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EX-32.3 - EXHIBIT 32.3 - SIMMONS FIRST NATIONAL CORPexh_323.htm
EX-32.2 - EXHIBIT 32.2 - SIMMONS FIRST NATIONAL CORPexh_322.htm
EX-32.1 - EXHIBIT 32.1 - SIMMONS FIRST NATIONAL CORPexh_321.htm
EX-31.3 - EXHIBIT 31.3 - SIMMONS FIRST NATIONAL CORPexh_313.htm
EX-31.2 - EXHIBIT 31.2 - SIMMONS FIRST NATIONAL CORPexh_312.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-12.1 - EXHIBIT 12.1 - SIMMONS FIRST NATIONAL CORPexh_121.htm
EX-3.2 - EXHIBIT 3.2 - SIMMONS FIRST NATIONAL CORPexh_32.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 September 30, 2016 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.    ☒  Yes   ☐  No

 

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

☒  Yes   ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, 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 ☐        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   ☒  No

 

The number of shares outstanding of the Registrant’s Common Stock as of October 31, 2016, was 31,270,522.

 

 

 

Simmons First National Corporation

Quarterly Report on Form 10-Q

September 30, 2016

 

 

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 8-52
   Report of Independent Registered Public Accounting Firm 53
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 54-79
Item 3. Quantitative and Qualitative Disclosure About Market Risk 80-81
Item 4. Controls and Procedures 82
        
Part II: Other Information   
Item 1A. Risk Factors 82
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 82
Item 6. Exhibits 83-86
        
Signatures 87

 

 

 

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

 

Simmons First National Corporation

Consolidated Balance Sheets

September 30, 2016 and December 31, 2015

 

(In thousands, except share data)  September 30,
2016
  December 31,
2015
    (Unaudited)      
ASSETS          
Cash and non-interest bearing balances due from banks  $112,572   $97,656 
Interest bearing balances due from banks   324,951    154,606 
Federal funds sold   17,000    -- 
Cash and cash equivalents   454,523    252,262 
Interest bearing balances due from banks - time   4,393    14,107 
Investment securities          
Held-to-maturity   496,594    705,373 
Available-for-sale   1,024,206    821,407 
Total investments   1,520,800    1,526,780 
Mortgage loans held for sale   28,069    30,265 
Assets held in trading accounts   2,969    4,422 
Loans:          
Legacy loans   3,943,089    3,246,454 
Allowance for loan losses   (34,094)   (31,351)
Loans acquired, net of discount and allowance   1,458,198    1,672,901 
Net loans   5,367,193    4,888,004 
Premises and equipment   192,523    193,618 
Premises held for sale   6,732    923 
Foreclosed assets   30,396    44,820 
Interest receivable   27,390    25,793 
Bank owned life insurance   138,298    131,536 
Goodwill   348,769    327,686 
Other intangible assets   54,268    53,237 
Other assets   50,669    66,205 
Total assets  $8,226,992   $7,559,658 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Deposits:          
Non-interest bearing transaction accounts  $1,473,420   $1,280,234 
Interest bearing transaction accounts and savings deposits   3,815,939    3,485,845 
Time deposits   1,328,022    1,320,017 
Total deposits   6,617,381    6,086,096 
Federal funds purchased and securities sold under agreements to repurchase   124,289    99,398 
Other borrowings   215,276    162,289 
Subordinated debentures   60,290    60,570 
Accrued interest and other liabilities   62,615    74,450 
Total liabilities   7,079,851    6,482,803 
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 December 31, 2015   --    30,852 
Common stock, Class A, $0.01 par value; 120,000,000 shares authorized; 31,267,614 and 30,278,432 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   313    303 
Surplus   710,132    662,378 
Undivided profits   434,579    385,987 
Accumulated other comprehensive income (loss)   2,117    (2,665)
Total stockholders’ equity   1,147,141    1,076,855 
Total liabilities and stockholders’ equity  $8,226,992   $7,559,658 

 

See Condensed Notes to Consolidated Financial Statements.

 

3
 

Simmons First National Corporation

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2016 and 2015

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2016  2015  2016  2015
   (Unaudited)  (Unaudited)
INTEREST INCOME                    
Loans  $65,078   $76,432   $194,765   $197,857 
Investment securities   7,774    8,335    24,779    22,264 
Mortgage loans held for sale   299    291    872    813 
Federal funds sold and other   267    141    524    690 
TOTAL INTEREST INCOME   73,418    85,199    220,940    221,624 
                     
INTEREST EXPENSE                    
Deposits   3,732    4,158    11,162    11,297 
Federal funds purchased and securities sold under agreements to repurchase   59    55    183    177 
Other borrowings   1,048    1,812    3,114    4,014 
Subordinated debentures   516    498    1,603    1,292 
TOTAL INTEREST EXPENSE   5,355    6,523    16,062    16,780 
                     
NET INTEREST INCOME   68,063    78,676    204,878    204,844 
Provision for loan losses   8,294    1,615    15,733    5,792 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   59,769    77,061    189,145    199,052 
                     
NON-INTEREST INCOME                    
Trust income   3,873    2,215    11,160    6,536 
Service charges on deposit accounts   8,771    8,488    23,748    22,881 
Other service charges and fees   1,840    2,672    5,320    7,102 
Mortgage lending income   5,760    3,446    15,429    9,156 
Investment banking income   1,131    663    2,999    1,808 
Debit and credit card fees   7,825    6,879    22,713    19,013 
Bank owned life insurance income   606    748    2,429    2,066 
Gain on sale of securities   315    40    4,403    2 
Net (loss) on assets covered by FDIC loss share agreements   --    (9,085)   --    (14,812)
Other income   6,755    7,006    15,066    12,262 
TOTAL NON-INTEREST INCOME   36,876    23,072    103,267    66,014 
                     
NON-INTEREST EXPENSE                    
Salaries and employee benefits   31,784    37,000    99,660    98,720 
Occupancy expense, net   4,690    4,812    14,151    13,440 
Furniture and equipment expense   4,272    4,202    12,296    10,621 
Other real estate and foreclosure expense   1,849    2,297    3,782    3,694 
Deposit insurance   1,136    1,013    3,380    2,979 
Merger related costs   1,524    857    1,989    12,523 
Other operating expenses   17,179    17,314    53,102    47,189 
TOTAL NON-INTEREST EXPENSE   62,434    67,495    188,360    189,166 
                     
INCOME BEFORE INCOME TAXES   34,211    32,638    104,052    75,900 
Provision for income taxes   10,782    10,963    34,209    25,395 
                     
NET INCOME   23,429    21,675    69,843    50,505 
Preferred stock dividends   --    77    24    180 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS  $23,429   $21,598   $69,819   $50,325 
BASIC EARNINGS PER SHARE  $0.77   $0.72   $2.29   $1.84 
DILUTED EARNINGS PER SHARE  $0.76   $0.72   $2.28   $1.83 

 

See Condensed Notes to Consolidated Financial Statements.

 

4
 

Simmons First National Corporation

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2016 and 2015

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2016  2015  2016  2015
   (Unaudited)  (Unaudited)
NET INCOME  $23,429   $21,675   $69,843   $50,505 
                     
OTHER COMPREHENSIVE INCOME                    
Unrealized holding (losses) gains arising during the period on available-for-sale securities   (3,175)   6,816    12,271    6,673 
Less: Reclassification adjustment for realized gains included in net income   315    40    4,403    2 
Other comprehensive (loss) gain, before tax effect   (3,490)   6,776    7,868    6,671 
Less: Tax effect of other comprehensive (loss) gain   (1,369)   2,658    3,086    2,617 
                     
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME   (2,121)   4,118    4,782    4,054 
                     
COMPREHENSIVE INCOME  $21,308   $25,793   $74,625   $54,559 

 

See Condensed Notes to Consolidated Financial Statements.

 

5
 

Simmons First National Corporation

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015

 

(In thousands)  September 30,
2016
  September 30,
2015
   (Unaudited)
OPERATING ACTIVITIES          
Net income  $69,843   $50,505 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Depreciation and amortization   12,229    10,884 
Provision for loan losses   15,733    5,792 
Gain on sale of available-for-sale securities   (4,403)   (2)
Net accretion of investment securities and assets not covered by FDIC loss share   (22,863)   (26,760)
Net amortization on borrowings   314    262 
Stock-based compensation expense   2,679    2,011 
Net accretion on assets covered by FDIC loss share   --    (2,709)
Loss on sale of premises and equipment, net of impairment   2,841    1,958 
Gain on sale of foreclosed assets held for sale   (1,731)   (3,205)
Deferred income taxes   1,070    (3,811)
FDIC loss share indemnification loss   --    7,476 
Gain on sale of banking operation   --    (2,110)
Increase in cash surrender value of bank owned life insurance   (2,429)   (2,066)
Originations of mortgage loans held for sale   (472,902)   (598,336)
Proceeds from sale of mortgage loans held for sale   475,098    604,045 
Changes in assets and liabilities:          
Interest receivable   (799)   (367)
Assets held in trading accounts   1,453    695 
Other assets   16,680    (2,528)
Accrued interest and other liabilities   (13,950)   15,528 
Income taxes payable   (2,286)   14,993 
Net cash provided by operating activities   76,577    72,255 
           
INVESTING ACTIVITIES          
Net originations of loans not covered by FDIC loss share   (140,240)   (230,589)
Net collections of loans covered by FDIC loss share   --    23,646 
Decrease in due from banks - time   9,714    7,685 
Purchases of premises and equipment, net   (7,950)   (5,388)
Proceeds from sale of foreclosed assets held for sale   24,095    34,387 
Proceeds from sale of foreclosed assets held for sale, covered by FDIC loss share   --    2,858 
Proceeds from sale of available-for-sale securities   249,079    31,702 
Proceeds from maturities of available-for-sale securities   137,832    372,511 
Purchases of available-for-sale securities   (498,011)   (264,636)
Proceeds from maturities of held-to-maturity securities   215,846    206,894 
Purchases of held-to-maturity securities   (6,162)   (56,073)
Proceeds from bank owned life insurance death benefits   2,043    -- 
Purchases of bank owned life insurance   (143)   (140)
Settlement of FDIC loss share agreements   --    2,368 
Cash received on FDIC loss share   --    3,980 
Cash paid on sale of banking operations, net of cash received   --    (68,273)
Cash received in business combinations, net of cash paid   106,419    201,029 
Net cash provided by investing activities   92,522    261,961 
           
FINANCING ACTIVITIES          
Net change in deposits   21,428    (103,929)
Repayments of subordinated debentures   (594)   -- 
Dividends paid on preferred stock   (24)   (180)
Dividends paid on common stock   (21,227)   (20,059)
Net change in other borrowed funds   48,940    (132,001)
Net change in federal funds purchased and securities sold under agreements to repurchase   11,658    (16,379)
Net shares issued under stock compensation plans   3,833    3,421 
Redemption of preferred stock   (30,852)   -- 
Net cash provided by (used in) financing activities   33,162    (269,127)
           
INCREASE IN CASH AND CASH EQUIVALENTS   202,261    65,089 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   252,262    335,909 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $454,523   $400,998 

 

See Condensed Notes to Consolidated Financial Statements.

 

6
 

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2016 and 2015

 

(In thousands, except share data)  Preferred Stock  Common
Stock
  Surplus  Accumulated
Other
Comprehensive
Income (Loss)
  Undivided
Profits
  Total
                   
Balance, December 31, 2014  $--   $181   $156,568   $(1,336)  $338,906   $494,319 
Comprehensive income   --    --    --    4,054    50,505    54,559 
Stock issued for employee stock purchase plan – 6,528 shares   --    --    226    --    --    226 
Stock-based compensation plans, net – 144,923 shares   --    1    5,205    --    --    5,206 
Stock issued for Community First acquisition – 30,852 preferred shares: 6,552,915 common shares   30,852    65    268,277    --    --    299,194 
Stock issued for Liberty Bank acquisition – 5,181,337 common shares   --    52    212,124    --    --    212,176 
Dividends on preferred stock   --    --    --    --    (180)   (180)
Dividends on common stock – $0.69 per share   --    --    --    --    (20,059)   (20,059)
                               
Balance, September 30, 2015 (Unaudited)   30,852    299    642,400    2,718    369,172    1,045,441 
Comprehensive income   --    --    --    (5,383)   23,859    18,476 
Stock-based compensation plans, net –951shares   --    1    2,114    --    --    2,115 
Stock issued for Ozark Trust acquisition – 339,290 common shares   --    3    17,864    --    --    17,867 
Dividends on preferred stock                       (77)   (77)
Cash dividends – $0.23 per share   --    --    --    --    (6,967)   (6,967)
                               
Balance, December 31, 2015   30,852    303    662,378    (2,665)   385,987    1,076,855 
Comprehensive income   --    --    --    4,782    69,843    74,625 
Stock issued for employee stock purchase plan – 15,735 shares   --    --    586    --    --    586 
Stock-based compensation plans, net –137,706 shares   --    2    5,924    --    --    5,926 
Stock issued for Citizens National acquisition – 835,741 common shares   --    8    41,244    --    --    41,252 
Preferred stock redeemed   (30,852)   --    --    --    --    (30,852)
Dividends on preferred stock   --    --    --    --    (24)   (24)
Dividends on common stock – $0.72 per share   --    --    --    --    (21,227)   (21,227)
                               
Balance, September 30, 2016 (Unaudited)  $--   $313   $710,132   $2,117   $434,579   $1,147,141 

 

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, 2015, 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 2015 filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Recently Issued Accounting Pronouncements

 

ASU 2016-15 – Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is designed to address the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard also provides guidance on when an entity should separate or aggregate cash flows based on the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2016-13 – Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP (“Accounting Principles Generally Accepted in the United States of America”) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2016-09 – Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2016-02 – Leases (“ASU 2016-02”). ASU 2016-02 establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance results in a more consistent representation of the rights and obligations arising from leases by requiring lessees to recognize the lease asset and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

8
 

ASU 2016-01 – Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 makes changes primarily affecting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2015-16 – Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”).  ASU 2015-16 requires entities to recognize measurement period adjustments during the reporting period in which the adjustments are determined.  The income effects, if any, of a measurement period adjustment are cumulative and are to be reported in the period in which the adjustment to a provisional amount is determined.  Also, ASU 2015-16 requires presentation on the face of the income statement or in the notes, the effect of the measurement period adjustment as if the adjustment had been recognized at acquisition date.  ASU 2015-16 is effective for fiscal periods beginning after December 15, 2016 and should be applied prospectively to measurement period adjustments that occur after the effective date. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

ASU 2015-14 – Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 is an update to the effective date in 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 2015-14 is effective prospectively, for annual and interim periods, beginning after December 15, 2017. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.

 

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 results of operations, financial position or disclosures.

 

ASU 2015-02 – Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements of ASU 810 by changing the consolidation analysis required under GAAP. The revised guidance amends the consolidation analysis based on certain fee arrangements or relationships to the reporting entity and, for limited partnerships, requires entities to consider the limited partner’s rights relative to the general partner. ASU 2015-02 became effective for annual and interim periods beginning after December 15, 2015. 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 2015 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 acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the 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, other than purchased impaired loans, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. The Company evaluates purchased impaired loans in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

 

9
 

For impaired loans accounted for under ASC Topic 310-30, the Company continues to estimate cash flows expected to be collected on these loans. The Company evaluates at each balance sheet date whether the present value of the 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, the Company adjusts the amount of accretable yield recognized on a prospective basis over the remaining life of the loan.

 

Covered Loans and Related Indemnification Asset

 

In September 2015, we entered into an agreement with the FDIC to terminate all loss share agreements which were entered into in 2010 and 2012 in conjunction with the Company’s acquisition of substantially all of the assets (“covered assets”) and assumption of substantially all of the liabilities of four failed banks in FDIC-assisted transactions. Under the early termination, all rights and obligations of the Company and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated.

 

Under the terms of the agreement, the FDIC made a net payment of $2,368,000 to the Bank as consideration for the early termination of the loss share agreements. The early termination was recorded in the Company’s financial statements by removing the FDIC Indemnification Asset, receivable from FDIC, the FDIC True-up liability and recording a one-time, pre-tax charge of $7,476,000. As a result, the Company reclassified loans previously covered by FDIC loss share to loans acquired, not covered by FDIC loss share. Foreclosed assets previously covered by FDIC loss share were reclassified to foreclosed assets not covered by FDIC loss share.

 

For further discussion of our acquisition and loan accounting, see Note 2, Acquisitions, and 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 nine months ended September 30, 2016 and 2015:

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2016  2015  2016  2015
Net income available to common shareholders  $23,429   $21,598   $69,819   $50,325 
                     
Average common shares outstanding   30,621    29,927    30,434    27,379 
Average potential dilutive common shares   223    119    223    119 
Average diluted common shares   30,844    30,046    30,657    27,498 
                     
Basic earnings per share  $0.77   $0.72   $2.29   $1.84 
Diluted earnings per share (1) (2)  $0.76   $0.72   $2.28   $1.83 

______________________________

(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 2015 year-to-date EPS, diluted EPS for the third quarter of 2015 would require a computed amount of $0.74, producing a difference of $.02 from actual third quarter 2015 diluted EPS of $0.72. This difference is based on the direct result of the varying denominator for each period presented.
(2)Stock options to purchase 61,395 and 326,565 shares for the three and nine months ended September 30, 2016 and 2015, respectively, were not included in the diluted EPS calculation because the exercise price of those options exceeded the average market price.

 

10
 
NOTE 2:ACQUISITIONS

 

Liberty Bancshares, Inc.

 

On February 27, 2015, 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”). The Company 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 24 branches located in southwest Missouri. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $1.1 billion in assets, including approximately $780.7 million in loans (inclusive of loan discounts) and approximately $874.7 million in deposits. The Company completed the systems conversion and merged LB into Simmons First National Bank on April 24, 2015.

 

Goodwill of $95.2 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the southwest Missouri market and the Company is 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 is not 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    (3,112)   14,591 
Total assets acquired  $1,061,567   $4,705   $1,066,272 
                
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    (510)   20,110 
Accrued interest and other liabilities   7,828    300    8,128 
Total liabilities assumed   949,290    13    949,303 
Equity   112,277    (112,277)   -- 
Total equity assumed   112,277    (112,277)   -- 
Total liabilities and equity assumed  $1,061,567   $(112,264)  $949,303 
Net assets acquired             116,969 
Purchase price             212,176 
Goodwill            $95,207 

 

11
 

During 2015 the Company finalized its analysis of the acquired loans and subordinated debentures along with the other acquired assets and assumed liabilities. 

 

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, 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”). The Company 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. The Company also issued $30.9 million of preferred stock in exchange for all outstanding shares of Community First preferred stock. On January 29, 2016, the Company redeemed all of the preferred stock, including accrued and unpaid dividends.

 

Prior to the acquisition, Community First conducted banking business from 33 branches located across Tennessee. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $1.9 billion in assets, including approximately $1.1 billion in loans (inclusive of loan discounts) and approximately $1.5 billion in deposits. The Company completed the systems conversion and merged FSB into Simmons First National Bank on September 4, 2015.

 

Goodwill of $110.4 million was recorded as a result of the transaction. The merger allowed the Company’s entrance into the Tennessee market and served as a launching platform for possible expansion into adjacent areas. The Company is able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions. Further the Company will 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 is not deductible for tax purposes.

 

12
 

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    3,538    7,238 
Other assets   11,474    --    11,474 
Total assets acquired  $1,918,325   $(3,264)  $1,915,061 
                
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    674    143,721 
Subordinated debentures   21,754    (840)   20,914 
Accrued interest and other liabilities   8,769    601    9,370 
Total liabilities assumed   1,725,013    1,284    1,726,297 
Equity   193,312    (193,312)   -- 
Total equity assumed   193,312    (193,312)   -- 
Total liabilities and equity assumed  $1,918,325   $(192,028)  $1,726,297 
Net assets acquired             188,764 
Purchase price             299,204 
Goodwill            $110,440 

 

During 2015 the Company finalized its analysis of the acquired loans and subordinated debentures along with the other acquired assets and assumed liabilities.

 

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.

 

13
 

Ozark Trust & Investment Corporation

 

On October 29, 2015, Simmons First National Corporation completed the acquisition of Ozark Trust & Investment Corporation (“Ozark Trust”), headquartered in Springfield, Missouri, including its wholly-owned non-deposit trust company, Trust Company of the Ozarks (“TCO”). Simmons issued 339,290 shares of its common stock valued at approximately $17.9 million as of October 29, 2015, plus $5.8 million in cash in exchange for all outstanding shares of Ozark Trust common stock.

 

Prior to the acquisition, Ozark Trust had over $1 billion in assets under management. The Company owned 1,000 shares of Ozark Trust’s common stock, which it acquired through its acquisition of Liberty in February 2015. The purchase price is allocated among the net assets of Ozark Trust acquired as appropriate, with the remaining balance being reported as goodwill.

 

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

 

(In thousands)  Acquired from
Ozark Trust
  Fair Value
Adjustments
  Fair
Value
          
Assets Acquired               
Cash  $1,756   $--   $1,756 
Investment securities   241    --    241 
Premises and equipment   1,126    418    1,544 
Other intangibles   --    9,733    9,733 
Other assets   752    869    1,621 
Total assets acquired  $3,875   $11,020   $14,895 
                
Liabilities Assumed               
Deferred tax liability   63    4,175    4,238 
Accrued and other liabilities   302    --    302 
Total liabilities assumed   365    4,175    4,540 
Equity   3,510    (3,510)   -- 
Total equity assumed   3,510    (3,510)   -- 
Total liabilities and equity assumed  $3,875   $665   $4,540 
Net assets acquired             10,355 
Purchase price             23,623 
Goodwill            $13,268 

 

During 2016 the Company finalized its analysis of the acquired loans and subordinated debentures along with the other acquired assets and assumed liabilities.

 

The Company’s operating results for 2015 include the operating results of the acquired assets and assumed liabilities of Ozark Trust subsequent to the acquisition date.

 

Citizens National Bank

 

On September 9, 2016, Simmons First National Corporation completed the acquisition of Citizens National Bank (“Citizens”), headquartered in Athens, Tennessee. The Company issued 835,741 shares of its common stock valued at approximately $41.3 million as of September 9, 2016 plus $35.0 million in cash in exchange for all outstanding shares of Citizens common stock.

 

Prior to the acquisition, Citizens conducted banking business from 9 branches located in east Tennessee. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $585.2 million in assets, including approximately $340.8 million in loans (inclusive of loan discounts) and approximately $509.9 million in deposits. The Company completed the systems conversion and merged Citizens into Simmons Bank on October 21, 2016.

 

Goodwill of $21.8 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the east Tennessee market and the Company is 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 be deductible for tax purposes.

 

14
 

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

 

(In thousands)  Acquired from
Citizens
  Fair Value
Adjustments
  Fair
Value
          
Assets Acquired               
Cash and due from banks  $131,467   $--   $131,467 
Federal funds sold   10,000    --    10,000 
Investment securities   61,987    1    61,988 
Loans acquired   350,361    (9,538)   340,823 
Allowance for loan losses   (4,313)   4,313    -- 
Foreclosed assets   4,960    (1,518)   3,442 
Premises and equipment   6,746    1,339    8,085 
Bank owned life insurance   6,632    --    6,632 
Core deposit intangible   --    4,941    4,941 
Other intangibles   --    500    500 
Other assets   17,364    (12)   17,352 
Total assets acquired  $585,204   $26   $585,230 
                
Liabilities Assumed               
Deposits:               
Non-interest bearing transaction accounts  $109,281   $--   $109,281 
Interest bearing transaction accounts and savings deposits   204,912    --    204,912 
Time deposits   195,664    --    195,664 
Total deposits   509,857    --    509,857 
Securities sold under agreement to repurchase   13,233    --    13,233 
FHLB borrowings   4,000    47    4,047 
Accrued interest and other liabilities   3,558    --    3,558 
Total liabilities assumed   530,648    47    530,695 
Equity   54,556    (54,556)   -- 
Total equity assumed   54,556    (54,556)   -- 
Total liabilities and equity assumed  $585,204   $(54,509)  $530,695 
Net assets acquired             54,535 
Purchase price             76,300 
Goodwill            $21,765 

 

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

 

The Company’s operating results for 2016 include the operating results of the acquired assets and assumed liabilities of Citizens subsequent to the acquisition date.

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

 

Cash and due from banks, 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 if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

 

15
 

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. Goodwill established prior to the acquisitions, if applicable, was written off.

 

Core deposit intangible – This intangible asset represents the value of the relationships that the acquired banks had with their deposit customers.  The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits. Core deposit intangible established prior to the acquisitions, if applicable, was written off.

 

Other intangibles – These intangible assets represent the value of the relationships that Community First’s insurance subsidiary and Ozark Trust had with their customers.  The fair value of these intangible assets was estimated based on a combination of discounted cash flow methodology and a market valuation approach. Other intangibles established prior to the acquisitions, if applicable, was written off.

 

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 Liberty’s, Community First’s and Ozark Trust’s remaining deferred tax assets and liabilities as of the acquisition date.

 

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

 

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date.  The Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material.

 

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 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.

 

16
 
NOTE 3:INVESTMENT SECURITIES

 

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

 

   September 30, 2016  December 31, 2015
(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  $80,849   $217   $(41)  $81,025   $237,139   $582   $(1,395)  $236,326 
Mortgage-backed securities   21,453    361    (12)   21,802    24,774    86    (290)   24,570 
State and political subdivisions   391,495    11,813    (22)   403,286    440,676    9,138    (123)   449,691 
Other securities   2,797    --    --    2,797    2,784    --    --    2,784 
Total HTM  $496,594   $12,391   $(75)  $508,910   $705,373   $9,806   $(1,808)  $713,371 
                                         
Available-for-Sale                                        
U.S. Treasury  $63,974   $11   $--   $63,985   $4,000   $--   $(6)  $3,994 
U.S. Government agencies   148,244    670    (133)   148,781    121,017    118    (898)   120,237 
Mortgage-backed securities   694,589    5,644    (485)   699,748    650,619    937    (4,130)   647,426 
State and political subdivisions   67,080    468    (529)   67,019    9,762    112    --    9,874 
Other securities   43,825    863    (15)   44,673    39,594    420    (138)   39,876 
Total AFS  $1,017,712   $7,656   $(1,162)  $1,024,206   $824,992   $1,587   $(5,172)  $821,407 

 

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 September 30, 2016, was $339.7 million, which is approximately 22.3% of the Company’s combined available-for-sale and held-to-maturity investment portfolios.

 

17
 

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 September 30, 2016:

 

   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  $30,987   $(13)  $19,972   $(28)  $50,959   $(41)
Mortgage-backed securities   339    (1)   1,618    (11)   1,957    (12)
State and political subdivisions   14,982    (21)   330    (1)   15,312    (22)
Total HTM  $46,308   $(35)  $21,920   $(40)  $68,228   $(75)
                               
Available-for-Sale                              
U.S. Government agencies  $102,360   $(133)  $--   $--   $102,360   $(133)
Mortgage-backed securities   134,133    (485)             134,133    (485)
State and political subdivisions   34,900    (529)   --    --    34,900    (529)
Other securities   --    --    60    (15)   60    (15)
Total AFS  $271,393   $(1,147)  $60   $(15)  $271,453   $(1,162)

 

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 September 30, 2016, 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 September 30, 2016, 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 $123.8 million and $96.8 million for September 30, 2016 and December 31, 2015, respectively.

 

18
 

Income earned on securities for the three and nine months ended September 30, 2016 and 2015, is as follows:

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2016  2015  2016  2015
Taxable:            
Held-to-maturity  $771   $1,531   $3,094   $4,227 
Available-for-sale   4,005    3,369    12,931    8,124 
Non-taxable:                    
Held-to-maturity   2,617    2,942    8,162    8,276 
Available-for-sale   381    493    592    1,637 
Total  $7,774   $8,335   $24,779   $22,264 

 

Maturities of investment securities at September 30, 2016, are as follows:

 

   Held-to-Maturity  Available-for-Sale
(In thousands)  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
             
One year or less  $34,442   $34,478   $68,882   $68,895 
After one through five years   149,702    150,779    97,523    97,451 
After five through ten years   116,101    119,142    16,274    16,452 
After ten years   174,896    182,709    97,719    98,087 
Securities not due on a single maturity date   21,453    21,802    694,589    699,748 
Other securities (no maturity)   --    --    42,725    43,573 
Total  $496,594   $508,910   $1,017,712   $1,024,206 

 

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $915.7 million at September 30, 2016 and $840.4 million at December 31, 2015.

 

There were $315,000 of gross realized gains and no realized losses from the sale of available for sale securities during the three months ended September 30, 2016 and there were $4.4 million of realized gains and no realized losses from the sale of available for sale securities during the nine months ended September 30, 2016. There were $43,000 of gross realized gains and $3,000 of realized losses for the three months ended September 30, 2015 and there were $45,000 of gross realized gains and $43,000 of realized losses from the sale of available for sale securities during the nine months ended September 30, 2015.

 

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

 

19
 

NOTE 4:LOANS AND ALLOWANCE FOR LOAN LOSSES

 

At September 30, 2016, the Company’s loan portfolio was $5.401 billion, compared to $4.919 billion at December 31, 2015.  The various categories of loans are summarized as follows:

 

(In thousands)  September 30,
2016
  December 31,
2015
       
Consumer:          
Credit cards  $175,032   $177,288 
Other consumer   275,947    208,380 
Total consumer   450,979    385,668 
Real Estate:          
Construction   304,082    279,740 
Single family residential   841,958    696,180 
Other commercial   1,521,132    1,229,072 
Total real estate   2,667,172    2,204,992 
Commercial:          
Commercial   607,738    500,116 
Agricultural   203,529    148,563 
Total commercial   811,267    648,679 
Other   13,671    7,115 
Loans   3,943,089    3,246,454 
Loans acquired, net of discount and allowance (1)   1,458,198    1,672,901 
Total loans  $5,401,287   $4,919,355 

______________________________

(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, a factor 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.  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.

 

20
 

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 one or three year balloons, 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)  September 30,
2016
  December 31,
2015
       
Consumer:          
Credit cards  $310   $212 
Other consumer   1,406    442 
Total consumer   1,716    654 
Real estate:          
Construction   3,636    4,955 
Single family residential   11,084    5,453 
Other commercial   15,721    4,420 
Total real estate   30,441    14,828 
Commercial:          
Commercial   3,404    1,968 
Agricultural   1,582    264 
Total commercial   4,986    2,232 
Total  $37,143   $17,714 

 

21
 

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
                   
September 30, 2016                              
Consumer:                              
Credit cards  $694   $446   $1,140   $173,892   $175,032   $137 
Other consumer   1,741    865    2,606    273,341    275,947    -- 
Total consumer   2,435    1,311    3,746    447,233    450,979    137 
Real estate:                              
Construction   2,230    1,150    3,380    300,702    304,082    -- 
Single family residential   3,919    5,501    9,420    832,538    841,958    7 
Other commercial   9,118    3,999    13,117    1,508,015    1,521,132    -- 
Total real estate   15,267    10,650    25,917    2,641,255    2,667,172    7 
Commercial:                              
Commercial   1,369    1,886    3,255    604,483    607,738    -- 
Agricultural   284    1,507    1,791    201,738    203,529    -- 
Total commercial   1,653    3,393    5,046    806,221    811,267    -- 
Other   --    --    --    13,671    13,671    -- 
Total  $19,355   $15,354   $34,709   $3,908,380   $3,943,089   $144 
                               
December 31, 2015                              
Consumer:                              
Credit cards  $639   $479   $1,118   $176,170   $177,288   $267 
Other consumer   1,879    648    2,527    205,853    208,380    374 
Total consumer   2,518    1,127    3,645    382,023    385,668    641 
Real estate:                              
Construction   1,328    4,511    5,839    273,901    279,740    -- 
Single family residential   4,856    3,342    8,198    687,982    696,180    364 
Other commercial   869    3,302    4,171    1,224,901    1,229,072    25 
Total real estate   7,053    11,155    18,208    2,186,784    2,204,992    389 
Commercial:                              
Commercial   3,427    637    4,064    496,052    500,116    90 
Agricultural   285    243    528    148,035    148,563    56 
Total commercial   3,712    880    4,592    644,087    648,679    146 
Other   108    93    201    6,914    7,115    15 
Total  $13,391   $13,255   $26,646   $3,219,808   $3,246,454   $1,191 

 

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.

 

22
 

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
September 30, 2016                 Three Months Ended
September 30, 2016
  Nine Months Ended
September 30, 2016
Consumer:                           
Credit cards  $446   $446   $--   $446   $--   $439   $--   $340   $10 
Other consumer   1,469    1,404    3    1,407    1    1,324    14    882    32 
Total consumer   1,915    1,850    3    1,853    1    1,763    14    1,222    42 
Real estate:                                             
Construction   4,472    3,056    579    3,635    155    4,474    44    4,692    170 
Single family residential   11,813    9,610    1,728    11,338    259    10,897    119    8,762    317 
Other commercial   23,130    15,934    151    16,085    101    18,981    178    15,113    547 
Total real estate   39,415    28,600    2,458    31,058    515    34,352    341    28,567    1,034 
Commercial:                                             
Commercial   7,174    3,325    2,633    5,958    64    4,402    59    3,256    118 
Agricultural   2,594    1,582    --    1,582    --    1,604    16    1,003    36 
Total commercial   9,768    4,907    2,633    7,540    64    6,006    75    4,259    154 
Total  $51,098   $35,357   $5,094   $40,451   $580   $42,121   $430   $34,048   $1,230 
                                              
December 31, 2015                 Three Months Ended
September 30, 2015
  Nine Months Ended
September 30, 2015
Consumer:                           
Credit cards  $479   $479   $--   $479   $7   $450   $8   $394   $20 
Other consumer   459    423    19    442    85    612    13    592    33 
Total consumer   938    902    19    921    92    1,062    21    986    53 
Real estate:                                             
Construction   5,678    1,636    3,318    4,954    441    6,230    109    5,532    306 
Single family residential   5,938    4,702    945    5,647    1,034    4,945    108    5,023    278 
Other commercial   5,688    4,328    88    4,416    832    3,175    68    2,830    157 
Total real estate   17,304    10,666    4,351    15,017    2,307    14,350    285    13,385    741 
Commercial:                                             
Commercial   2,656    1,654    334    1,988    387    1,488    39    1,673    93 
Agricultural   264    264    --    264    45    180    5    252    14 
Total commercial   2,920    1,918    334    2,252    432    1,668    44    1,925    107 
Total  $21,162   $13,486   $4,704   $18,190   $2,831   $17,080   $350   $16,296   $901 

 

At September 30, 2016, and December 31, 2015, impaired loans, net of government guarantees and excluding loans acquired, totaled $40.5 million and $18.2 million, respectively.  Allocations of the allowance for loan losses relative to impaired loans were $580,000 and $2.8 million at September 30, 2016 and December 31, 2015, respectively. Approximately $430,000 and $1.2 million of interest income was recognized on average impaired loans of $42.1 million and $34.0 million for the three and nine months ended September 30, 2016.  Interest income recognized on impaired loans on a cash basis during the three and nine months ended September 30, 2016 and 2015 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.

 

23
 

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
                   
September 30, 2016                              
Consumer:                              
Other consumer   --   $--    2   $11    2   $11 
Total consumer   --    --    2    11    2    11 
Real estate:                              
Construction   --    --    1    22    1    22 
Single-family residential   2    136    31    2,543    33    2,679 
Other commercial   27    11,683    1    66    28    11,749 
Total real estate   29    11,819    33    2,631    62    14,450 
Commercial:                              
Commercial   14    1,785    5    303    19    2,088 
Total commercial   14    1,785    5    303    19    2,088 
Total   43   $13,604    40   $2,945    83   $16,549 
                               
December 31, 2015                              
Consumer:                              
Other consumer   --   $--    1   $13    1   $13 
Total consumer   --    --    1    13    1    13 
Real estate:                              
Construction   --    --    1    253    1    253 
Single-family residential   2    137    11    1,335    13    1,472 
Other commercial   4    2,894    1    597    5    3,491 
Total real estate   6    3,031    13    2,185    19    5,216 
Commercial:                              
Commercial   --    --    5    332    5    332 
Total commercial   --    --    5    332    5    332 
Total   6   $3,031    19   $2,530    25   $5,561 

 

24
 

The following table presents loans that were restructured as TDRs during the three and nine months ended September 30, 2016 and 2015, excluding loans acquired, segregated by class of loans.

 

            Modification Type   
(Dollars in thousands)  Number of
Loans
  Balance Prior
to TDR
  Balance at
September 30
  Change in
Maturity
Date
  Change in
Rate
  Financial Impact
on Date of
Restructure
                   
Three Months Ended September 30, 2016                              
Consumer:                              
Other consumer   1   $47   $8   $8   $--   $-- 
Total consumer   1    47    8    8    --    -- 
Real Estate:                              
Single-family residential   13    742    694    694    --    -- 
Other commercial   2    835    834    66    768    -- 
Total real estate   15    1,577    1,528    760    768    -- 
Commercial:                              
Commercial   5    1,387    1,387    1,387    --    -- 
Total commercial   5    1,387    1,387    1,387    --    -- 
Total   21   $3,011   $2,923   $2,155   $768   $-- 
                               
Three Months Ended September 30, 2015                              
Consumer:                              
Other consumer   1   $14   $14   $14   $--   $-- 
Total consumer   1    14    14    14    --    -- 
Real Estate:                              
Single-family residential   2    249    207    207    --    -- 
Other commercial   5    347    339    339    --    -- 
Total real estate   7    596    546    546    --    -- 
Total   8   $610   $560   $560   $--   $-- 
                               
Nine Months Ended September 30, 2016                              
Consumer:                              
Other consumer   2   $50   $11   $11   $--   $-- 
Total consumer   2    50    11    11    --    -- 
Real estate:                              
Single-family residential   22    1,538    1,487    933    554    -- 
Other commercial   27    9,797    9,765    8,633    1,132    -- 
Total real estate   49    11,335    11,252    9,566    1,686    -- 
Commercial:                              
Commercial   16    1,987    1,959    1,959    --    -- 
Total commercial   16    1,987    1,959    1,959    --    -- 
Total   67   $13,372   $13,222   $11,536   $1,686   $-- 
                               
Nine Months Ended September 30, 2015                              
Consumer:                              
Other consumer   1   $14   $14   $14   $--   $-- 
Total consumer   1    14    14    14    --    -- 
Real estate:                              
Single-family residential   8    958    914    914    --    -- 
Other commercial   6    366    339    339    --    -- 
Total real estate   14    1,324    1,253    1,253    --    -- 
Total   15   $1,338   $1,267   $1,267   $--   $-- 

 

 

25
 

During the three months ended September 30, 2016, the Company modified 21 loans with a recorded investment of $3.0 million prior to modification which were deemed troubled debt restructuring.  The restructured loans were modified by deferring amortized principal payments, changing the maturity date, changing the interest rate and requiring interest only payments for a period of 12 months.  Based on the fair value of the collateral, a specific reserve of $78,000 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 nine months ended September 30, 2016, the Company modified 67 loans with a recorded investment of $13.4 million prior to modification which was deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity date, changing the interest rate and requiring interest only payments for a period of 12 months. Based on the fair value of the collateral, a specific reserve of $402,000 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 September 30, 2015, the Company modified eight loans with a recorded investment of $610,000 and during the nine months ended September 30, 2015, the Company modified fifteen loans with a total recorded investment of $1,338,000 prior to modification which were deemed troubled debt restructuring.  The restructured loans were modified by changing 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, a $113,000 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.

 

There was one consumer loan for which a payment default occurred during the nine months ended September 30, 2016, that had been modified as a TDR within 12 months or less of the payment default. A charge off of $39,000 was recorded for this loan. There were no loans during the nine months ended September 30, 2015 for which there was a payment default. 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 $166,500 and $167,000 at September 30, 2016 and 2015, 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 September 30, 2016, the Company had $2,034,000 of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At September 30, 2016, the Company had $5,875,000 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.

 

26
 

 

Risk Rate 5 – Special Mention - A loan in this category has potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date.  Special Mention loans are not adversely classified (although they are "criticized") and do not expose an institution to sufficient risk to warrant adverse classification.  Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet.  Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

 

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

 

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

 

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

 

Loans acquired are evaluated using this internal grading system. Loans acquired are evaluated individually and include purchased credit impaired loans of $20.4 million and $23.5 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of September 30, 2016 and December 31, 2015, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $52.8 million and $49.9 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at September 30, 2016 and December 31, 2015, respectively.

 

Loans acquired, covered by loss share agreements, had additional protection provided by the FDIC prior to the termination of the loss share agreements. During the 2014 quarterly impairment testing on the estimated cash flows of the credit impaired loans, the Company established that some of the loans covered by loss share from our FDIC-assisted transactions had experienced material projected credit deterioration. As a result, the Company established a $954,000 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 2015. The $954,000 allowance was reclassified to allowance on acquired non-covered loans subsequent to the agreement with the FDIC to terminate the loss share agreements. See Note 5, Loans Acquired, for further discussion of the acquired loans and loss sharing agreements.

 

27
 

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

 

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8.  Loans may be classified, but not considered impaired, due to one of the following reasons:  (1) The Company has established minimum dollar amount thresholds for loan impairment testing.  Loans rated 6 – 8 that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans.  (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans.  Total classified loans, excluding loans accounted for under ASC Topic 310-30, were $178.7 million and $153.7 million, as of September 30, 2016 and December 31, 2015, respectively.

 

28
 

The following table presents a summary of loans by credit risk rating as of September 30, 2016 and December 31, 2015, segregated by class of loans. Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
September 30, 2016                              
Consumer:                              
Credit cards  $174,586   $--   $446   $--   $--   $175,032 
Other consumer   274,278    27    1,628    14    --    275,947 
Total consumer   448,864    27    2,074    14    --    450,979 
Real estate:                              
Construction   296,866    152    7,048    16    --    304,082 
Single family residential   814,788    3,765    23,244    161    --    841,958 
Other commercial   1,464,760    4,468    51,904    --    --    1,521,132 
Total real estate   2,576,414    8,385    82,196    177    --    2,667,172 
Commercial:                              
Commercial   587,652    1,306    18,760    20    --    607,738 
Agricultural   200,958    265    2,306    --    --    203,529 
Total commercial   788,610    1,571    21,066    20    --    811,267 
Other   13,671    --    --    --    --    13,671 
Loans acquired   1,361,041    23,960    71,515    1,682    --    1,458,198 
Total  $5,188,600   $33,943   $176,851   $1,893   $--   $5,401,287 

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
December 31, 2015                              
Consumer:                              
Credit cards  $176,809   $--   $479   $--   $--   $177,288 
Other consumer   207,069    --    1,262    49    --    208,380 
Total consumer   383,878    --    1,741    49    --    385,668 
Real estate:                              
Construction   270,386    319    9,019    16    --    279,740 
Single family residential   679,484    2,701    13,824    171    --    696,180 
Other commercial   1,178,817    5,404    44,261    590    --    1,229,072 
Total real estate   2,128,687    8,424    67,104    777    --    2,204,992 
Commercial:                              
Commercial   487,563    2,760    9,787    6    --    500,116 
Agricultural   147,788    --    775    --    --    148,563 
Total commercial   635,351    2,760    10,562    6    --    648,679 
Other   7,022    --    93    --    --    7,115 
Loans acquired   1,590,384    9,150    69,219    3,689    459    1,672,901 
Total  $4,745,322   $20,334   $148,719   $4,521   $459   $4,919,355 

 

 

29
 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

30
 

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2016.  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 September 30, 2016                         
Balance, beginning of period (2)  $7,832   $19,635   $3,748   $2,308   $33,523 
Provision for loan losses (1)   680    6,066    501    832    8,079 
Charge-offs   (284)   (6,297)   (699)   (600)   (7,880)
Recoveries   12    55    199    106    372 
Net charge-offs   (272)   (6,242)   (500)   (494)   (7,508)
Balance, September 30, 2016 (2)  $8,240   $19,459   $3,749   $2,646   $34,094 
                          
Nine Months Ended September 30, 2016                         
Balance, beginning of period (2)  $5,985   $19,522   $3,893   $1,951   $31,351 
Provision for loan losses (1)   4,961    7,009    1,422    1,819    15,211 
Charge-offs   (3,043)   (7,350)   (2,260)   (1,482)   (14,135)
Recoveries   337    278    694    358    1,667 
Net charge-offs   (2,706)   (7,072)   (1,566)   (1,124)   (12,468)
Balance, September 30, 2016 (2)  $8,240   $19,459   $3,749   $2,646   $34,094 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $64   $515   $--   $1   $580 
Loans collectively evaluated for impairment   8,176    18,944    3,749    2,645    33,514 
Balance, September 30, 2016 (2)  $8,240   $19,459   $3,749   $2,646   $34,094 

______________________________

(1)Provision for loan losses of $215,000 and $522,000 attributable to loans acquired was excluded from this table for the three and nine months ended September 30, 2016 (total provision for loan losses for the three and nine months ended September 30, 2016 was $8,294,000 and $15,733,000). The $215,000 and $522,000 was subsequently charged-off, resulting in no increase in the ending balance in the allowance related to loans acquired.
(2)Allowance for loan losses at September 30, 2016, June 30, 2016 and December 31, 2015 includes $954,000 allowance for loans acquired. The total allowance for loan losses at September 30, June 30, 2016 and December 31, 2015 was $35,048,000, $34,477,000 and $32,305,000, respectively.

 

31
 

Activity in the allowance for loan losses for the three and nine months ended September 30, 2015 was as follows:

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                
Three Months Ended September 30, 2015                         
Balance, beginning of period (2)  $5,310   $18,577   $5,318   $1,362   $30,567 
Provision for loan losses (1)   725    794    (835)   798    1,482 
Charge-offs   (516)   (109)   (763)   (597)   (1,985)
Recoveries   --    25    213    78    316 
Net charge-offs   (516)   (84)   (550)   (519)   (1,669)
Balance, September 30, 2015 (2)  $5,519   $19,287   $3,933   $1,641   $30,380 
                          
Nine Months Ended September 30, 2015                         
Balance, beginning of period (2)  $6,962   $15,161   $5,445   $1,460   $29,028 
Provision for loan losses (1)   (860)   4,778    171    966    5,055 
Charge-offs   (761)   (735)   (2,350)   (1,183)   (5,029)
Recoveries   178    83    667    398    1,326 
Net charge-offs   (583)   (652)   (1,683)   (785)   (3,703)
Balance, September 30, 2015 (2)  $5,519   $19,287   $3,933   $1,641   $30,380 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $626   $2,040   $7   $124   $2,797 
Loans collectively evaluated for impairment   4,893    17,247    3,926    1,517    27,583 
Balance, September 30, 2015 (2)  $5,519   $19,287   $3,933   $1,641   $30,380 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $432   $2,307   $7   $85   $2,831 
Loans collectively evaluated for impairment   5,553    17,215    3,886    1,866    28,520 
Balance, December 31, 2015 (3)  $5,985   $19,522   $3,893   $1,951   $31,351 

______________________________

(1)Provision for loan losses of $ 133,000 and $737,000 attributable to loans acquired was excluded from this table for the three and nine months ended September 30, 2015 (total provision for loan losses for the three and nine months ended September 30, 2015 was $1,615,000 and $5,792,000). The $133,000 and $737,000 was subsequently charged-off, resulting in no increase to the ending balance in the allowance related to loans acquired.
(2)Allowance for loan losses at September 30, 2015, June 30, 2015 and December 31, 2014 includes $954,000 allowance for loans acquired (not shown in the table above). The total allowance for loan losses at September 30, 2015, June 30, 2015 and December 31, 2014 was $31,334,000, $31,521,000 and $29,982,000, respectively.
(3)Allowance for loan losses at December 31, 2015 includes $954,000 allowance for loans acquired (not shown in the table above). The total allowance for loan losses December 31, 2015 was $32,305,000.

 

32
 

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

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                
September 30, 2016                         
Loans individually evaluated for impairment  $7,540   $31,058   $446   $1,407   $40,451 
Loans collectively evaluated for impairment   803,727    2,636,114    174,586    288,211    3,902,638 
Balance, end of period  $811,267   $2,667,172   $175,032   $289,618   $3,943,089 
                          
December 31, 2015                         
Loans individually evaluated for impairment  $2,252   $15,017   $479   $442   $18,190 
Loans collectively evaluated for impairment   646,427    2,189,975    176,809    215,053    3,228,264 
Balance, end of period  $648,679   $2,204,992   $177,288   $215,495   $3,246,454 

 

NOTE 5:LOANS ACQUIRED

 

On September 15, 2015, the Company entered into an agreement with the FDIC to terminate all loss share agreements which were entered into in 2010 and 2012 in conjunction with the Company’s acquisition of substantially all of the assets (“covered assets”) and assumption of substantially all of the liabilities of four failed banks in FDIC-assisted transactions. Under the early termination, all rights and obligations of the Company and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated.

 

Under the terms of the agreement, the FDIC made a net payment of $2,368,000 to the bank as consideration for the early termination of the loss share agreements. The early termination was recorded in the Company’s financial statements by removing the FDIC Indemnification Asset, receivable from FDIC, the FDIC True-up liability and recording a one-time, pre-tax charge of $7,476,000. As a result, the Company reclassified loans previously covered by FDIC loss share to loans acquired, not covered by FDIC loss share. Foreclosed assets previously covered by FDIC loss share were reclassified to foreclosed assets not covered by FDIC loss share.

 

During the third quarter of 2016, the Company evaluated $340.1 million of net loans ($348.8 million gross loans less $8.7 million discount) purchased in conjunction with the acquisition of Citizens, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $757,000 of net loans ($1.6 million gross loans less $848,000 discount) purchased in conjunction with the acquisition of Citizens for impairment in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

 

During the first quarter of 2015, the Company evaluated $769.9 million of net loans ($774.8 million gross loans less $4.9 million discount) purchased in conjunction with the acquisition of Liberty, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $10.7 million of net loans ($15.7 million gross loans less $5.0 million discount) purchased in conjunction with the acquisition of Liberty for impairment in accordance with the provisions of ASC Topic 310-30.

 

Also during the first quarter of 2015, the Company evaluated $1.13 billion of net loans ($1.15 billion gross loans less $23.7 million discount) purchased in conjunction with the acquisition of Community First, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $7.0 million of net loans ($10.1 million gross loans less $3.1 million discount) purchased in conjunction with the acquisition of Community First for impairment in accordance with the provisions of ASC Topic 310-30.

 

33
 

The following table reflects the carrying value of all acquired loans as of September 30, 2016 and December 31, 2015:

 

   Loans Acquired
(in thousands)  September 30,
2016
  December 31,
2015
       
Consumer:          
Other consumer  $51,237   $75,606 
Total consumer   51,237    75,606 
Real estate:          
Construction   60,307    77,119 
Single family residential   461,346    501,002 
Other commercial   771,858    854,068 
Total real estate   1,293,511    1,432,189 
Commercial:          
Commercial   109,562    154,533 
Agricultural   3,888    10,573 
Total commercial   113,450    165,106 
           
Total loans acquired (1)  $1,458,198   $1,672,901 

______________________________

(1)Loans acquired are reported net of a $954,000 allowance at September 30, 2016 and December 31, 2015.

 

Nonaccrual acquired loans, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 4, Loans an Allowance for Loan Losses, for discussion of nonaccrual loans):

 

(In thousands)  September 30,
2016
  December 31,
2015
       
Consumer:          
Other consumer  $115   $71 
Total consumer   115    71 
Real estate:          
Construction   1,580    783 
Single family residential   9,237    7,795 
Other commercial   9,007    6,435 
Total real estate   19,824    15,013 
Commercial:          
Commercial   1,347    3,859 
Agricultural   121    8 
Total commercial   1,468    3,867 
Total  $21,407   $18,951 

 

 

34
 

An age analysis of past due acquired loans segregated by class of loans, is as follows (see Note 4, Loans and Allowance for Loan Losses, for discussion of past due loans):

 

(In thousands)  Gross
30-89 Days
Past Due
  90 Days
or More
Past Due
  Total
Past Due
  Current  Total
Loans
  90 Days
Past Due &
Accruing
                   
September 30, 2016                              
Consumer:                              
Other consumer  $432   $73   $505   $50,732   $51,237   $8 
Total consumer   432    73    505    50,732    51,237    8 
Real estate:                              
Construction   152    7,348    7,500    52,807    60,307    -- 
Single family residential   4,520    4,706    9,226    452,120    461,346    744 
Other commercial   1,841    12,422    14,263    757,595    771,858    47 
Total real estate   6,513    24,476    30,989    1,262,522    1,293,511    791 
Commercial:                              
Commercial   458    2,316    2,774    106,788    109,562    14 
Agricultural   --    33    33    3,855    3,888    -- 
Total commercial   458    2,349    2,807    110,643    113,450    14 
                               
Total  $7,403   $26,898   $34,301   $1,423,897   $1,458,198   $813 
                               
December 31, 2015                              
Consumer:                              
Other consumer  $826   $122   $948   $74,658   $75,606   $57 
Total consumer   826    122    948    74,658    75,606    57 
Real estate:                              
Construction   736    9,449    10,185    66,934    77,119    410 
Single family residential   9,493    4,850    14,343    486,659    501,002    1,246 
Other commercial   12,910    7,810    20,720    833,348    854,068    203 
Total real estate   23,139    22,109    45,248    1,386,941    1,432,189    1,859 
Commercial:                              
Commercial   1,999    2,334    4,333