    -    (71)   -    -    (71)
Stock issued for Delta Trust & Bank acquisition – 1,629,515 shares   -    16    65,030    -    -    65,046 
Cash dividends – $0.44 per share   -    -    -    -    (7,892)   (7,892)
                               
Balance, December 31, 2014   -    181    156,568    (1,336)   338,906    494,319 
Comprehensive income:                              
Net income   -    -    -    -    28,830    28,830 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of ($41)   -    -    -    (64)   -    (64)
Comprehensive income                            28,766 
Stock issued as bonus shares – 56,600 shares   -    1    1,564    -    -    1,565 
Vesting bonus shares, net of forfeitures – (9,500 shares)   -    -    803    -    -    803 
Stock issued for employee stock purchase plan – 6,528 shares   -    -    226    -    -    226 
Exercise of stock options – 52,929 shares   -    -    1,201    -    -    1,201 
Stock granted under stock-based compensation plans   -    -    274    -    -    274 
Securities exchanged under stock option plan – (3,290 shares)   -    -    (142)   -    -    (142)
Stock issued for Community First acquisition – 30,852 preferred shares; 6,552,916 common shares   30,852    65    268,277    -    -    299,194 
Stock issued for Liberty Bank acquisition – 5,181,337 shares   -    52    212,124    -    -    212,176 
Dividends on preferred stock   -    -    -    -    (103)   (103)
Dividends on common stock – $0.46 per share   -    -    -    -    (13,174)   (13,174)
                               
Balance, June 30, 2015 (Unaudited)  $30,852   $299   $640,895   $(1,400)  $354,459   $1,025,105 

 

See Condensed Notes to Consolidated Financial Statements. 

7
 

SIMMONS FIRST NATIONAL CORPORATION

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1: BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of Simmons First National Corporation (the “Company”) and its subsidiaries.  Significant intercompany accounts and transactions have been eliminated in consolidation.

 

All adjustments made to the unaudited financial statements were of a normal recurring nature.  In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made.  Certain prior year amounts are reclassified to conform to current year classification.  The consolidated balance sheet of the Company as of December 31, 2014, has been derived from the audited consolidated balance sheet of the Company as of that date.  The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

 

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report for 2014 filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Recently Issued Accounting Pronouncements

 

ASU 2015-08 – Business Combinations: Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (“ASU 2015-08”). ASU 2015-08 removes references to the SEC’s Staff Accounting Bulletin (SAB) Topic 5.J on pushdown accounting from ASC 805-50, thereby conforming the FASB’s guidance on pushdown accounting with the SEC’s guidance on this topic. ASU 2015-08 became effective upon issuance. The adoption of this standard has not had a material effect on the Company’s operating results or financial condition.

 

ASU 2014-17 – Business Combinations: Pushdown Accounting (“ASU 2014-17”). ASU 2014-17 amends existing guidance related to the accounting by an acquired entity upon a change-in-control event. The standard provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. ASU 2014-17 was effective on November 18, 2014. The adoption of this standard has not had a material effect on the Company’s operating results or financial condition.

 

ASU 2014-14 – Receivables – Troubled Debt Restructurings by Creditors: Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure (“ASU 2014-14”). ASU 2014-14 amends existing guidance related to the classification of certain government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA, upon foreclosure. It requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if three conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and early adoption is permitted. It can be applied using a prospective transition method or a modified retrospective transition using a cumulative-effect adjustment. The adoption of this standard has not had a material effect on the Company’s results of operations, financial position or disclosures.

 

ASU 2014-12 – Compensation – Stock Compensation – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 amends existing guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. It can be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

 

8
 

ASU 2014-11 – Transfers and Servicing – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. ASU 2014-11 requires that these transactions all be accounted for as secured borrowings. The standard requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction and requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or disclosures.

 

ASU 2014-09 – Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective prospectively, for annual and interim periods, beginning after December 15, 2016. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2014-04 – Receivables – Troubled Debt Restructurings by Creditors (“ASU 2014-04”). ASU 2014-04 clarifies when a creditor should reclassify mortgage loans collateralized by residential real estate from loans to other real estate owned. It defines when an in-substance repossession or foreclosure has occurred and when a creditor is considered to have received physical possession of residential real estate collateralizing a mortgage loan. ASU 2014-04 is effective for fiscal years beginning after December 31, 2014, and early adoption is permitted. It can be applied either prospectively or using a modified retrospective transition method. The adoption of this standard has not had a material effect on the Company’s results of operations, financial position or disclosures.

 

There have been no other significant changes to the Company’s accounting policies from the 2014 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 the Company’s present or future financial position or results of operations.

 

Acquisition Accounting, Acquired Loans

 

The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. 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 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. These loans are not considered to be impaired loans. 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.

 

The Company evaluates all of the loans purchased in conjunction with its FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30. All loans acquired in the FDIC transactions, both covered and not covered, were deemed to be impaired loans. All loans acquired, whether or not covered by FDIC loss share agreements, 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, we continue to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. We evaluate at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income. For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.

 

9
 

Covered Loans and Related Indemnification Asset

 

Because the FDIC will reimburse us for certain losses incurred on certain acquired loans, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

 

The shared-loss agreements continue to be measured on the same basis as the related indemnified loans, as prescribed by ASC Topic 805. Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over 1) the same period or 2) the life of the shared-loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements.

 

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC.  A corresponding, claim receivable is recorded until cash is received from the FDIC.  For further discussion of the Company’s acquisition and loan accounting, see Note 5, Loans Acquired.

 

Earnings Per Common Share (“EPS”)

 

Basic EPS is computed by dividing reported net income available to common shareholders by weighted average number of common shares outstanding during each period.  Diluted EPS is computed by dividing reported net income available to common shareholders by the weighted average common shares and all potential dilutive common shares outstanding during the period.

 

Following is the computation of earnings per common share for the three and six months ended June 30, 2015 and 2014:

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(In thousands, except per share data)  2015  2014  2015  2014
Net income available to common shareholders  $20,018   $9,908   $28,727   $14,261 
                     
Average common shares outstanding   29,867    16,318    26,084    16,294 
Average potential dilutive common shares   120    43    120    43 
Average diluted common shares   29,987    16,361    26,204    16,337 
                     
Basic earnings per share  $

0.67

   $0.61   $1.10   $0.88 
Diluted earnings per share (1)  $

0.67

   $0.60   $1.10   $0.87 

 

(1)EPS are computed independently for each quarter and therefore the sum of each quarterly EPS may not equal the year-to-date EPS. As a result of the large stock issuances during 2015 as part of the Company’s acquisitions, the computed independent quarterly average common shares outstanding and the computed year-to-date average common shares differ significantly. For purposes of calculating a roll-forward amount for year-to-date EPS, diluted EPS for the second quarter would require a computed amount of $0.71, producing a difference of $.04 from actual second quarter diluted EPS of $0.67. This difference is based on the direct result of the varying denominator for each period presented.

 

NOTE 2: ACQUISITIONS

 

Liberty Bancshares, Inc.

 

On February 27, 2015, the Simmons First National Corporation completed the acquisition of Liberty Bancshares, Inc. (“Liberty”), headquartered in Springfield, Missouri, including its wholly-owned bank subsidiary Liberty Bank (“LB”). Simmons issued 5,181,337 shares of its common stock valued at approximately $212.2 million as of February 27, 2015 in exchange for all outstanding shares of Liberty common stock.

 

Prior to the acquisition, Liberty conducted banking business from 23 branches located in southwest Missouri. Including the effects of the purchase accounting adjustments, the Company acquired approximately $1.1 billion in assets, approximately $780.7 million in loans including loan discounts and approximately $874.7 million in deposits. The Company completed the systems conversion and merged LB into Simmons Bank on April 24, 2015.

 

10
 

Goodwill of $95.6 million was recorded as a result of the transaction. The merger strengthened Simmons’ position in the southwest Missouri market and Simmons believes that it 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 Liberty transaction, as of the acquisition date, is as follows:

 

(In thousands)  Acquired from
Liberty
  Fair Value
Adjustments
  Fair
Value
                
Assets Acquired               
Cash and due from banks, including time deposits  $102,637   $(14)  $102,623 
Federal funds sold   7,060    -    7,060 
Investment securities   99,123    (335)   98,788 
Loans acquired, not covered by FDIC loss share   790,493    (9,835)   780,658 
Allowance for loan losses   (10,422)   10,422    - 
Premises and equipment   34,239    (3,215)   31,024 
Bank owned life insurance   16,972    -    16,972 
Core deposit intangible   699    13,857    14,556 
Other intangibles   3,063    (3,063)   - 
Other assets   17,703    (3,843)   13,860 
Total assets acquired  $1,061,567   $3,974   $1,065,541 
                
Liabilities Assumed               
Deposits:               
Non-interest bearing transaction accounts  $146,618   $-   $146,618 
Interest bearing transaction accounts and savings deposits   543,183    -    543,183 
Time deposits   184,913    -    184,913 
Total deposits   874,714    -    874,714 
FHLB borrowings   46,128    223    46,351 
Subordinated debentures   20,620    (840)   19,780 
Accrued interest and other liabilities   7,828    300    8,128 
Total liabilities assumed   949,290    (317)   948,973 
Equity   112,277    (112,277)   - 
Total equity assumed   112,277    (112,277)   - 
Total liabilities and equity assumed  $1,061,567   $(112,594)  $948,973 
Net assets acquired             116,568 
Purchase price             212,176 
Goodwill            $95,608 

 

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

 

Cash and due from banks, time deposits due from banks and federal funds sold – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. Due from banks – time were acquired with an adjustment to fair value based on rates currently available to the Company for deposits in banks with similar maturities.

 

Investment securities – Investment securities were acquired with an adjustment 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.

11
 

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, of $95.6 million.

 

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

 

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. The deferred tax asset, included in other assets, is based on 39.225% of fair value adjustments related to the acquired assets and assumed liabilities and on a calculation of future tax benefits. The Company also recorded Liberty’s remaining deferred tax assets and liabilities as of the acquisition date.

 

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 Liberty’s certificates of deposits compared to the current market rates. Based on the results of the analysis, the estimated fair value adjustment was immaterial.

 

FHLB borrowings – The fair value of Federal Home Loan Bank 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.

 

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.

 

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition and due to the number of assets acquired and liabilities assumed. Management will continue to review the estimated fair values of loans, property and equipment, intangible assets, subordinated debentures, and other assets and liabilities, and to evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired loans and subordinated debentures along with the other 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 2015 include the operating results of the acquired assets and assumed liabilities of Liberty subsequent to the acquisition date.

 

Community First Bancshares, Inc.

 

On February 27, 2015, the Simmons First National Corporation completed the acquisition of Community First Bancshares, Inc. (“Community First”), headquartered in Union City, Tennessee, including its wholly-owned bank subsidiary First State Bank (“FSB”). Simmons issued 6,552,915 shares of its common stock valued at approximately $268.3 million as of February 27, 2015, plus $9,974 in cash in exchange for all outstanding shares of Community First common stock. Simmons also issued $30.9 million of preferred stock in exchange for all outstanding shares of Community First preferred stock.

12
 

Prior to the acquisition, Community First conducted banking business from 33 branches located across Tennessee. Including the effects of the purchase accounting adjustments, the Company acquired approximately $1.9 billion in assets, approximately $1.1 billion in loans including loan discounts and approximately $1.5 billion in deposits. The Company expects to complete the systems conversion and merge FSB into Simmons Bank by September 4, 2015.

 

Goodwill of $111.3 million was recorded as a result of the transaction. The merger allowed Simmons’ entrance into the Tennessee market and will serve as a launching platform for possible expansion into adjacent areas. Simmons believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions. Further Simmons believes it can benefit from the addition of Community First's small-business lending platform while cross-selling its trust products in Community First’s market. This combination of factors 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 Community First transaction, as of the acquisition date, is as follows:

 

(In thousands)  Acquired from
Community First
  Fair Value
Adjustments
  Fair
Value
                
Assets Acquired               
Cash and due from banks  $39,848   $-   $39,848 
Federal funds sold   76,508    -    76,508 
Investment securities   570,199    (3,381)   566,818 
Loans acquired, not covered by FDIC loss share   1,163,398    (26,855)   1,136,543 
Allowance for loan losses   (14,635)   14,635    - 
Foreclosed assets not covered by FDIC loss share   747    -    747 
Premises and equipment   44,837    (2,794)   42,043 
Bank owned life insurance   22,149    -    22,149 
Goodwill   100    (100)   - 
Core deposit intangible   -    11,273    11,273 
Other intangibles   -    420    420 
Deferred tax asset   3,700    3,667    7,367 
Other assets   11,474    -    11,474 
Total assets acquired  $1,918,325   $(3,135)  $1,915,190 
                
Liabilities Assumed               
Deposits:               
Non-interest bearing transaction accounts  $103,825   $-   $103,825 
Interest bearing transaction accounts and savings deposits   995,207    -    995,207 
Time deposits   436,181    849    437,030 
Total deposits   1,535,213    849    1,536,062 
Federal funds purchased and securities sold under agreement to repurchase   16,230    -    16,230 
FHLB borrowings   143,047    1,347    144,394 
Subordinated debentures   21,754    (510)   21,244 
Accrued interest and other liabilities   8,769    601    9,370 
Total liabilities assumed   1,725,013    2,287    1,727,300 
Equity   193,312    (193,312)   - 
Total equity assumed   193,312    (193,312)   - 
Total liabilities and equity assumed  $1,918,325   $(191,025)  $1,727,300 
Net assets acquired             187,890 
Purchase price             299,204 
Goodwill            $111,314 

 

 

 

13
 

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

 

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

 

Investment securities – Investment securities were acquired with an adjustment 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.

 

Foreclosed assets held for sale – 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, of $111.3 million. Goodwill established prior to the acquisition was written off.

 

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

 

Other intangibles – This intangible asset represents the value of the relationships that Community First’s insurance subsidiary had with their customers.  The fair value of this intangible asset was estimated based on a combination of discounted cash flow methodology and a market valuation approach.

 

Deferred tax asset – The deferred tax asset is based on 39.225% of fair value adjustments related to the acquired assets and assumed liabilities and on a calculation of future tax benefits. The Company also recorded Community First’s remaining deferred tax assets and liabilities as of the acquisition date.

 

Other assets – 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 Community First’s certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference.

 

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

 

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

 

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

 

14
 

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.

 

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition and due to the number of assets acquired and liabilities assumed. Management will continue to review the estimated fair values of loans, foreclosed assets, property and equipment, intangible assets, subordinated debentures, and other assets and liabilities, and to evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired loans and subordinated debentures along with the other 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 2015 include the operating results of the acquired assets and assumed liabilities of Community First subsequent to the acquisition date.

 

Summary of Unaudited Pro forma Information

 

The unaudited pro forma information below for the three and six months ended June 30, 2015 and 2014 gives effect to the Liberty and Community First acquisitions as if the acquisitions had occurred on January 1, 2014. Pro forma earnings for the three months ended June 30, 2015 were adjusted to exclude $7.4 million of acquisition-related costs, net of tax, incurred by Simmons during 2015. Supplemental pro-forma earnings for the six months ended June 30, 2014 were also adjusted to include these charges. 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) 

Three Months Ended

June 30, 2015

 

Three Months Ended

June 30, 2014

Revenue (1)  $96,942   $95,504 
Net income  $30,043   $9,934 
Earnings per share  $1.00   $0.35 

 

(In thousands) 

Six Months Ended

June 30, 2015

 

Six Months Ended

June 30, 2014

Revenue (1)  $194,203   $185,977 
Net income  $42,090   $26,191 
Earnings per share  $1.40   $0.93 

 

(1) Net interest income plus noninterest income.

 

Consolidated year-to-date 2015 results included approximately $18.8 million of revenue and $8.3 million of net income attributable to the Liberty acquisition and $32.5 million of revenue and $8.4 million of net income attributable to the Community First acquisition.

 

Ozark Trust & Investment Corporation (Pending Acquisition)

 

On April 28, 2015, the Company entered into a definitive agreement and plan of merger (the “Agreement”) with Ozark Trust & Investment Corporation (“OTIC”), including its wholly-owned non-deposit trust company, Trust Company of the Ozarks (“TCO”). TCO is headquartered in Springfield, Missouri and has over $1 billion in assets under management. Under the terms of the Agreement, each outstanding share of common stock of OTIC held by banks or bank holding companies will be converted into the right to receive $701.9268 in cash and each share of common stock or common stock equivalents held by any other type of shareholder will be converted into the right to receive 16.7205 shares of the Company’s common stock, all subject to certain conditions and potential adjustments. The Company owns 1,000 shares of OTIC’s common stock, which it acquired through its acquisition of Liberty Bancshares, Inc. in February 2015. The transaction is valued at $20.7 million (based on the Company’s April 27, 2015 closing price). The purchase price will be allocated among the net assets of OTIC acquired as appropriate, with the remaining balance being reported as goodwill. The transaction is subject to the routine regulatory review by the Missouri Department of Finance and other customary closing conditions. The transaction is expected to close during the third quarter of 2015. Upon closing, OTIC will merge into the Company.

 

 

15
 

NOTE 3: INVESTMENT SECURITIES

 

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

 

   June 30, 2015  December 31, 2014
(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  $361,744   $1,234   $(1,463)  $361,515   $418,914   $929   $(4,055)  $415,788 
Mortgage-backed securities   27,146    130    (240)   27,036    29,743    56    (411)   29,388 
State and political subdivisions   471,631    5,151    (3,059)   473,723    328,310    7,000    (573)   334,737 
Other securities   1,075    -    -    1,075    620    -    -    620 
Total HTM  $861,596   $6,515   $(4,762)  $863,349   $777,587   $7,985   $(5,039)  $780,533 
                                         
Available-for-Sale                                        
U.S. Treasury  $4,000   $5   $-   $4,005   $4,000   $1   $(9)  $3,992 
U.S. Government agencies   236,700    138    (835)   236,003    275,381    15    (2,580)   272,816 
Mortgage-backed securities   466,060    889    (2,092)   464,857    1,579    -    (7)   1,572 
State and political subdivisions   10,961    29    (19)   10,971    6,536    7    (3)   6,540 
Other securities   32,284    422    (841)   31,865    19,985    386    (8)   20,363 
Total AFS  $750,005   $1,483   $(3,787)  $747,701   $307,481   $409   $(2,607)  $305,283 

 

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 available-for-sale securities in the table above.

 

Certain investment securities are valued at less than their historical cost.  Total fair value of these investments at June 30, 2015, was $983.1 million, which is approximately 61.1% of the Company’s combined available-for-sale and held-to-maturity investment portfolios.

 

16
 

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 June 30, 2015:

 

   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  $177,586   $(850)  $63,880   $(613)  $241,466   $(1,463)
Mortgage-backed securities   8,581    (46)   8,882    (194)   17,463    (240)
State and political subdivisions   191,420    (2,995)   3,805    (64)   195,225    (3,059)
Total HTM  $377,587   $(3,891)  $76,567   $(871)  $454,154   $(4,762)
                               
Available-for-Sale                              
U.S. Government agencies  $138,848   $(405)  $42,673   $(430)  $181,521   $(835)
Mortgage-backed securities   342,210    (2,092)   -    -    342,210    (2,092)
State and political subdivisions   3,473    (19)   -    -    3,473    (19)
Equity Securities   764    (5)   -    -    764    (5)
Other   1,000    (836)   -    -    1,000    (836)
Total AFS  $486,295   $(3,357)  $42,673   $(430)  $528,968   $(3,787)

 

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 held-to-maturity and available-for-sale 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 held to maturity until they mature, at which time the Company expects to receive full value for the securities.  Furthermore, as of June 30, 2015, management also had the ability and intent to hold the securities classified as available-for-sale 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 June 30, 2015, 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.

 

The book value of securities sold under agreements to repurchase equaled $105.7 million and $100.8 million for June 30, 2015 and December 31, 2014, respectively.

 

 

17
 

Income earned on securities for the three and six months ended June 30, 2015 and 2014, is as follows:

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(In thousands, except per share data)  2015  2014  2015  2014
Taxable:                    
Held-to-maturity  $1,307   $1,378   $2,696   $2,727 
Available-for-sale   3,172    729    4,755    1,279 
Non-taxable:                    
Held-to-maturity   2,732    2,633    5,334    5,252 
Available-for-sale   839    26    1,144    57 
Total  $8,050   $4,766   $13,929   $9,315 

 

Maturities of investment securities at June 30, 2015, are as follows:

 

   Held-to-Maturity  Available-for-Sale
(In thousands, except per share data)  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
                     
One year or less  $52,552   $52,603   $21,853   $21,833 
After one through five years   379,913    379,511    183,376    182,746 
After five through ten years   177,863    179,113    116,360    116,088 
After ten years   251,268    252,122    396,901    395,933 
Other securities (no maturity)   -    -    31,515    31,101 
Total  $861,596   $863,349   $750,005   $747,701 

 

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $819.6 million at June 30, 2015 and $520.4 million at December 31, 2014.

 

There were no realized gains and no realized losses for the three months ended June 30, 2015 and there were $2,000 of gross realized gains and $40,000 of realized losses from the sale of available for sale securities during the six months ended June 30, 2015. There were $38,000 of realized gains and no realized losses on investment securities for the three and six months ended June 30, 2014.

 

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

  

18
 

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

 

At June 30, 2015, the Company’s loan portfolio was $4.81 billion, compared to $2.74 billion at December 31, 2014.  The various categories of loans are summarized as follows:

 

(In thousands)  June 30,
2015
  December 31,
2014
           
Consumer:          
Credit cards  $174,074   $185,380 
Other consumer   160,828    103,402 
Total consumer   334,902    288,782 
Real Estate:          
Construction   199,707    181,968 
Single family residential   662,954    455,563 
Other commercial   878,109    714,797 
Total real estate   1,740,770    1,352,328 
Commercial:          
Commercial   388,869    291,820 
Agricultural   141,502    115,658 
Total commercial   530,371    407,478 
Other   5,186    5,133 
Legacy loans   2,611,229    2,053,721 
Loans acquired, not covered by FDIC loss share (net of discount) (1)   2,108,306    575,980 
Loans acquired, covered by FDIC loss share (net of discount and allowance) (1)   93,121    106,933 
Total loans  $4,812,656   $2,736,634 

______________________

 (1)See Note 5, 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, factors that influenced the Company’s judgment regarding the allowance for loan losses consists of a five-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.  The Company no longer originates or services student 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 and has no significant concentrations in its real estate loan portfolio.

 

19
 

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 purchase 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 a one or three year balloon, and the Company has recently instituted a pricing mechanism for commercial loans.  It is standard practice to require personal guaranties on all commercial loans, particularly as they relate to 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 of whether or not 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)  June 30,
2015
  December 31,
2014
           
Consumer:          
Credit cards  $321   $197 
Other consumer   308    405 
Total consumer   629    602 
Real estate:          
Construction   5,058    4,863 
Single family residential   4,672    4,010 
Other commercial   3,266    1,522 
Total real estate   12,996    10,395 
Commercial:          
Commercial   1,844    585 
Agricultural   96    456 
Total commercial   1,940    1,041 
Total  $15,565   $12,038 

 

20
 

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
                               
June 30, 2015                              
Consumer:                              
Credit cards  $539   $479   $1,018   $173,056   $174,074   $158 
Other consumer   1,650    352    2,002    158,826    160,828    194 
Total consumer   2,189    831    3,020    331,882    334,902    352 
Real estate:                              
Construction   475    2,544    3,019    196,688    199,707    357 
Single family residential   3,963    3,487    7,450    655,504    662,954    273 
Other commercial   1,903    2,193    4,096    874,013    878,109    96 
Total real estate   6,341    8,224    14,565    1,726,205    1,740,770    726 
Commercial:                              
Commercial   994    425    1,419    387,450    388,869    203 
Agricultural   187    163    350    141,152    141,502    94 
Total commercial   1,181    588    1,769    528,602    530,371    297 
Other   -    -    -    5,186    5,186    - 
Total  $9,711   $9,643   $19,354   $2,591,875   $2,611,229   $1,375 
                               
December 31, 2014                              
Consumer:                              
Credit cards  $687   $457   $1,144   $184,236   $185,380   $- 
Other consumer   1,349    447    1,796    101,606    103,402    223 
Total consumer   2,036    904    2,940    285,842    288,782    223 
Real estate:                              
Construction   760    570    1,330    180,638    181,968    177 
Single family residential   4,913    2,213    7,126    448,437    455,563    248 
Other commercial   1,987    847    2,834    711,963    714,797    - 
Total real estate   7,660    3,630    11,290    1,341,038    1,352,328    425 
Commercial:                              
Commercial   381    354    735    291,085    291,820    - 
Agricultural   119    109    228    115,430    115,658    40 
Total commercial   500    463    963    406,515    407,478    40 
Other   -    -    -    5,133    5,133    - 
Total  $10,196   $4,997   $15,193   $2,038,528   $2,053,721   $688 

 

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.

  

21
 

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
 

Average

Investment in

Impaired

Loans

 

Interest

Income

Recognized

June 30, 2015                          

Three Months Ended

June 30, 2015

 

Six Months Ended

June 30, 2015

Consumer:                                             
Credit cards  $479   $479   $-   $479   $14   $459   $7   $372   $12 
Other consumer   519    502    21    523    89    538    11    565    19 
Total consumer   998    981    21    1,002    103    997    18    937    31 
Real estate:                                             
Construction   6,104    2,650    -    2,650    -    5,066    107    5,717    197 
Single family residential   5,744    5,237    639    5,876    920    5,251    93    4,942    170 
Other commercial   4,240    3,362    127    3,489    593    3,104    48    2,563    88 
Total real estate   16,088    11,249    766    12,015    1,513    13,421    248    13,222    455 
Commercial:                                             
Commercial   1,824    2,048    1,102    3,150    363    2,054    29    1,558    54 
Agricultural   195    190    -    190    33    166    5    264    9 
Total commercial   2,019    2,238    1,102    3,3407    396    2,220    34    1,822    63 
Total  $19,105   $14,468   $1,889   $16,357   $2,012   $16,638   $300   $15,981   $549 

 

December 31, 2014                          

Three Months Ended

June 30, 2014

 

Six Months Ended

June 30, 2014

Consumer:                                             
Credit cards  $197   $197   $-   $197   $6   $446   $4   $470   $9 
Other consumer   604    610    9    619    118    778    7    823    16 
Total consumer   801    807    9    816    124    1,224    11    1,293    25 
Real estate:                                             
Construction   7,400    7,020    -    7,020    599    2,840    24    2,962    58 
Single family residential   4,442    3,948    377    4,325    899    4,254    36    4,153    81 
Other commercial   1,955    1,446    36    1,482    268    9,562    80    9,437    185 
Total real estate   13,797    12,414    413    12,827    1,766    16,656    140    16,552    324 
Commercial:                                             
Commercial   1,227    566    -    566    102    765    6    664    13 
Agricultural   501    460    -    466    83    98    1    92    2 
Total commercial   1,728    1,026    -    1,026    185    863    7    756    15 
Total  $16,326   $14,247   $422   $14,669   $2,075   $18,743   $158   $18,601   $364 

 

At June 30, 2015, and December 31, 2014, impaired loans, net of government guarantees and excluding loans acquired, totaled $16.4 million and $14.7 million, respectively.  Allocations of the allowance for loan losses relative to impaired loans were $2.0 million at June 30, 2015 and $2.1 million at December 31, 2014.  Approximately $300,000 and $549,000 of interest income was recognized on average impaired loans of $16.6 million and $16.0 million for the three and six months ended June 30, 2015.  Interest income recognized on impaired loans on a cash basis during the three and six months ended June 30, 2015 and 2014 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.

 

22
 

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
                   
June 30, 2015                              
Real estate:                              
Construction   -   $-    1   $263    1   $263 
Single-family residential   2    137    6    953    8    1,090 
Other commercial   3    1,822    2    622    5    2,444 
Total real estate   5    1,959    9    1,838    14    3,797 
Total   5   $1,959    9   $1,838    14   $3,797 
                               
December 31, 2014                              
Real estate:                              
Construction   -   $-    1   $391    1   $391 
Single-family residential   2    393    1    3    3    396 
Other commercial   3    1,840    1    614    4    2,454 
Total real estate   5    2,233    3    1,008    8    3,241 
Total   5   $2,233    3   $1,008    8   $3,241 

 

23
 

The following table presents loans that were restructured as TDRs during the three and six months ended June 30, 2015 and 2014, excluding loans acquired, segregated by class of loans.

 

            Modification Type   
(Dollars in thousands)  Number of
Loans
  Balance Prior
to TDR
  Balance at
June 30
  Change in
Maturity
Date
  Change in
Rate
  Financial Impact
on Date of
Restructure
                   
Three Months Ended June 30, 2015                              
Real Estate:                              
Single-family residential   4   $361   $361   $361   $-   $- 
Other commercial   1    19    19    19           
Total real estate   5    380    380    380    -    - 
Total   5   $380   $380   $380   $-   $- 
                               
Three Months Ended June 30, 2014                              
Commercial:                              
Commercial   1   $599   $599   $599   $-   $- 
Total commercial   1    599    599    599    -    - 
Total   1   $599   $599   $599   $-   $- 
                               
Six Months Ended June 30, 2015                              
Real estate:                              
Single-family residential   6   $709   $701   $701   $-   $- 
Other commercial   1    19    19    19           
Total real estate   7    728    720    720    -    - 
Total   7   $728   $720   $720   $-   $- 
                               
Six Months Ended June 30, 2014                              
Real estate:                              
Single-family residential   1   $1,031   $1,031   $1,031   $-   $- 
Total real estate   1    1,031    1,031    1,031    -    - 
Commercial:                              
Commercial   1    599    599    599    -    - 
Total commercial   1    599    599    599    -    - 
Total   2   $1,630   $1,630   $1,630   $-   $- 

 

During the three months ended June 30, 2015, the Company modified five loans with a recorded investment of $380,000 prior to modification which were deemed troubled debt restructuring.  The restructured loans were modified various terms, including changing the maturity date, deferring amortized principal payments and requiring interest only payments for a period of 12 months.  Based on the fair value of the collateral, no specific reserve was determined necessary for these loans.  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 six months ended June 30, 2015, the Company modified seven loans with a total recorded investment of $728,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by various terms, including changing the maturity date and deferring amortized principal payments. Based on the fair value of the collateral, no specific reserve was determined necessary for these loans. 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 June 30, 2014, the Company modified one loan with a recorded investment of $599,000 and during the six months ended June 30, 2014, the Company modified two loans with a total recorded investment of $1,630,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by changing various terms, including changing the maturity date and deferring amortized principal payments. Based on the fair value of the collateral, no specific reserve was determined necessary for these loans. 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.

 

24
 

There were no loans for which a payment default occurred during the six months ended June 30, 2015 and 2014, and that had been modified as a TDR within 12 months or less of the payment default, excluding loans acquired.  We define 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 $4,756,500 and $9,268,321 at June 30, 2015 and 2014, respectively, for which other real estate owned (“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 June 30, 2015, the Company had $1,537,000 of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At June 30, 2015, the Company had $4,599,000 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, Kansas, Missouri and Tennessee.

 

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 harsher 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.

 

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·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, including loans covered by FDIC loss share agreements, are evaluated using this internal grading system. Loans acquired through FDIC-assisted transactions are accounted for in pools. All of the non-covered loan pools accounted for under ASC Topic 310-30 were considered satisfactory (Risk Ratings 1 – 4) at June 30, 2015 and December 31, 2014, respectively. Loans acquired in the Liberty, Community First, Metropolitan and Delta Trust acquisitions are evaluated individually and include purchased credit impaired loans of $32.9 million and $22.3 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of June 30, 2015 and December 31, 2014, respectively. Of the remaining loans acquired in the Liberty, Community First, Metropolitan and Delta Trust transactions and accounted for under ASC Topic 310-20, $29.8 million and $16.6 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at June 30, 2015 and December 31, 2014, respectively. Loans acquired, covered by loss share agreements, have additional protection provided by the FDIC. During the 2014 quarterly impairment testing on the estimated cash flows of the credit impaired loans, the Company established that some of the pools covered by loss share from our FDIC-assisted transactions had experienced material projected credit deterioration. As a result, the Company established a $1.0 million allowance for loan losses on covered loans by recording a provision for loan losses of $0.4 million (net of FDIC-loss share adjustments) during the period ended December 31, 2014. There was no further projected credit deterioration and no addition to the allowance for covered loans during the period ended June 30, 2015. See Note 5, Loans Acquired, for further discussion of the acquired loans, loan pools and loss sharing agreements.

 

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 covered and non-covered loans acquired in FDIC-assisted transactions, were $102.1 million and $82.1 million, as of June 30, 2015 and December 31, 2014, respectively.

 

 

 

26
 

The following table presents a summary of loans by credit risk rating as of June 30, 2015 and December 31, 2014, segregated by class of loans.

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
June 30, 2015                              
Consumer:                              
Credit cards  $173,595   $-   $479   $-   $-   $174,074 
Other consumer   160,243    -    577    8    -    160,828 
Total consumer   333,838    -    1,056    8    -    334,902 
Real estate:                              
Construction   192,697    514    6,496    -    -    199,707 
Single family residential   651,355    1,616    9,808    175    -    662,954 
Other commercial   846,907    5,206    25,996    -    -    878,109 
Total real estate   1,690,959    7,336    42,300    175    -    1,740,770 
Commercial:                              
Commercial   377,144    1,374    10,313    38    -    388,869 
Agricultural   140,631    700    171    -    -    141,502 
Total commercial   517,775    2,074    10,484    38    -    530,371 
Other   5,148    -    38    -    -    5,186 
Loans acquired, not covered by FDIC loss share   2,046,360    13,901    46,151    1,855    39    2,108,306 
Loans acquired, covered by FDIC loss share   93,121    -    -    -    -    93,121 
Total  $4,687,201   $23,311   $100,029   $2,076   $39   $4,812,656 

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
December 31, 2014                              
Consumer:                              
Credit cards  $184,923   $-   $457   $-   $-   $185,380 
Other consumer   102,515    5    839    43    -    103,402 
Total consumer   287,438    5    1,296    43    -    288,782 
Real estate:                              
Construction   176,825    84    5,059    -    -    181,968 
Single family residential   446,040    1,776    7,665    82    -    455,563 
Other commercial   698,329    7,074    9,394    -    -    714,797 
Total real estate   1,321,194    8,934    22,118    82    -    1,352,328 
Commercial:                              
Commercial   271,017    1,544    19,248    11    -    291,820 
Agricultural   115,106    20    532    -    -    115,658 
Total commercial   386,123    1,564    19,780    11    -    407,478 
Other   5,133    -    -    -    -    5,133 
Loans acquired, not covered by FDIC loss share   535,728    1,435    36,958    1,854    5    575,980 
Loans acquired, covered by FDIC loss share   106,933    -    -    -    -    106,933 
Total  $2,642,549   $11,938   $80,152   $1,990   $5   $2,736,634 

 

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Net (charge-offs)/recoveries for the three and six months ended June 30, 2015 and 2014, excluding loans acquired, segregated by class of loans, were as follows:

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(In thousands)  2015  2014  2015  2014
Consumer:                    
Credit cards  $(561)  $(510)  $(1,133)  $(1,055)
Student loans   -    (20)   -    (29)
Other consumer   (179)   (273)   (266)   (291)
Total consumer   (740)   (803)   (1,399)   (1,375)
Real estate:                    
Construction   (29)   (24)   (29)   (444)
Single-family residential   (74)   (47)   (325)   (358)
Other commercial   (184)   (11)   (214)   (7)
Total real estate   (287)   (82)   (568)   (809)
Commercial:                    
Commercial   -    (170)   (76)   (220)
Agriculture   9    -    9    (18)
Total commercial   9    (170)   (67)   (238)
Total  $(1,018)  $(1,055)  $(2,034)  $(2,422)

 

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) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) 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.

 

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The following table details activity in the allowance for loan losses, excluding loans acquired, by portfolio segment for the three and six months ended June 30, 2015.  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 June 30, 2015                         
Balance, beginning of period (2)   $6,870   $15,553   $5,527   $1,233   $29,183 
Provision for loan losses (1)   (1,569)   3,311    352    308    2,402 
Charge-offs   -    (333)   (802)   (366)   (1,501)
Recoveries   9    46    241    187    483 
Net recoveries (charge-offs)   9    (287)   (561)   (179)   (1,018)
Balance, June 30, 2015 (2)  $5,310   $18,577   $5,318   $1,362   $30,567 
                          
 Six Months Ended June 30, 2015                         
Balance, beginning of period (2)  $6,962   $15,161   $5,445   $1,460   $29,028 
Provision for loan losses (1)   (1,585)   3,984    1,006    168    3,573 
Charge-offs   (245)   (626)   (1,587)   (586)   (3,044)
Recoveries </