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, 2015  Commission File Number 000-06253

 

SIMMONS FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

870-541-1000

(Registrant's telephone number, including area code)

 

Not Applicable

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

 

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

 

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

S Yes   £ No

 

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

 

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐

 

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

 

The number of shares outstanding of the Registrant’s Common Stock as of October 26, 2015, was 29,939,652.

 

 

 

Simmons First National Corporation

Quarterly Report on Form 10-Q

September 30, 2015

 

 

Table of Contents

 

    Page
Part I: Financial Information  
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets 3
  Consolidated Statements of Income 4
  Consolidated Statements of Comprehensive Income 5
  Consolidated Statements of Cash Flows 6
  Consolidated Statements of Stockholders' Equity 7
  Condensed Notes to Consolidated Financial Statements 8-51
  Report of Independent Registered Public Accounting Firm 52
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 53-77
Item 3. Quantitative and Qualitative Disclosure About Market Risk 77-79
Item 4. Controls and Procedures 79
     
Part II: Other Information  
Item 1A. Risk Factors 79
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 80
Item 6. Exhibits 80-85
     
Signatures 86

 

 

Part I:       Financial Information

Item 1.      Financial Statements (Unaudited)

 

Simmons First National Corporation

Consolidated Balance Sheets

September 30, 2015 and December 31, 2014

 

(In thousands, except share data)  September 30,
2015
  December 31,
2014
   (Unaudited)   
ASSETS          
Cash and non-interest bearing balances due from banks  $106,678   $54,347 
Interest bearing balances due from banks   284,645    281,562 
Federal funds sold   9,675    - 
Cash and cash equivalents   400,998    335,909 
Interest bearing balances due from banks - time   16,504    - 
Investment securities:          
Held-to-maturity   776,294    777,587 
Available-for-sale   703,347    305,283 
Total investments   1,479,641    1,082,870 
Mortgage loans held for sale   15,556    21,265 
Assets held in trading accounts   6,292    6,987 
Loans:          
Legacy loans   2,839,278    2,053,721 
Allowance for loan losses   (30,380)   (29,028)
Loans acquired, not covered by FDIC loss share (net of discount and allowance)   2,013,816    575,980 
Loans acquired, covered by FDIC loss share (net of discount and allowance)   -    106,933 
Net loans   4,822,714    2,707,606 
FDIC indemnification asset   -    22,663 
Premises and equipment   190,182    122,246 
Premises held for sale   923    6,846 
Foreclosed assets not covered by FDIC loss share   48,073    44,856 
Foreclosed assets covered by FDIC loss share   -    11,793 
Interest receivable   26,873    16,774 
Bank owned life insurance   118,922    77,592 
Goodwill   314,282    108,095 
Other intangible assets   44,904    22,526 
Other assets   73,830    55,326 
Total assets  $7,559,694   $4,643,354 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Deposits:          
Non-interest bearing transaction accounts  $1,212,724   $889,260 
Interest bearing transaction accounts and savings deposits   3,521,840    2,006,271 
Time deposits   1,355,236    965,187 
Total deposits   6,089,800    3,860,718 
Federal funds purchased and securities sold under agreements to repurchase   110,437    110,586 
Other borrowings   173,426    114,682 
Subordinated debentures   61,906    20,620 
Accrued interest and other liabilities   78,684    42,429 
Total liabilities   6,514,253    4,149,035 
Stockholders’ equity:          
Preferred stock, 40,040,000 shares authorized; Series A, $0.01 par value, $1,000 liquidation value per share; 30,852 shares issued and outstanding at September 30, 2015   30,852    - 
Common stock, Class A, $0.01 par value; 120,000,000 shares authorized; 29,939,252 and 18,052,488 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively   299    181 
Surplus   642,400    156,568 
Undivided profits   369,172    338,906 
Accumulated other comprehensive income (loss)   2,718    (1,336)
Total stockholders’ equity   1,045,441    494,319 
Total liabilities and stockholders’ equity  $7,559,694   $4,643,354 

 

 

See Condensed Notes to Consolidated Financial Statements.

3 

 

 

Simmons First National Corporation

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2015 and 2014

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2015  2014  2015  2014
   (Unaudited)  (Unaudited)
INTEREST INCOME                    
Loans  $76,432   $40,082   $197,857   $118,834 
Federal funds sold   15    12    118    16 
Investment securities   8,335    4,717    22,264    14,032 
Mortgage loans held for sale   291    269    813    506 
Assets held in trading accounts   4    3    11    13 
Interest bearing balances due from banks   122    132    561    691 
TOTAL INTEREST INCOME   85,199    45,215    221,624    134,092 
                     
INTEREST EXPENSE                    
Deposits   4,158    2,232    11,297    6,737 
Federal funds purchased and securities sold under agreements to repurchase   55    55    177    194 
Other borrowings   1,812    996    4,014    2,995 
Subordinated debentures   498    160    1,292    477 
TOTAL INTEREST EXPENSE   6,523    3,443    16,780    10,403 
                     
NET INTEREST INCOME   78,676    41,772    204,844    123,689 
Provision for loan losses   1,615    1,128    5,792    3,638 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   77,061    40,644    199,052    120,051 
                     
NON-INTEREST INCOME                    
Trust income   2,215    1,838    6,536    4,929 
Service charges on deposit accounts   8,488    6,238    22,881    19,098 
Other service charges and fees   3,089    808    8,044    2,490 
Mortgage lending income   3,446    1,812    9,156    3,885 
Investment banking income   663    284    1,808    620 
Debit and credit card fees   6,879    5,769    19,013    17,213 
Bank owned life insurance income   748    411    2,066    1,117 
Gain (loss) on sale of securities   40    (18)   2    20 
Net (loss) on assets covered by FDIC loss share agreements   (9,085)   (3,744)   (14,812)   (17,303)
Other income   7,006    2,637    12,262    8,619 
TOTAL NON-INTEREST INCOME   23,489    16,035    66,956    40,688 
                     
NON-INTEREST EXPENSE                    
Salaries and employee benefits   37,417    20,892    99,662    64,338 
Occupancy expense, net   4,812    3,204    13,440    10,338 
Furniture and equipment expense   4,202    2,363    10,621    6,592 
Other real estate and foreclosure expense   2,297    1,864    3,694    3,112 
Deposit insurance   1,013    877    2,979    2,630 
Merger related costs   857    3,628    12,523    6,255 
Other operating expenses   17,314    11,526    47,189    35,492 
TOTAL NON-INTEREST EXPENSE   67,912    44,354    190,108    128,757 
                     
INCOME BEFORE INCOME TAXES   32,638    12,325    75,900    31,982 
Provision for income taxes   10,963    3,537    25,395    8,933 
                     
NET INCOME   21,675    8,788    50,505    23,049 
Preferred stock dividends   77    -    180    - 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS  $21,598   $8,788   $50,325   $23,049 
BASIC EARNINGS PER SHARE  $0.72   $0.52   $1.84   $1.40 
DILUTED EARNINGS PER SHARE  $0.72   $0.52   $1.83   $1.39 

 

See Condensed Notes to Consolidated Financial Statements. 

4 

 

 

Simmons First National Corporation

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2015 and 2014

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2015  2014  2015  2014
   (Unaudited)  (Unaudited)
NET INCOME  $21,675   $8,788   $50,505   $23,049 
                     
OTHER COMPREHENSIVE INCOME                    
Unrealized holding gains (losses) arising during the period on available-for-sale securities   6,816    (911)   6,673    1,748 
Less: Reclassification adjustment for realized gains (losses) included in net income   40    (18)   2    20 
Other comprehensive gain (loss), before tax effect   6,776    (893)   6,671    1,728 
Less: Tax effect of other comprehensive gain (loss)   2,658    (350)   2,617    678 
                     
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)   4,118    (543)   4,054    1,050 
                     
COMPREHENSIVE INCOME  $25,793   $8,245   $54,559   $24,099 

 

 

See Condensed Notes to Consolidated Financial Statements.

 

5 

 

 

Simmons First National Corporation

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015 and 2014

 

(In thousands)  September 30,
2015
  September 30,
2014
OPERATING ACTIVITIES   (Unaudited)
Net income  $50,505   $23,049 
Items not requiring (providing) cash:          
Depreciation and amortization   10,884    5,221 
Provision for loan losses   5,792    3,638 
Net (accretion) of investment securities and assets not covered by FDIC loss share   (26,760)   (2,768)
Net amortization on borrowings   262    - 
Stock-based compensation expense   2,011    962 
Net accretion on assets covered by FDIC loss share   (2,709)   (1,541)
Deferred income taxes   (3,881)   (4,456)
FDIC loss share indemnification loss   7,476    - 
(Gain) loss on sale of available-for-sale securities   (2)   (20)
Gain on sale of banking operation   (2,110)   - 
Gain on sale of premises and equipment   -    -
Loss (gain) on sale of premises and equipment, net of impairment   1,958    (3,156) 
Bank owned life insurance income   (2,066)   (1,117)
Changes in:          
Interest receivable   (367)   (873)
Mortgage loans held for sale   5,709    (12,509)
Assets held in trading accounts   695    2,159 
Other assets   (2,528)   (4,893)
Accrued interest and other liabilities   15,598    11,706 
Income taxes payable   14,993    (3,328)
Net cash provided by operating activities   75,460    12,074 
INVESTING ACTIVITIES          
Net originations of loans not covered by FDIC loss share   (230,589)   (96,670)
Net collections of loans covered by FDIC loss share   23,646    41,649 
Decrease in due from banks - time   

7,685

    - 
Proceeds from sale of student loans   -    22,136 
(Purchases) proceeds from sale of premises and equipment, net   (5,388)   10,288 
Proceeds from sale of foreclosed assets held for sale   

31,182

    19,733 
Proceeds from sale of foreclosed assets held for sale, covered by FDIC loss share   

2,858

    10,853 
Proceeds from sale of short-term investment securities   -    1,504 
Proceeds from sale of available-for-sale securities   31,702    13,159 
Proceeds from maturities of available-for-sale securities   372,511    122,041 
Purchases of available-for-sale securities   (264,636)   (200,284)
Proceeds from maturities of held-to-maturity securities   206,894    325,895 
Purchases of held-to-maturity securities   (56,073)   (381,175)
Purchase of bank owned life insurance   (140)   (6,326)
Settlement of FDIC loss share agreements   

2,368

    - 
Cash received on FDIC loss share   3,980    13,325 
Cash paid on sale of banking operations, net of cash received   (68,273)   - 
Cash received in business combinations, net of cash paid   201,029    11,343 
Net cash provided by (used in) investing activities   258,756    (92,529)
FINANCING ACTIVITIES          
Net change in deposits   (103,929)   (144,014)
Dividends paid on preferred stock   (180)   - 
Dividends paid on common stock   (20,059)   (11,441)
Net change in other borrowed funds   (132,001)   (4,671)
Net change in federal funds purchased and securities sold under agreements to repurchase   (16,379)   (6,010)
Net shares issued under stock compensation plans   3,421    1,507 
Net cash used in financing activities   (269,127)   (164,629)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   65,089    (245,084)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   335,909    539,380 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $400,998   $294,296 

 

 

See Condensed Notes to Consolidated Financial Statements. 

 

6 

 

 

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2015 and 2014

 

(In thousands, except share data) 

Preferred

Stock

  Common
Stock
  Surplus  Accumulated
Other
Comprehensive
Income (Loss)
  Undivided
Profits
  Total
                               
Balance, December 31, 2013  $-   $162   $88,095   $(3,002)  $318,577   $403,832 
Comprehensive income:                              
Net income   -    -    -    -    23,049    23,049 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $678   -    -    -    1,050    -    1,050 
Comprehensive income                            24,099 
Stock issued as bonus shares – 92,630 shares   -    1    441    -    -    442 
Vesting bonus shares, net of forfeitures – (1,560 shares)   -    -    962    -    -    962 
Stock issued for employee stock purchase plan – 4,897 shares   -    -    118    -    -    118 
Exercise of stock options – 45,160 shares   -    1    1,131    -    -    1,132 
Securities exchanged under stock option plan – (4,546 shares)   -    -    (185)   -    -    (185)
Stock issued for Delta Trust & Bank acquisition – 1,629,515 shares   -    16    65,030    -    -    65,046 
Cash dividends – $0.66 per share   -    -    -    -    (11,441)   (11,441)
                               
Balance, September 30, 2014 (Unaudited)   -    180    155,592    (1,952)   330,185    484,005 
Comprehensive income:                              
Net income   -    -    -    -    12,639    12,639 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $397   -    -    -    616    -    616 
Comprehensive income   -    -    -    -    -    13,255 
Stock issued as bonus shares – 41,250 shares   -    -    -    -    -    - 
Vesting bonus shares, net of forfeitures – (1,560 shares)   -    -    461    -    -    461 
Exercise of stock options – 19,560 shares   -    1    543    -    -    544 
Securities exchanged under stock option plan – (674 shares)   -    -    (28)   -    -    (28)
Cash dividends – $0.22 per share   -    -    -    -    (3,918)   (3,918)
                               
Balance, December 31, 2014   -    181    156,568    (1,336)   338,906    494,319 
Comprehensive income:                              
Net income   -    -    -    -    50,505    50,505 
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $2,617   -    -    -    4,054    -    4,054 
Comprehensive income                            54,559 
Stock issued as bonus shares – 56,600 shares   -    1    1,872    -    -    1,873 
Vesting bonus shares, net of forfeitures – (9,500 shares)   -    -    1,225    -    -    1,225 
Stock issued for employee stock purchase plan – 6,528 shares   -    -    226    -    -    226 
Exercise of stock options – 65,418 shares   -    -    1,464    -    -    1,464 
Stock granted under stock-based compensation plans   -    -    786    -    -    786 
Securities exchanged under stock option plan – (3,290 shares)   -    -    (142)   -    -    (142)
Stock issued for Community First acquisition – 30,852 preferred shares; 6,552,916 common shares   30,852    65    268,277    -    -    299,194 
Stock issued for Liberty Bank acquisition – 5,181,337 shares   -    52    212,124    -    -    212,176 
Dividends on preferred stock   -    -    -    -    (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 

 

 

See Condensed Notes to Consolidated Financial Statements. 

7 

 

SIMMONS FIRST NATIONAL CORPORATION

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1:      BASIS OF PRESENTATION

 

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

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

ASU 2015-14 – 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”). ASU2014-09 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 2014-17 – Business Combinations: Pushdown Accounting (“ASU 2014-17”). ASU 2014-17 amends existing guidance related to the accounting by an acquired entity upon a change-in-control event. The standard provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. ASU 2014-17 was effective on November 18, 2014. The adoption of this standard has not had a material effect on the Company’s operating results or financial condition.

 

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

 

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

 

8 

 

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

 

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

 

There have been no other significant changes to the Company’s accounting policies from the 2014 Form 10-K.  Presently, the Company is not aware of any other changes to the Accounting Standards Codification that will have a material impact on the Company’s present or future financial position or results of operations.

 

Acquisition Accounting, Acquired Loans

 

The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

 

The Company evaluates loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluates purchased impaired loans in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

 

For impaired loans accounted for under ASC Topic 310-30, we continue to estimate cash flows expected to be collected on those loans. We evaluate 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, we adjust the amount of accretable yield recognized on a prospective basis over the remaining life of the loan.

 

9 

 

Covered Loans and Related Indemnification Asset

 

In September, 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 the Company’s acquisition and loan accounting, see Note 5, Loans Acquired.

 

Earnings Per Common Share (“EPS”)

 

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

 

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

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands, except per share data)  2015  2014  2015  2014
Net income available to common shareholders  $21,598   $8,788   $50,325   $23,049 
                     
Average common shares outstanding   29,927    16,873    27,379    16,489 
Average potential dilutive common shares   119    44    119    44 
Average diluted common shares   30,046    16,917    27,498    16,533 
                     
Basic earnings per share  $0.72   $0.52   $1.84   $1.40 
Diluted earnings per share (1)  $0.72   $0.52   $1.83   $1.39 

__________________________________________________

 (1)EPS are computed independently for each quarter and therefore the sum of each quarterly EPS may not equal the year-to-date EPS. As a result of the large stock issuances during 2015 as part of the Company’s acquisitions, the computed independent quarterly average common shares outstanding and the computed year-to-date average common shares differ significantly. For purposes of calculating a roll-forward amount for year-to-date EPS, diluted EPS for the second quarter would require a computed amount of $0.74, producing a difference of $.02 from actual third quarter diluted EPS of $0.72. This difference is based on the direct result of the varying denominator for each period presented.

 

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

 

Goodwill of $95.6 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the southwest Missouri market and the Company believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

 

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

 

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

 

11 

 

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

 

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

 

Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices.

 

Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates.  The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.  The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.  Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

 

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

 

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

 

Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill, of $95.6 million.

 

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

 

Other assets – The fair value adjustment results from certain assets whose value was estimated to be less than book value, such as certain prepaid assets, receivables and other miscellaneous assets. The deferred tax asset, included in other assets, is based on 39.225% of fair value adjustments related to the acquired assets and assumed liabilities and on a calculation of future tax benefits. The Company also recorded Liberty’s remaining deferred tax assets and liabilities as of the acquisition date.

 

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

 

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

 

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

 

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

 

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

 

12 

 

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.

 

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

 

Goodwill of $111.3 million was recorded as a result of the transaction. The merger allowed the Company’s entrance into the Tennessee market and will serve as a launching platform for possible expansion into adjacent areas. The Company believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions. Further the Company believes it can benefit from the addition of Community First's small-business lending platform while cross-selling its trust products in Community First’s market. This combination of factors gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

 


13 

 

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

 

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

 

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

 

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

 

Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices.

 

Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates.  The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.  The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.  Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

 

14 

 

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

 

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

 

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

 

Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill, of $111.3 million. Goodwill established prior to the acquisition was written off.

 

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

 

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

 

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

 

Other assets – The carrying amount of these assets was deemed to be a reasonable estimate of fair value.

 

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

 

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

 

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

 

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

 

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

 

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

 

15 

 

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

 

Summary of Unaudited Pro forma Information

 

The unaudited pro forma information below for the three and nine months ended September 30, 2015 and 2014 gives effect to the Liberty and Community First acquisitions as if the acquisitions had occurred on January 1, 2014. Pro forma earnings for the nine months ended September 30, 2015 were adjusted to exclude $7.4 million of acquisition-related costs, net of tax, incurred by Simmons during 2015. Supplemental pro-forma earnings for the nine months ended September 30, 2014 were also adjusted to include these charges. The pro forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.

 

(In thousands, except per share data)  Three Months Ended
September 30, 2015
  Three Months Ended
September 30, 2014
Revenue (1)  $100,997   $95,176 
Net income  $31,830   $8,778 
Earnings per share  $1.06   $0.31 

 

(In thousands, except per share data)  Nine Months Ended
September 30, 2015
  Nine Months Ended
September 30, 2014
Revenue (1)  $294,137   $281,174 
Net income  $62,497   $45,973 
Earnings per share  $2.01   $1.63 

__________________________________________________

(1) Net interest income plus noninterest income.          

 

Consolidated year-to-date 2015 results included approximately $33.3 million of revenue and $16.3 million of net income attributable to the Liberty acquisition and $58.2 million of revenue and $23.3 million of net income attributable to the Community First acquisition.

 

Ozark Trust & Investment Corporation

 

On April 28, 2015, the Company entered into a definitive agreement and plan of merger (the “Agreement”) with Ozark Trust & Investment Corporation (“OTIC”), including its wholly-owned non-deposit trust company, Trust Company of the Ozarks (“TCO”). TCO is headquartered in Springfield, Missouri and has over $1 billion in assets under management.  The transaction closed on October 29, 2015 with OTIC merging with and into the Company. Under the terms of the Agreement, each outstanding share of common stock of OTIC held by banks or bank holding companies was converted into the right to receive $701.9268 in cash and each share of common stock or common stock equivalents held by any other type of shareholder was converted into the right to receive 16.7205 shares of the Company’s common stock. The Company owned 1,000 shares of OTIC’s common stock, which it acquired through its acquisition of Liberty Bancshares, Inc. in February 2015.  The transaction is valued at $23.6 million (based on the Company’s October 29, 2015 closing price).  The purchase price will be allocated among the net assets of OTIC acquired as appropriate, with the remaining balance being reported as goodwill.

 

16 

 

NOTE 3: INVESTMENT SECURITIES

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

 

   September 30, 2015  December 31, 2014
(In thousands)  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
(Losses)
  Estimated
Fair
Value
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
(Losses)
  Estimated
Fair
Value
                         
Held-to-Maturity                                        
U.S. Government agencies  $285,071   $1,189   $(393)  $285,867   $418,914   $929   $(4,055)  $415,788 
Mortgage-backed securities   25,913    301    (88)   26,126    29,743    56    (411)   29,388 
State and political subdivisions   464,245    8,153    (427)   471,971    328,310    7,000    (573)   334,737 
Other securities   1,065    -    -    1,065    620    -    -    620 
Total HTM  $776,294   $9,643   $(908)  $785,029   $777,587   $7,985   $(5,039)  $780,533 
                                         
Available-for-Sale                                        
U.S. Treasury  $4,000   $8   $-   $4,008   $4,000   $1   $(9)  $3,992 
U.S. Government agencies   153,610    225    (259)   153,576    275,381    15    (2,580)   272,816 
Mortgage-backed securities   497,847    4,756    (259)   502,344    1,579    -    (7)   1,572 
State and political subdivisions   10,898    78    -    10,976    6,536    7    (3)   6,540 
Other securities   32,520    714    (791)   32,443    19,985    386    (8)   20,363 
Total AFS  $698,875   $5,781   $(1,309)  $703,347   $307,481   $409   $(2,607)  $305,283 

 

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

 

Certain investment securities are valued at less than their historical cost. Total fair value of these investments at September 30, 2015, was $417.7 million, which is approximately 28.2% 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, 2015:

 

   Less Than 12 Months  12 Months or More  Total
(In thousands)  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
                   
Held-to-Maturity                              
U.S. Government agencies  $184,082   $(393)  $-   $-   $184,082   $(393)
Mortgage-backed securities   11,281    (88)   -    -    11,281    (88)
State and political subdivisions   38,627    (409)   2,759    (18)   41,386    (427)
Total HTM  $233,990   $(890)  $2,759   $(18)  $236,749   $(908)
                               
Available-for-Sale                              
U.S. Government agencies  $97,763   $(259)  $-   $-   $97,763   $(259)
Mortgage-backed securities   81,619    (259)   -    -    81,619    (259)
State and political subdivisions   -    -    -    -    -    - 
Other   1,573    (791)   -    -    1,573    (791)
Total AFS  $180,955   $(1,309)  $-   $-   $180,955   $(1,309)

 

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, 2015, management also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2015, management believes the impairments detailed in the table above are temporary.  Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

The book value of securities sold under agreements to repurchase equaled $104.9 million and $100.8 million for September 30, 2015 and December 31, 2014, respectively.

 

18 

 

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

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
Taxable:                    
Held-to-maturity  $1,531   $1,440   $4,227   $4,167 
Available-for-sale   3,369    603    8,124    1,882 
Non-taxable:                    
Held-to-maturity   2,941    2,647    8,276    7,900 
Available-for-sale   493    27    1,637    83 
Total  $8,335   $4,717   $22,264   $14,032 

 

The amortized cost and fair value of available-for-sale securities at September 30, 2015, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties:

 

   Held-to-Maturity  Available-for-Sale
(In thousands)  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
             
One year or less  $43,646   $43,761   $18,741   $18,743 
After one through five years   327,252    328,226    115,400    115,194 
After five through ten years   157,376    159,808    30,676    30,928 
After ten years   222,107    227,108    5,162    5,168 
Securities not due on a single maturity date   25,913    26,126    497,847    502,344 
Other securities (no maturity)   -    -    31,049    30,970 
Total  $776,294   $785,029   $698,875   $703,347 

 

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $856.2 million at September 30, 2015 and $520.4 million at December 31, 2014.

 

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. There were $153,000 of realized gains and $171,000 of realized losses on investment securities for the three months ended September 30, 2014. There were $191,000 of realized gains and $171,000 of realized losses for the nine months ended September 30, 2014.

 

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

 

 

19 

 

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

 

At September 30, 2015, the Company’s loan portfolio was $4.85 billion, compared to $2.74 billion at December 31, 2014.  The various categories of loans are summarized as follows:

 

(In thousands)  September 30,
2015
  December 31,
2014
Consumer:          
Credit cards  $171,701   $185,380 
Other consumer   182,472    103,402 
Total consumer   354,173    288,782 
Real Estate:          
Construction   253,761    181,968 
Single family residential   623,089    455,563 
Other commercial   1,037,559    714,797 
Total real estate   1,914,409    1,352,328 
Commercial:          
Commercial   394,422    291,820 
Agricultural   170,257    115,658 
Total commercial   564,679    407,478 
Other   6,017    5,133 
Legacy loans   2,839,278    2,053,721 
Loans acquired, not covered by FDIC loss share (net of discount and allowance) (1)   2,013,816    575,980 
Loans acquired, covered by FDIC loss share (net of discount and allowance) (1)   -    106,933 
Total loans  $4,853,094   $2,736,634 

__________________________________________________

 (1)See Note 5, Loans Acquired, for segregation of loans acquired by loan class. In September 2015 the Company entered into an agreement with the FDIC to terminate all loss sharing agreements.

 

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

 

Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans.  The Company no longer originates or services student loans.  Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment.  Other consumer loans include direct and indirect installment loans and overdrafts.  Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

 

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

 

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 a one or three year balloon, and the Company has recently instituted a pricing mechanism for commercial loans.  It is standard practice to require personal guaranties on all commercial loans, particularly as they relate to closely-held or limited liability entities.

 

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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

 

(In thousands)  September 30,
2015
  December 31,
2014
Consumer:          
Credit cards  $231   $197 
Other consumer   334    405 
Total consumer   565    602 
Real estate:          
Construction   4,625    4,863 
Single family residential   4,912    4,010 
Other commercial   3,349    1,522 
Total real estate   12,886    10,395 
Commercial:          
Commercial   1,766    585 
Agricultural   88    456 
Total commercial   1,854    1,041 
Total  $15,305   $12,038 

 

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, 2015                              
Consumer:                              
Credit cards  $765   $231   $996   $170,705   $171,701   $- 
Other consumer   1,411    699    2,110    180,362    182,472    327 
Total consumer   2,176    930    3,106    351,067    354,173    327 
Real estate:                              
Construction   3,772    1,979    5,751    248,010    253,761    239 
Single family residential   3,922    3,066    6,988    616,101    623,089    388 
Other commercial   3,162    2,085    5,247    1,032,312    1,037,559    - 
Total real estate   10,856    7,130    17,986    1,896,423    1,914,409    627 
Commercial:                              
Commercial   3,106    652    3,758    390,664    394,422    202 
Agricultural   204    191    395    169,862    170,257    119 
Total commercial   3,310    843    4,153    560,526    564,679    321 
Other   -    -    -    6,017    6,017    - 
Total  $16,342   $8,903   $25,245   $2,814,033   $2,839,278   $1,275 
                               
December 31, 2014                              
Consumer:                              
Credit cards  $687   $457   $1,144   $184,236   $185,380   $- 
Other consumer   1,349    447    1,796    101,606    103,402    223 
Total consumer   2,036    904    2,940    285,842    288,782    223 
Real estate:                              
Construction   760    570    1,330    180,638    181,968    177 
Single family residential   4,913    2,213    7,126    448,437    455,563    248 
Other commercial   1,987    847    2,834    711,963    714,797    - 
Total real estate   7,660    3,630    11,290    1,341,038    1,352,328    425 
Commercial:                              
Commercial   381    354    735    291,085    291,820    - 
Agricultural   119    109    228    115,430    115,658    40 
Total commercial   500    463    963    406,515    407,478    40 
Other   -    -    -    5,133    5,133    - 
Total  $10,196   $4,997   $15,193   $2,038,528   $2,053,721   $688 

 

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

 

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

 

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, 2015                           Three Months Ended
September 30, 2015
 

Nine Months Ended

September 30, 2015

Consumer:                                             
Credit cards  $461   $461   $-   $461   $7   $450   $8   $394   $20 
Other consumer   701    652    20    672    124    612    13    592    33 
Total consumer   1,162    1,113    20    1,133    131    1,062    21    986    53 
Real estate:                                             
Construction   5,683    2,196    2,781    4,977    378    6,230    109    5,532    306 
Single family residential   6,068    4,710    557    5,267    963    4,945    108    5,023    278 
Other commercial   4,859    3,541    90    3,631    699    3,175    68    2,830    157 
Total real estate   16,610    10,447    3,428    13,875    2,040    14,350    285    13,385    741 
Commercial:                                             
Commercial   2,883    1,145    873    2,018    588    1,488    39    1,673    93 
Agricultural   207    218    -    218    38    180    5    252    14 
Total commercial   3,090    1,363    873    2,236    626    1,668    44    1,925    107 
Total  $20,862   $12,923   $4,321   $17,244   $2,797   $17,080   $350   $16,296   $901 

 

December 31, 2014                          

Three Months Ended

September 30, 2014

 

Nine Months Ended

September 30, 2014

Consumer:                                             
Credit cards  $197   $197   $-   $197   $6   $471   $-   $482   $9 
Other consumer   604    610    9    619    118    781    14    821    30 
Total consumer   801    807    9    816    124    1,252    14    1,303    39 
Real estate:                                             
Construction   7,400    7,020    -    7,020    599    4,323    49    3,662    114 
Single family residential   4,442    3,948    377    4,325    899    4,583    52    4,282    133 
Other commercial   1,955    1,446    36    1,482    268    6,663    75    8,115    252 
Total real estate   13,797    12,414    413    12,827    1,766    15,569    176    16,059    499 
Commercial:                                             
Commercial   1,227    566    -    566    102    654    7    646    20 
Agricultural   501    460    -    466    83    274    3    178    6 
Total commercial   1,728    1,026    -    1,026    185    928    10    824    26 
Total  $16,326   $14,247   $422   $14,669   $2,075   $17,749   $200   $18,186   $564 

 

At September 30, 2015, and December 31, 2014, impaired loans, net of government guarantees and excluding loans acquired, totaled $17.2 million and $14.7 million, respectively.  Allocations of the allowance for loan losses relative to impaired loans were $2.8 million at September 30, 2015 and $2.1 million at December 31, 2014.  Approximately $350,000 and $900,000 of interest income was recognized on average impaired loans of $17.1 million and $16.3 million for the three and nine months ended September 30, 2015.  Interest income recognized on impaired loans on a cash basis during the three and nine months ended September 30, 2015 and 2014 was not material.

 

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

 

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, 2015                              
Consumer:                              
Other consumer   -   $-    1   $13    1   $13 
Total consumer   -    -    1    13    1    13 
Real estate:                              
Construction   -   $-    1   $256    1   $256 
Single-family residential   2    137    9    1,155    11    1,292 
Other commercial   3    1,818    6    937    9    2,755 
Total real estate   5    1,955    16    2,348    21    4,303 
Total   5   $1,955    17   $2,361    22   $4,316 
                               
December 31, 2014                              
Real estate:                              
Construction   -   $-    1   $391    1   $391 
Single-family residential   2    393    1    3    3    396 
Other commercial   3    1,840    1    614    4    2,454 
Total real estate   5    2,233    3    1,008    8    3,241 
Total   5   $2,233    3   $1,008    8   $3,241 

 

24 

 

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

 

            Modification Type   
(Dollars in thousands)  Number of
Loans
  Balance Prior
to TDR
  Balance at
September 30
  Change in
Maturity
Date
  Change in
Rate
  Financial Impact
on Date of
Restructure
                   
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   $-   $- 
                               
Three Months Ended September 30, 2014                              
Commercial:                              
Commercial   -   $-   $-   $-   $-   $- 
Total commercial   -    -    -    -    -    - 
Total   -   $-   $-   $-   $-   $- 
                               
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   $-   $- 
                               
Nine Months Ended September 30, 2014                              
Real estate:                              
Single-family residential   1   $1,031   $1,031   $-   $1,031   $- 
Total real estate   1    1,031    1,031    -    1,031    - 
Commercial:                              
Commercial   1    599    -    -    -    - 
Total commercial   1    599    -    -    -    - 
Total   2   $1,630   $1,031   $-   $1,031   $- 

 

During the three months ended September 30, 2015, the Company modified eight loans with a recorded investment of $610,000 prior to modification which were deemed troubled debt restructuring.  The restructured loans were modified by 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.

 

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 various terms, including changing the maturity date and deferring amortized principal payments. 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.

 

25 

 

During the three months ended September 30, 2014, the Company did not modify any loans and during the nine months ended September 30, 2014, the Company modified two loans with a total recorded investment of $1,630,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by changing various terms, including changing the maturity date and deferring amortized principal payments. Based on the fair value of the collateral, no specific reserve was determined necessary for these loans. Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

 

There were no loans for which a payment default occurred during the nine months ended September 30, 2015 and 2014, and that had been modified as a TDR within 12 months or less of the payment default, excluding loans acquired.  We define a payment default as a payment received more than 90 days after its due date.

 

In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $167,000 and $5,719,000 at September 30, 2015 and 2014, respectively, for which other real estate owned (“OREO”) was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate and residential real estate. At September 30, 2015, the Company had $1,481,000 of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At September 30, 2015, the Company had $5,092,000 of OREO secured by residential real estate properties.

 

Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the States of Arkansas, Kansas, Missouri and Tennessee.

 

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

 

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

 

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

 

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

 

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

 

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

 

26 

 

·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 $39.9 million and $22.3 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of September 30, 2015 and December 31, 2014, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $53.3 million and $16.6 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at September 30, 2015 and December 31, 2014, 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.

 

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

 

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8.  Loans may be classified, but not considered impaired, due to one of the following reasons:  (1) The Company has established minimum dollar amount thresholds for loan impairment testing.  Loans rated 6 – 8 that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans.  (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans.  Total classified loans, excluding loans accounted for under ASC Topic 310-30, were $116.4 million and $82.1 million, as of September 30, 2015 and December 31, 2014, respectively.

 

27 

 

The following table presents a summary of loans by credit risk rating as of September 30, 2015 and December 31, 2014, 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, 2015                              
Consumer:                              
Credit cards  $171,239   $-   $462   $-   $-   $171,701 
Other consumer   181,551    -    883    38    -    182,472 
Total consumer   352,790    -    1,345    38    -    354,173 
Real estate:                              
Construction   247,457    476    5,812    16    -    253,761 
Single family residential   610,347    2,064    10,505    173    -    623,089 
Other commercial   996,692    4,869    34,815    1,183    -    1,037,559 
Total real estate   1,854,496    7,409    51,132    1,372    -    1,914,409 
Commercial:                              
Commercial   384,393    1,483    8,538    8    -    394,422 
Agricultural   169,615    -    642    -    -    170,257 
Total commercial   554,008    2,074    9,180    8    -    564,679 
Other   6,017    -    -    -    -    6,017 
Loans acquired, not covered by FDIC loss share   1,952,157    8,372    51,175    2,108    4    2,013,816 
Loans acquired, covered by FDIC loss share   -    -    -    -    -    - 
Total  $4,719,468   $17,264   $112,832   $3,526   $4   $4,853,094 

 

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

 

28 

 

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

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
Consumer:                    
Credit cards  $(550)  $(598)  $(1,683)  $(1,653)
Student loans   -    (9)   -    (38)
Other consumer   (519)   (517)   (785)   (806)
Total consumer   (1,069)   (1,124)   (2,468)   (2,497)
Real estate:                    
Construction   (15)   30    (44)   (424)
Single-family residential   (43)   (31)   (368)   (389)
Other commercial   (26)   (154)   (240)   (161)
Total real estate   (84)   (155)   (652)   (974)
Commercial:                    
Commercial   (466)   (308)   (542)   (520)
Agriculture   (50)   5    (41)   (13)
Total commercial   (516)   (303)   (583)   (533)
Total  $(1,669)  $(1,582)  $(3,703)  $(4,004)

 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

29 

 

The following table details activity in the allowance for loan losses, excluding loans acquired, by portfolio segment for the three and nine months ended September 30, 2015.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                          
 Three Months Ended 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 recoveries (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 

__________________________________________________

(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 were 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.

 

30 

 

Activity in the allowance for loan losses, excluding allowance on loans acquired, for the three and nine months ended September 30, 2014 was as follows:

 

(In thousands)  Commercial  Real
Estate
  Credit
Card
  Other
Consumer
and Other
  Total
                
 Three Months Ended September 30, 2014                         
Balance, beginning of period  $3,951   $16,169   $5,510   $1,900   $27,530 
Provision for loan losses   994    (419)   576    (23)   1,128 
Charge-offs   (474)   (534)   (788)   (648)   (2,444)
Recoveries   171    379    190    122    862 
Net charge-offs   (303)   (155)   (598)   (526)   (1,582)
Balance, September 30, 2014  $4,642   $15,595   $5,488   $1,351   $27,076 
                          
 Nine Months Ended September 30, 2014                         
Balance, beginning of period  $3,205   $16,885   $5,430   $1,922   $27,442 
Provision for loan losses   1,970    (316)   1,711    273    3,638 
Charge-offs   (734)   (2,484)   (2,329)   (1,220)   (6,767)
Recoveries   201    1,510    676    376    2,763 
Net charge-offs   (533)   (974)   (1,653)   (844)   (4,004)
Balance, September 30, 2014  $4,642   $15,595   $5,488   $1,351   $27,076 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $-   $478   $-   $28   $506 
Loans collectively evaluated for impairment   4,642    15,117    5,488    1,323    26,570 
Balance, September 30, 2014  $4,462   $15,595   $5,488   $1,351   $27,076 
                          
Period-end amount allocated to:                         
Loans individually evaluated for impairment  $185   $1,766   $6   $118   $2,075 
Loans collectively evaluated for impairment   6,777    13,395    5,439    1,342    26,953 
Balance, December 31, 2014 (1)  $6,962   $15,161   $5,445   $1,460   $29,028 

__________________________________________________

(1)Allowance for loan losses at December 31, 2014 includes $954,000 allowance for loans acquired, covered by loss share (not shown in the table above). The total allowance for loan losses at December 31, 2014 was $29,982,000.

 

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, 2015                         
Loans individually evaluated for impairment  $2,236   $13,875   $461   $672   $17,244 
Loans collectively evaluated for impairment   562,443    1,900,534    171,240    187,817    2,822,034 
Balance, end of period  $564,679   $1,914,409   $171,701   $188,489   $2,839,278 
                          
December 31, 2014                         
Loans individually evaluated for impairment  $1,026   $12,827   $197   $619   $14,669 
Loans collectively evaluated for impairment   406,452    1,339,501    185,183    107,916    2,039,052 
Balance, end of period  $407,478   $1,352,328   $185,380   $108,535   $2,053,721 

 

31 

 

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 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, 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 $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, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

 

Also during the 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.

 

The following table reflects the carrying value of all acquired loans as of September 30, 2015 and December 31, 2014:

 

   Loans Acquired
(in thousands)  September 30,
2015
  December 31,
2014
       
Consumer:          
Other consumer  $100,080   $8,514 
Total consumer   100,080    8,514 
Real estate:          
Construction   116,302    46,911 
Single family residential   618,031    175,970 
Other commercial   988,831    390,877 
Total real estate   1,723,164    613,758 
Commercial:          
Commercial   164,942    56,134 
Agricultural   25,630    4,507 
Total commercial   190,572    60,641 
Other   -    - 
Total loans acquired (1)  $2,013,816   $682,913 

__________________________________________________

 (1)Loans acquired are reported net of a $954,000 allowance at September 30, 2015. Loans acquired include $106.9 million (net of a $954,000 allowance) of loans covered by FDIC loss share agreements at December 31, 2014.

 

32 

 

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,
2015
  December 31,
2014
       
Consumer:          
Other consumer  $167   $29 
Total consumer   167    29 
Real estate:          
Construction   133    105 
Single family residential   5,274    2,018 
Other commercial   6,836    271 
Total real estate   12,243    2,394 
Commercial:          
Commercial   1,165    291 
Agricultural   13    3 
Total commercial   1,178    294 
Other   -    - 
Total  $13,588   $2,717 

 

 

33 

 

An age analysis of past due acquired loans, segregated by class of loans, is as follows (see Note 4, Loans an 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, 2015                              
Consumer:                              
Other consumer  $992   $123   $1,115   $98,965   $100,080   $44 
Total consumer   992    123    1,115    98,965    100,080    44 
Real estate:                              
Construction   6,229    4,671    10,900    105,402    116,302    442 
Single family residential   8,560    3,965    12,525    605,506    618,031    1,022 
Other commercial   10,007    7,813    17,820    971,011    988,831    904 
Total real estate   24,796    16,449    41,245    1,681,919    1,723,164    2,368 
Commercial:                              
Commercial   3,503    3,858    7,361    157,581    164,942    379 
Agricultural   412    10    422    25,208    25,630    10 
Total commercial   3,915    3,868    7,783    182,789    190,572    389 
Other   -    -    -    -    -    - 
                               
Total  $29,703   $20,440   $50,143   $1,963,673   $2,013,816   $2,801 
                               
December 31, 2014                              
Consumer:                              
Other consumer  $70   $34   $104   $8,407   $8,511   $5 
Total consumer   70    34    104    8,407    8,511    5 
Real estate:                              
Construction   292    105    397    36,450    36,847    - 
Single family residential   3,804    2,906    6,710    138,383    145,093    594 
Other commercial   1,415    5,994    7,409    326,759    334,168    - 
Total real estate   5,511    9,005    14,516    501,592    516,108    594 
Commercial:                              
Commercial   110    421    531    46,730    47,261    - 
Agricultural   -    -    -    4,100    4,100    - 
Total commercial   110    421    531    50,830    51,361    - 
                               
Total  $5,691   $9,460   $15,151   $560,829   $575,980   $599 

 

34 

 

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

 

(In thousands)  Risk Rate
1-4
  Risk Rate
5
  Risk Rate
6
  Risk Rate
7
  Risk Rate
8
  Total
                   
September 30, 2015                              
Consumer:                              
Other consumer  $99,732   $-   $-   $348   $-   $100,080 
Total consumer   99,732    -    -    348    -    100,080 
Real estate:                              
Construction   109,987    78    6,237    -    -    116,302 
Single family residential   603,543    1,791    10,953    1,739    4    618,031 
Other commercial   957,247    6,370    25,214    -    -    988,831 
Total real estate   1,670,778    8,239    42,404    1,739    4    1,723,164 
Commercial:                              
Commercial   156,319    133    8,469    21    -    164,942 
Agricultural   25,328    -    302    -    -    25,630 
Total commercial   181,647    133    8,771    21    -    190,572 
Other   -    -    -    -    -    - 
                               
Total  $1,952,157   $8,372   $51,175   $2,108   $4   $2,013,816 
                               
December 31, 2014                              
Consumer:                              
Other consumer  $8,479   $-   $32   $-   $-   $8,511 
Total consumer   8,479    -    32    -    -    8,511 
Real estate:                              
Construction   27,430    78    9,339    -    -    36,847 
Single family residential   135,240    683    7,311    1,854    5    145,093 
Other commercial   317,965    605    15,598    -    -    334,168 
Total real estate   480,635    1,366    32,248    1,854    5    516,108 
Commercial:                              
Commercial   43,585    69    3,607    -    -    47,261 
Agricultural   3,030    -    1,070    -    -    4,100 
Total commercial   46,615    69    4,677    -    -    51,361 
                               
Total  $535,729   $1,435   $36,957   $1,854   $5   $575,980 

 

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

 

35 

 

The following is a summary of the loans acquired in the Liberty acquisition on February 27, 2015, as of the date of acquisition.

 

(in thousands)  Not Impaired  Impaired
           
Contractually required principal and interest at acquisition  $774,777   $15,716 
Non-accretable difference (expected losses and foregone interest)   -    (4,978)
Cash flows expected to be collected at acquisition   774,777    10,738 
Accretable yield   (4,869)   12 
Basis in acquired loans at acquisition  $769,908   $10,750 

 

The following is a summary of the loans acquired in the Community First acquisition on February 27, 2015, as of the date of acquisition.

 

(in thousands)  Not Impaired  Impaired
           
Contractually required principal and interest at acquisition  $1,153,255   $10,143 
Non-accretable difference (expected losses and foregone interest)   -    (3,247)
Cash flows expected to be collected at acquisition   1,153,255    6,896 
Accretable yield   (23,712)   104 
Basis in acquired loans at acquisition  $1,129,543   $7,000 

 

The amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield.  The accretable yield is recognized as interest income over the estimated lives of the loans.  Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments may or may not be required.  This has resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loans. For those loans previously covered by FDIC loss share, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which was recorded as indemnification assets.  The estimated adjustments to the indemnification assets were amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected lives of the loans, whichever was shorter. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization in future quarters.

 

The impact of the adjustments on the Company’s financial results for the three and nine months ended September 30, 2015 and 2014 is shown below:

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
             
Impact on net interest income  $9,699   $4,974   $19,024   $18,216 
Non-interest income (1)   (2,033)   (3,724)   (7,718)   (17,570)
Net impact to pre-tax income   7,666    1,250    11,306    646 
Net impact, net of taxes  $4,658   $760   $6,871   $393 

__________________________________________________

 (1)Negative non-interest income resulted from the amortization of the FDIC indemnification assets. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization in future quarters.

 

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

 

36 

 

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three and nine months ended September 30, 2015 and 2014.

 

   Three Months Ended
September 30, 2015
  Nine Months Ended
September 30, 2015
(In thousands)  Accretable
Yield
  Carrying
Amount of
Loans
  Accretable
Yield
  Carrying
Amount of
Loans
Beginning balance  $15,048   $160,094   $20,635   $169,098 
Additions   -    -    (116)   17,750 
Accretable yield adjustments   575    -    6,018    - 
Accretion   (9,744)   9,744    (20,658)   20,658 
Payments and other reductions, net   (4,476)   (129,985)   (4,476)   (167,633)
Balance, ending  $1,403   $39,853   $1,403   $39,853 

 

   Three Months Ended
September 30, 2014
  Nine Months Ended
September 30, 2014
(In thousands)  Accretable
Yield
  Carrying
Amount of
Loans
  Accretable
Yield
  Carrying
Amount of
Loans
Beginning balance  $31,290   $192,093   $41,385   $234,785 
Additions   234    3,404    234    3,404 
Accretable yield adjustments   (877)   -    4,534    - 
Accretion   (6,063)   6,063    (21,569)   21,569 
Payments and other reductions, net   -    (12,960)   -    (71,158)
Balance, ending  $24,584   $188,600   $24,584   $188,600 

 

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company, previously covered by loss share agreements, were determined to have experienced impairment in the estimated credit quality or cash flows during 2014, the Company recorded a provision to establish a $954,000 allowance for loan losses for covered purchased impaired loans.  During 2015, the Company recorded a provision totaling $737,000 to cover impairment in the estimated credit quality of acquired loans, not covered by loss share. Non-covered loans were subsequently charged-off and the allowance was used during 2015. Because of the termination of the loss share agreements, the allowance for previously covered loans was reclassified to allowance for acquired non-covered loans, resulting in a total allowance on acquired non-covered loans of $954,000 at September 30, 2015.

 

The purchase and assumption agreements for the FDIC-assisted acquisitions allowed for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses failed to reach the expected loss level under a claw back provision (“true-up provision”). The amount of the true-up provision for each acquisition was measured and recorded at Day 1 fair values. It was calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement, then discounted back to net present value.

 

Under the terms of the loss share termination agreement, the FDIC made a net payment of $2.4 million to the bank as consideration for early termination. The early termination was recorded in the Company’s financial statements by removing the FDIC indemnification asset, receivable from FDIC, the FDIC true-up provision and recording a one-time, pre-tax charge of $7.5 million.

 

37 

 

The following table presents a summary of the changes in the FDIC true-up provision for the three and nine months ended September 30, 2015 and 2014.

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
             
Beginning balance  $8,921   $7,768   $8,308   $6,768 
Amortization expense   27    42    107    126 
Adjustments related to changes in expected losses   187    278    720    1,194 
Loss share termination agreement   (9,135)   -    (9,135)   - 
Balance, ending  $-   $8,088   $-   $8,088 

 

NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is tested annually, or more often than annually, if circumstances warrant, for impairment.  If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.  Goodwill totaled $314.2 million at September 30, 2015 and $108.1 million at December 31, 2014.   The Company recorded $111.3 million and $95.6 of goodwill during the nine months ended September 30, 2015 as a result of its acquisitions of Community First and Liberty, respectively. Goodwill impairment was neither indicated nor recorded during the nine months ended September 30, 2015 or the year ended December 31, 2014.

 

Core deposit premiums are amortized over a ten year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value.  Core deposit premiums of $11.3 million and $14.6 million were recorded during the first quarter of 2015 as part of the Community First and Liberty acquisitions, respectively.

 

The Delta Trust acquisition on August 31, 2014 included some significant lines of business related to investments, trust and insurance, for which the Company recorded $5.1 million of intangible assets. The Company also recorded $0.4 million of intangible assets during the nine months ended September 30, 2015 related to a line of insurance business as part of the Community First acquisition. These intangible assets are being amortized over various periods ranging from 10 to 15 years.

 

On September 30, 2013, the Company acquired a credit card portfolio and recorded Purchased Credit Card Relationships (“PCCR’s”) of $2.1 million. This intangible asset is being amortized over a five year period.

 

38 

 

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at September 30, 2015 and December 31, 2014, were as follows: 

 

(In thousands)  September 30,
2015
  December 31,
2014
           
Goodwill  $314,282   $108,095 
Core deposit premiums:          
Gross carrying amount   43,648    18,318 
Accumulated amortization   (5,135)   (2,386)
Core deposit premiums, net   38,513    15,932 
Purchased credit card relationships:          
Gross carrying amount   2,068    2,068 
Accumulated amortization   (827)   (517)
Purchased credit card relationships, net   1,241    1,551 
Books of business intangible:          
Gross carrying amount   5,560    5,140 
Accumulated amortization   (410)   (97)
Books of business intangible, net   5,150    5,043 
Other intangible assets, net   44,904    22,526 
Total goodwill and other intangible assets  $359,186   $130,621 

 

The Company’s estimated future amortization expense for intangible assets remaining as of September 30, 2015 is as follows:

 

(In thousands)  Year  Amortization
Expense
 
   Remainder of 2015  $1,287   
   2016   5,166   
   2017   5,166   
   2018   5,063   
   2019   4,752   
   Thereafter   23,469   
   Total  $44,904   

 

NOTE 7: TIME DEPOSITS

 

Time deposits include approximately $681,585,000 and $434,297,000 of certificates of deposit of $100,000 or more at September 30, 2015, and December 31, 2014, respectively. Of this total approximately $186,903,000 and $106,603,000 of certificates of deposit were over $250,000 at September 30, 2015, and December 31, 2014, respectively.

 

NOTE 8: INCOME TAXES

 

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

 

(In thousands)  September 30,
2015
  September 30,
2014
Income taxes currently payable  $29,206   $13,389 
Deferred income taxes   (3,811)   (4,456)
Provision for income taxes  $25,395   $8,933 

 

39 

 

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

 

(In thousands) 

September 30,

2015

 

December 31,

2014

       
Deferred tax assets:          
Loans acquired  $28,982   $16,925 
FDIC true-up liability   -    2,792 
Allowance for loan losses   12,373    11,749 
Valuation of foreclosed assets   14,529    14,167 
Tax NOLs from acquisition   11,819    11,819 
Deferred compensation payable   2,722    1,536 
Vacation compensation   2,036    1,456 
Accumulated depreciation   -    1,937 
Loan interest   2,304    1,693 
Accrued pension and profit sharing   1,809    1,793 
Accrued equity and other compensation   4,805    3,356 
Acquired securities   2,065    2,568 
Accrued merger related costs   2,482    2,464 
Basis difference in partnership investments   800    617 
Unrealized loss on available-for-sale securities   -    862 
Other   4,704    1,666 
Gross deferred tax assets   91,430    77,400 
           
Deferred tax liabilities:          
Goodwill and other intangible amortization   (25,686)   (16,953)
FDIC acquired assets   (696)   (4,377)
Deferred loan fee income and expenses, net   (970)   (1,515)
FHLB stock dividends   (2,240)   (1,160)
Limitations under IRC Sec 382   (8,087)   (11,169)
Prepayment liabilities   (1,993)   (1,141)
Accumulated depreciation   (1,084)   - 
Other   (1,050)   (337)
Gross deferred tax liabilities   (41,806)   (36,652)
           
Net deferred tax asset, included in other assets  $49,624   $40,748 

 

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

 

(In thousands)  September 30,
2015
  September 30,
2014
       
Computed at the statutory rate (35%)  $26,565   $11,194 
Increase (decrease) in taxes resulting from:          
State income taxes, net of federal tax benefit   2,503    783 
Tax exempt interest income   (3,502)   (2,808)
Tax exempt earnings on BOLI   (566)   (384)
Federal tax credits   (429)   - 
Other differences, net   824    148 
Actual tax provision  $25,395   $8,933 

 

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

 

40 

 

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

 

The Company files income tax returns in the U.S. federal jurisdiction.  The Company’s U.S. federal income tax returns are open and subject to examinations from the 2011 tax year and forward.  The Company’s various state income tax returns are generally open from the 2008 and later tax return years based on individual state statute of limitations.

 

NOTE 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

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

 

The gross amount of recognized liabilities for repurchase agreements was $104.9 million and $100.8 million at September 30, 2015 and December 31, 2014, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2015 and December 31, 2014 is presented in the following tables.

 

   Remaining Contractual Maturity of the Agreements
(In thousands) 

Overnight and

Continuous

  Up to 30 Days  30-90 Days 

Greater than 90

Days

  Total
September 30, 2015                         
Repurchase agreements:                         
U.S. Government agencies  $97,616   $-   $-   $7,321   $104,937 
                          
December 31, 2014                         
Repurchase agreements:                         
U.S. Government agencies  $93,454   $-   $-   $7,317   $100,771 

 

41 

 

NOTE 10: OTHER BORROWINGS AND SUBORDINATED DEBENTURES

 

Debt at September 30, 2015 and December 31, 2014 consisted of the following components:

 

(In thousands) 

September 30,

2015

 

December 31,

2014

       
Other Borrowings          
FHLB advances, net of discount, due 2015 to 2033, 0.35% to 7.38% secured by residential real estate loans  $131,960   $71,582 
Notes payable, due 10/31/2015 to 12/31/2016, 3.25%, floating rate, unsecured   41,466    43,100 
Total other borrowings   173,426    114,682 
Subordinated Debentures          
Trust preferred securities, due 12/30/2033, floating rate of 2.80% above the three month LIBOR rate, reset quarterly, callable without penalty   20,620    20,620 
Trust preferred securities, net of discount, due 6/30/2035, floating rate of 1.75% above the three month LIBOR rate, reset quarterly, callable without penalty   11,141    - 
Trust preferred securities, net of discount, due 9/15/2037, floating rate of 1.37% above the three month LIBOR rate, reset quarterly   9,936    - 
Trust preferred securities, net of discount, due 12/3/2033, floating rate of 2.88% above the three month LIBOR rate, reset quarterly, callable without penalty   5,168    - 
Trust preferred securities, net of discount, due 12/13/2034, floating rate of 2.00% above the three month LIBOR rate, reset quarterly, callable without penalty   5,052    - 
Trust preferred securities, net of discount, due 6/6/2037, floating rate of 1.57% above the three month LIBOR rate, reset quarterly, callable without penalty   9,989    - 
Total subordinated debentures   61,906    20,620 
Total other borrowings and subordinated debentures  $235,332   $135,302 

 

During the fourth quarter of 2013, the Company borrowed $46.0 million from correspondent banks to partially fund the acquisition of Metropolitan National Bank. This debt is unsecured and is scheduled to be repaid in three years or less, by December 31, 2016.

 

During October 2015, the Company borrowed $52.3 million from correspondent banks at a rate of 3.58% with quarterly principal and interest payments. The debt has a 10 year amortization with a 5 year balloon payment due in October 2020. The Company used approximately $36 million of this borrowing to refinance the debt issued during the fourth quarter of 2013.

 

At September 30, 2015, the Company had $60.0 million of Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less. During the third quarter of 2015 the Company early extinguished FHLB advances with principal balances of $22 million. The consideration paid for the early extinguishment was $23.2 million representing the net settlement of the advance balances and prepayment penalties of $1.3 million. These penalties were partially offset by the remaining acquisition market adjustment balances on these borrowings. The resulting net loss of $782,000 was recorded in interest expense for the period.

 

The Company had total FHLB advances of $132.0 million at September 30, 2015, with approximately $1.1 billion of additional advances available from the FHLB.  The FHLB advances are secured by mortgage loans and investment securities totaling approximately $1.2 billion at September 30, 2015.

 

The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

 

42 

 

Aggregate annual maturities of debt at September 30, 2015, are:

 

(In thousands)  Year  Annual
Maturities
 
           
   2015  $61,728   
   2016   24,866   
   2017   48,944   
   2018   21,437   
   2019   2,707   
   Thereafter   75,650   
   Total  $235,332   

 

NOTE 11: CONTINGENT LIABILITIES

 

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

 

NOTE 12: COMMON STOCK

 

During 2012, the Company announced the adoption by the Board of Directors of a new stock repurchase program. The program authorizes the repurchase of up to 850,000 additional shares of Class A common stock, or approximately 5% of the shares outstanding at that time. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes. The Company suspended its stock repurchases in August of 2013, with 154,136 shares remaining available for repurchase under the program.

 

On March 4, 2014 the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). Subsequently, on June 18, 2014 the Company filed Amendment No. 1 to the shelf registration statement. After becoming effective, the shelf registration statement allows the Company to raise capital from time to time, up to an aggregate of $300 million, through the sale of common stock, preferred stock, stock warrants, stock rights or a combination thereof, subject to market conditions. Specific terms and prices are determined at the time of any offering under a separate prospectus supplement that the Company is required to file with the SEC at the time of the specific offering.

 

NOTE 13: UNDIVIDED PROFITS

 

The Company’s subsidiaries are subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies.  The approval of the Comptroller of the Currency is required, if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits, as defined, for that year combined with its retained net profits of the preceding two years.  At September 30, 2015, the Company’s subsidiary bank had approximately $30.4 million available for payment of dividends to the Company, without prior regulatory approval.

 

The risk-based capital guidelines of the Federal Reserve Board and the Office of the Comptroller of the Currency include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution.  Under the newly adopted Basel III Rules, the criteria for a well-capitalized institution are: a 5% "Tier l leverage capital" ratio, an 8% "Tier 1 risk-based capital" ratio, 10% "total risk-based capital" ratio; and a 6.50% “common equity Tier 1 (“CETI”) ratio.  As of September 30, 2015, The Company’s subsidiary bank met the capital standards for a well-capitalized institution.  The Company's CET1 ratio was 13.98% at September 30, 2015.

 

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NOTE 14: STOCK BASED COMPENSATION

 

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

 

The table below summarizes the transactions under the Company's active stock compensation plans for the nine months ended September 30, 2015:

   Stock Options
Outstanding
  Non-Vested Stock
Awards Outstanding
   Number
of
Shares
  Weighted
Average
Exercise
Price
  Number
of
Shares
  Weighted
Average
Grant-Date
Fair-Value
             
Balance, January 1, 2015   119,690   $27.72    226,932   $31.88 
Granted   375,255    44,69    95,020    43.47 
Stock Options Exercised   (65,418)   22.37    -    - 
Stock Options from Acquisitions   65,850    20.43    -    - 
Stock Awards Vested   -    -    (79,607)   34.37 
Forfeited/Expired   (1,450)   20.60    (14,751)   20.70 
Balance, September 30, 2015   493,927   $40.30    227,594   $36.57 
                     
Exercisable, September 30, 2015   105,572   $26.84           

 

The following table summarizes information about stock options under the plans outstanding at September 30, 2015:

 

      Options Outstanding  Options Exercisable
Range of
Exercise Prices
  Number
of Shares
  Weighted
Average
Remaining
Contractual
Life (Years)
  Weighted
Average
Exercise
Price
  Number
of Shares
  Weighted
Average
Exercise
Price
                   
$15.55  -  $21.29   26,802    5.00   $19.41    15,202   $18.60 
21.51  -  21.51   2,300    4.30    21.51    2,300    21.51 
26.19  -  26.19   26,900    0.62    26.19    26,900    26.19 
28.42  -  28.42   30,500    1.60    28.42    30,500    28.42 
30.31  -  30.31   30,670    2.61    30.31    30,670    30.31 
40.57  -  40.57   48,690    9.25    40.57    -    - 
40.72  -  40.72   1,500    9.13    40.72    -    - 
44.40  -  44.40   65,005    9.48    44.40    -    - 
45.50  -  45.50   258,255    9.86    45.50    -    - 
48.13     48.13   3,305    9.96    48.13    -    - 
$15.55  -  $48.13   493,927    8.00   $40.30    105,572   $26.84 

 

Total stock-based compensation expense was $2,010,000 and $962,000 during the nine months ended September 30, 2015 and 2014, respectively.  Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards.  There was $2,122,000 of unrecognized stock-based compensation expense related to stock options at September 30, 2015. There was no unrecognized stock-based compensation expense related to stock options at September 30, 2014.  

 

The intrinsic value of stock options outstanding and stock options exercisable at September 30, 2015 was $3,771,000 and $2,227,000.  Intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $47.93 as of September 30, 2015, and the exercise price multiplied by the number of options outstanding and exercisable at a price below that closing price.  The total intrinsic value of stock options exercised during the nine months ended September 30, 2015 and September 30, 2014 was $1,672,000 and $607,000, respectively.

 

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The fair value of the Company’s employee stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. The weighted-average fair value of stock options granted during the nine months ended September 30, 2015 was $7.81 per share. There were no stock options granted during the year ended December 31, 2014. The Company estimated expected market price volatility and expected term of the options based on historical data and other factors. The weighted-average assumptions used to determine the fair value of options granted are detailed in the table below:

 

   Nine Months Ended
September 30, 2015
    
Expected dividend yield   2.06%
Expected stock price volatility   16.96%
Risk-free interest rate   2.17%
Expected life of options (years)   10 

 

NOTE 15: ADDITIONAL CASH FLOW INFORMATION

 

The following is a summary of the Company’s additional cash flow information during the nine months ended:

 

   Nine Months Ended
September 30,
(In thousands)  2015  2014
       
Interest paid  $15,944   $10,178 
Income taxes paid   21,039    14,642 
Transfers of loans not covered by FDIC loss share to foreclosed assets held for sale   14,242    3,892 
Transfers of loans acquired, covered by FDIC loss share, to foreclosed assets covered by FDIC loss share   4,349    5,480 
Transfers of foreclosed assets covered by FDIC loss share to foreclosed assets held for sale   

13,895

    - 
Transfers of loans acquired, covered by FDIC loss share, to loans acquired not covered by FDIC loss share   

88,922

    - 
Transfers of premises held for sale to foreclosed assets held for sale   6,126    - 

 

NOTE 16: OTHER OPERATING EXPENSES

 

Other operating expenses consist of the following:

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
             
Professional services  $2,111   $2,201   $6,248   $5,447 
Postage   1,079    853    3,097    2,603 
Telephone   1,521    774    3,698    2,179 
Credit card expense   2,309    2,231    6,579    6,553 
Operating supplies   687    507    1,693    1,473 
Amortization of intangibles   1,265    454    3,552    1,374 
Branch right sizing expense   458    151    3,237    4,329 
Other expense   7,884    4,355    19,085    11,534 
Total other operating expenses  $17,314   $11,526   $47,189   $35,492 

 

NOTE 17: CERTAIN TRANSACTIONS

 

From time to time the Company and its subsidiaries have made loans and other extensions of credit to directors, officers, their associates and members of their immediate families.  From time to time directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary, Simmons Bank.  Such loans, other extensions of credit and deposits were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons not related to the lender and did not involve more than normal risk of collectability or present other unfavorable features.

 

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NOTE 18: COMMITMENTS AND CREDIT RISK

 

The Company grants agri-business, commercial and residential loans to customers throughout Arkansas, Kansas, Missouri and Tennessee, along with credit card loans to customers throughout the United States.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer's creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

 

At September 30, 2015, the Company had outstanding commitments to extend credit aggregating approximately $498,614,000 and $792,660,000 for credit card commitments and other loan commitments.  At December 31, 2014, the Company had outstanding commitments to extend credit aggregating approximately $480,653,000 and $439,053,000 for credit card commitments and other loan commitments.

 

Standby letters of credit are conditional commitments issued by the Company, to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  The Company had total outstanding letters of credit amounting to $26,930,000 and $16,217,000 at September 30, 2015, and December 31, 2014, respectively, with terms ranging from 9 months to 15 years.  At September 30, 2015, the Company had no deferred revenue under standby letter of credit agreements and approximately $13,000 at December 31, 2014.

 

NOTE 19: PREFERRED STOCK

 

On February 27, 2015, as part of the acquisition of Community First, the Company issued 30,852 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (“Simmons Series A Preferred Stock”) in exchange for the outstanding shares of Community First Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Community First Series C Preferred Stock”). The preferred stock is held by the United States Department of the Treasury (“Treasury”) as the Community First Series C Preferred Stock was issued when Community First entered into a Small Business Lending Fund Securities Purchase Agreement with the Treasury.  The Simmons Series A Preferred Stock qualifies as Tier 1 capital, has a $1,000 liquidation value per share and will pay quarterly dividends.  The rate will remain fixed at 1% through February 18, 2016, at which time it will convert to a fixed rate of 9%. The Company plans to redeem the Simmons Series A Preferred Stock in the first quarter of 2016.

 

NOTE 20: FAIR VALUE MEASUREMENTS

 

ASC Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  Topic 820 describes three levels of inputs that may be used to measure fair value:

 

·Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.

 

·Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in valuation techniques during the periods ended September 30, 2015 and 2014.

 

Available-for-sale securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. In order to ensure the fair values are consistent with ASC Topic 820, we periodically check the fair values by comparing them to another pricing source, such as Bloomberg. The availability of pricing confirms Level 2 classification in the fair value hierarchy. The third-party pricing service is subject to an annual review of internal controls (SSAE 16), which is made available to us for our review. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company’s investment in a government money market mutual fund (the “AIM Fund”) is reported at fair value utilizing Level 1 inputs. The remainder of the Company's available-for-sale securities are reported at fair value utilizing Level 2 inputs.

 

Assets held in trading accounts – The Company’s trading account investment in the AIM Fund is reported at fair value utilizing Level 1 inputs.  The remainder of the Company's assets held in trading accounts are reported at fair value utilizing Level 2 inputs.

 

 

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The following table sets forth the Company’s financial assets and liabilities by level within the fair value hierarchy that were measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.

 

      Fair Value Measurements Using
(In thousands)  Fair Value  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable Inputs
(Level 3)
             
September 30, 2015                    
ASSETS                    
Available-for-sale securities                    
U.S. Treasury  $4,008   $-   $4,008   $- 
U.S. Government agencies   153,576    -    153,576    - 
Mortgage-backed securities   502,344    -    502,344    - 
State and political subdivisions   10,976    -    10,976    - 
Other securities   32,443    -    32,443    - 
Assets held in trading accounts   6,292    2,409    3,883    - 
                     
December 31, 2014                    
ASSETS                    
Available-for-sale securities                    
U.S. Treasury  $3,992   $-   $3,992   $- 
U.S. Government agencies   272,816    -    272,816    - 
Mortgage-backed securities   1,572    -    1,572    - 
State and political subdivisions   6,540    -    6,540    - 
Other securities   20,363    -    20,363    - 
Assets held in trading accounts   6,987    3,320    3,667    - 

 

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Financial assets and liabilities measured at fair value on a nonrecurring basis include the following:

 

Impaired loans (collateral dependent) – Loan impairment is reported when full payment under the loan terms is not expected. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

 

Appraisals are updated at renewal, if not more frequently, for all collateral dependent loans that are deemed impaired by way of impairment testing. Impairment testing for selected loans rated Special Mention or worse begins at $500,000, with testing on all loans over $1.5 million rated Special Mention or worse. All collateral dependent impaired loans meeting these thresholds have had updated appraisals or internally prepared evaluations within the last one to two years and these updated valuations are considered in the quarterly review and discussion of the corporate Special Asset Committee. On targeted CRE loans, appraisals/internally prepared valuations may be updated before the typical 1-3 year balloon/maturity period. If an updated valuation results in decreased value, a specific (ASC 310) impairment is placed against the loan, or a partial charge-down is initiated, depending on the circumstances and anticipation of the loan’s ability to remain a going concern, possibility of foreclosure, certain market factors, etc.

 

Foreclosed assets held for sale – Foreclosed assets held for sale are reported at fair value, less estimated costs to sell.  At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses.  Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income.  The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on observable market data.  As of September 30, 2015 and December 31, 2014, the fair value of foreclosed assets held for sale, excluding those covered by FDIC loss share agreements, less estimated costs to sell was $48.1 million and $44.9 million, respectively.

 

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The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral.  The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan.  Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.  It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.  As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount.  During the reported periods, collateral discounts ranged from 10% to 40% for commercial and residential real estate collateral.

 

Mortgage loans held for sale – Mortgage loans held for sale are reported at fair value if, on an aggregate basis, the fair value of the loans is less than cost.  In determining whether the fair value of loans held for sale is less than cost when quoted market prices are not available, the Company may consider outstanding investor commitments, discounted cash flow analyses with market assumptions or the fair value of the collateral if the loan is collateral dependent.  Such loans are classified within either Level 2 or Level 3 of the fair value hierarchy.  Where assumptions are made using significant unobservable inputs, such loans held for sale are classified as Level 3.  At September 30, 2015 and December 31, 2014, the aggregate fair value of mortgage loans held for sale exceeded their cost.  Accordingly, no mortgage loans held for sale were marked down and reported at fair value.

 

The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014.

 

      Fair Value Measurements Using
(In thousands)  Fair Value  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable Inputs
(Level 3)
             
September 30, 2015                    
ASSETS                    
Impaired loans (1) (2) (collateral dependent)  $18,413   $-   $-   $18,413 
Foreclosed assets held for sale (1)   12,292    -    -    12,292 
                     
December 31, 2014                    
ASSETS                    
Impaired loans (1) (2) (collateral dependent)  $12,276   $-   $-   $12,276 
Foreclosed assets held for sale (1)   3,417    -    -    3,417 

__________________________________________________

  (1)These amounts represent the resulting carrying amounts on the Consolidated Balance Sheets for impaired collateral dependent loans and foreclosed assets held for sale for which fair value re-measurements took place during the period.
  (2)Specific allocations of $1,100,000 and $733,000 were related to the impaired collateral dependent loans for which fair value re-measurements took place during the periods ended September 30, 2015 and December 31, 2014, respectively.

 

ASC Topic 825, Financial Instruments, requires disclosure in annual and interim financial statements of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The following methods and assumptions were used to estimate the fair value of classes of financial instruments.

 

Cash and cash equivalents and interest bearing balances due from banks – time – The carrying amount for cash and cash equivalents approximates fair value (Level 1). ).  The fair value of interest bearing balances due from banks - time is estimated using a discounted cash flow calculation that applies the rates currently offered on deposits of similar remaining maturities (Level 2).

 

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Held-to-maturity securities – Fair values for held-to-maturity securities equal quoted market prices, if available, such as for highly liquid government bonds (Level 1).  If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things (Level 2).  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

Loans – The fair value of loans, excluding loans acquired, is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations (Level 3).

 

Loans acquired – Fair values of loans acquired are based on a discounted cash flow methodology that considers factors including the type of loan and related collateral, variable or fixed rate, classification status, remaining term, interest rate, historical delinquencies, loan to value ratios, current market rates and remaining loan balance.  The loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.  The discount rates used for loans were based on current market rates for new originations of similar loans.  Estimated credit losses were also factored into the projected cash flows of the loans (Level 3).

 

FDIC indemnification asset – Fair value of the FDIC indemnification asset is based on the net present value of future cash proceeds expected to be received from the FDIC under the provisions of the loss share agreements using a discount rate that is based on current market rates (Level 3).

 

Deposits – The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2).  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities (Level 3).

 

Federal Funds purchased, securities sold under agreement to repurchase – The carrying amount for Federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value (Level 2).

 

Other borrowings – For short-term instruments, the carrying amount is a reasonable estimate of fair value.  For long-term debt, rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value (Level 2).

 

Subordinated debentures – The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities (Level 2).

 

Accrued interest receivable/payable – The carrying amounts of accrued interest approximated fair value (Level 2).

 

Commitments to extend credit, letters of credit and lines of credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

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The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

 

   Carrying  Fair Value Measurements   
(In thousands)  Amount  Level 1  Level 2  Level 3  Total
                
September 30, 2015                         
Financial assets:                         
Cash and cash equivalents  $400,998   $400,998   $-   $-   $400,998 
Interest bearing balances due from banks - time   16,504    -    16,498    -    16,498 
Held-to-maturity securities   776,294    -    785,029    -    785,029 
Mortgage loans held for sale   15,556    -    -    15,556    15,556 
Interest receivable   26,873    -    26,873    -    26,873 
Legacy loans, net   2,808,898    -    -    2,808,148    2,808,148 
Loans acquired, not covered by FDIC loss share, net   2,013,816    -    -    2,007,543    2,007,543 
                          
Financial liabilities:                         
Non-interest bearing transaction accounts   1,212,724    -    1,212,724    -    1,212,724 
Interest bearing transaction accounts and savings deposits   3,521,840    -    3,521,840    -    3,521,840 
Time deposits   1,355,236    -    -    1,353,622    1,353,622 
Federal funds purchased and securities sold under agreements to repurchase   110,437    -    110,437    -    110,437 
Other borrowings   173,426    -    178,214    -    178,214 
Subordinated debentures   61,906    -    57,202    -    57,202 
Interest payable   1,983    -    1,983    -    1,983 
                          
December 31, 2014                         
Financial assets:                         
Cash and cash equivalents  $335,909   $335,909   $-   $-   $335,909 
Held-to-maturity securities   777,587    -    780,533    -    780,533 
Mortgage loans held for sale   21,265    -    -    21,265    21,265 
Interest receivable   16,774    -    16,774    -    16,774 
Legacy loans, net   2,024,693    -    -    2,022,889    2,022,889 
Loans acquired, not covered by FDIC loss share, net   575,980    -    -    560,651    560,651 
Loans acquired, covered by FDIC loss share, net   106,933    -    -    105,789    105,789 
FDIC indemnification asset   22,663    -    -    22,663    22,663 
                          
Financial liabilities:                         
Non-interest bearing transaction accounts   889,260    -    889,260    -    889,260 
Interest bearing transaction accounts and savings deposits   2,006,271    -    2,006,271    -    2,006,271 
Time deposits   965,187    -    -    967,900    967,900 
Federal funds purchased and securities sold under agreements to repurchase   110,586    -    110,586    -    110,586 
Other borrowings   114,682    -    114,698    -    114,698 
Subordinated debentures   20,620    -    16,115    -    16,115 
Interest payable   1,147    -    1,147    -    1,147 

 

The fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

Audit Committee, Board of Directors and Stockholders

Simmons First National Corporation

Pine Bluff, Arkansas

 

We have reviewed the accompanying condensed consolidated balance sheet of SIMMONS FIRST NATIONAL CORPORATION as of September 30, 2015, and the related condensed consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2015 and 2014 and the related consolidated statements of stockholders’ equity and cash flows for the nine month periods ended September 30, 2015 and 2014.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 16, 2015, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

  BKD, LLP
   
  /s/ BKD, LLP

 

Little Rock, Arkansas

November 9, 2015

 

 

 

 

 

 

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

Our net income for the three months ended September 30, 2015 was $21.6 million and diluted earnings per share were $0.72, compared to net income of $8.8 million and $0.52 diluted earnings per share for the same period of 2014. Net income for the nine months ended September 30, 2015, was $50.3 million and diluted earnings per share were $1.83, compared to net income of $23.0 million and $1.39 diluted earnings per share for the same period in 2014.

 

Net income for each quarter in both 2015 and 2014 included significant nonrecurring items that impacted net income, primarily related to our acquisitions and branch right sizing initiatives. Excluding all nonrecurring items, core earnings for the three months ended September 30, 2015 were $25.6 million, or $0.85 diluted core earnings per share, compared to $10.7 million, or $0.63 diluted core earnings per share for the same period in 2014. Diluted core earnings per share increased by $0.22, or 34.9%. Year-to-date core earnings were $63.7 million, an increase of $36.4 million, or 133%, compared with the same period of 2014. Year-to-date diluted core earnings per share were $2.32, an increase of $0.67, or 40.6%. See Reconciliation of Non-GAAP Measures and Table 13 – Reconciliation of Core Earnings (non-GAAP) for additional discussion of non-GAAP measures.

 

In September, 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 $7.5 million.

 

During the second quarter of 2014 we entered into a definitive agreement and plan of merger with Community First Bancshares, Inc. (“Community First”), headquartered in Union City, Tennessee, including its wholly-owned bank subsidiary First State Bank (“First State”). During the second quarter of 2014 we also entered into a definitive agreement and plan of merger with Liberty Bancshares, Inc. (“Liberty”), headquartered in Springfield, Missouri, including its wholly-owned bank subsidiary Liberty Bank. On February 27, 2015, we closed the transactions to acquire Community First and Liberty and at March 31, 2015 Liberty Bank and First State operated as independently chartered banks. Liberty Bank was subsequently merged into our lead bank, Simmons First National Bank (“Simmons Bank” or “the Bank”), on April 24, 2015 with a simultaneous systems conversion while First State subsequently merged into Simmons Bank on September 4, 2015. As a result of these acquisitions, we have recognized $8.2 million in after tax merger related expenses during the year.

 

During the second quarter we entered into a definitive agreement and plan of merger with Ozark Trust & Investment Corporation (“OTIC”), including its wholly-owned non-deposit trust company, Trust Company of the Ozarks (“TCO”). TCO is headquartered in Springfield, Missouri and has over $1 billion in assets under management. The transaction was completed on October 29, 2015.

 

We are pleased with the growth in core earnings for the first three quarters of 2015. We reported record core earnings and record core earnings per share in each quarter. As a result of acquisitions and efficiency initiatives in recent reporting periods, we have and will continue to recognize one-time revenue and expense items which may skew our short-term core business results but provide long-term performance benefits. Our focus continues to be improvement in core operating income.

 

We are also pleased with the positive trends in our balance sheet, as reflected in our organic loan growth as well as in our growth from acquisitions, which enabled us to produce a net interest margin of 4.82% for the quarter.

 

Common stockholders’ equity as of September 30, 2015 was $1.05 billion, book value per share was $33.89 and tangible book value per share was $21.89.  Our ratio of stockholders’ equity to total assets was 13.8% and the tangible common equity to tangible assets ratio (TCE) was 9.1% at September 30, 2015. The Company’s Tier I leverage ratio of 10.8%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” levels (see Table 12 in the Capital section of this Item).

 

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Total assets were $7.60 billion at September 30, 2015, compared to $4.64 billion at December 31, 2014 and $4.69 billion at September 30, 2014.  Total loans, including loans acquired, were $4.85 billion at September 30, 2015, compared to $2.74 billion at December 31, 2014 and $2.76 billion at September 30, 2014. We continue to have good asset quality.

 

Simmons First National Corporation is a $7.6 billion Arkansas based financial holding company conducting financial operations throughout Arkansas, Kansas, Missouri and Tennessee.

 

CRITICAL ACCOUNTING POLICIES

 

Overview

 

We follow accounting and reporting policies that conform, in all material respects, to generally accepted accounting principles and to general practices within the financial services industry.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

 

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.

 

The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for loan losses, (b) acquisition accounting and valuation of assets and liabilities, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of employee benefit plans and (e) income taxes.

 

Allowance for Loan Losses on Loans Not Acquired

 

The allowance for loan losses is management’s estimate of probable losses in the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) other factors and trends that will affect specific loans and categories of loans. We establish 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. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued for probable losses on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral.

 

Our evaluation of the allowance for loan losses is inherently subjective as it requires material estimates. The actual amounts of loan losses realized in the near term could differ from the amounts estimated in arriving at the allowance for loan losses reported in the financial statements.

 

Acquisition Accounting, Acquired Loans

 

We account for our acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

 

54 

 

We evaluate loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. We evaluate purchased impaired loans 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. All loans acquired, whether or not previously covered by FDIC loss share agreements, are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

 

For impaired loans accounted for under ASC Topic 310-30, we continue to estimate cash flows expected to be collected on purchased credit impaired loans.  We evaluate at each balance sheet date whether the present value of our purchased credit impaired loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the remaining life of the purchased credit impaired loans.

 

Covered Loans and Related Indemnification Asset

 

During the third quarter, the Bank entered into an agreement with the FDIC to terminate all of its remaining loss-sharing agreements. As a result, all FDIC-acquired assets are now classified as non-covered. All acquired loans are recorded at their discounted net present value; therefore, they are excluded from the computations of the asset quality ratios for the legacy loan portfolio, except for their inclusion in total assets. Under the early termination, all rights and obligations of the Bank 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 our financial statements by removing the FDIC indemnification asset, receivable from FDIC, the FDIC true-up provision and recording a one-time, pre-tax charge of $7.5 million.

 

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

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.  Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.  We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles – Goodwill and Other, as amended by ASU 2011-08 – Testing Goodwill for Impairment.  ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually, or more frequently if certain conditions occur.  Impairment losses, if any, will be recorded as operating expenses.

 

Employee Benefit Plans

 

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

 

55 

 

In accordance with ASC Topic 718, Compensation – Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions.  This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate.  For additional information, see Note 13, Stock Based Compensation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report.

 

Income Taxes

We are subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business.  Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations.  Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law.  When preparing the Company’s income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management’s analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law.  Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year.  On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities.

 

NET INTEREST INCOME

 

Overview

 

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets.  Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets.  Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis.  The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 39.225%.

 

Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing.  Historically, approximately 70% of our loan portfolio and approximately 80% of our time deposits have repriced in one year or less.  These historical percentages are consistent with our current interest rate sensitivity.

 

Net Interest Income Quarter-to-Date Analysis

 

For the three month period ended September 30, 2015, net interest income on a fully taxable equivalent basis was $80.8 million, an increase of $37.4 million, or 86.0%, over the same period in 2014.  The increase in net interest income was the result of a $40.4 million increase in interest income and a $3.0 million increase in interest expense.

 

The increase in interest income primarily resulted from a $36.3 million increase in interest income on loans, consisting of legacy loans and acquired loans. The increase in loan volume during 2015 generated $36.6 million of additional interest income, while a 5 basis point decline in yield resulted in a $0.3 million decrease in interest income. The interest income increase from loan volume was primarily due to our Liberty, Community First and Delta Trust acquisitions; however, a significant portion of the increase in loan interest income can be attributed to our legacy loan growth of $876 million, or 44.6%, from the same period last year.

 

Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our acquired loans, as discussed in Note 5, Loans Acquired, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.  Each quarter, we estimate the cash flows expected to be collected from the acquired loans, and adjustments may or may not be required.  The cash flows estimate has increased based on payment histories and reduced loss expectations of the loans.  This resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loans.  For loans previously covered by FDIC loss sharing agreements, any increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements, which were recorded as indemnification assets.  The estimated adjustments to the indemnification assets were amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected life of the loan pools, whichever is shorter, and are recorded in non-interest expense.

 

56 

 

For the three months ended September 30, 2015, the adjustments decreased interest income by $4.7 million and increased non-interest income by $1.7 million compared to the same period in 2014. The net increase to 2015 third quarter pre-tax income was $6.4 million from 2014. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loans. With the termination of the loss sharing agreements, there will be no future adjustments to non-interest income.

 

The $3.1 million increase in interest expense is primarily from the growth in deposit accounts and other debt, primarily from Liberty, Community First and Delta Trust acquisitions.

 

Net Interest Income Year-to-Date Analysis

 

For the nine month period ended September 30, 2015, net interest income on a fully taxable equivalent basis was $211.2 million, an increase of $82.3 million, or 64.0%, over the same period in 2014.  The increase in net interest income was the result of a $88.7 million increase in interest income and a $6.4 million increase in interest expense.

 

The increase in interest income primarily resulted from a $79.0 million increase in interest income on loans and a $8.2 million increase in interest income on investment securities. The increase in interest income on investment securities was primarily due to volume increases resulting from the Liberty and Community First acquisitions. The increase in loan volume during 2015 generated $86.8 million of additional interest income, while a 41 basis point decline in yield resulted in a $7.8 million decrease in interest income. The interest income increase from loan volume was primarily due to our Liberty, Community First and Delta Trust acquisitions.

 

For the nine months ended September 30, 2015, the acquired loan cash flow adjustments resulted in an increase to interest income of $0.8 million and an increase to non-interest income of $9.9 million compared to the same period in 2014. The net increase to year-to-date 2015 pre-tax income was $10.7 million compared with 2014.

 

The $6.4 million increase in interest expense is primarily from the growth in deposit accounts and other debt, primarily from Liberty, Community First and Delta Trust acquisitions.

 

Net Interest Margin

 

Our net interest margin increased 46 basis points to 4.82% for the three month period ended September 30, 2015, when compared to 4.36% for the same period in 2014. For the nine month period ended September 30, 2015, net interest margin increased 17 basis points to 4.58% when compared to 4.41% for the same period in 2014.  The most significant factor in the increasing margin during the three month period ended September 30, 2015 is the impact of the decrease in accretable yield adjustments discussed above offset by the impact of the loans acquired in the Liberty and Community First acquisitions. Normalized for all accretion on acquired loans, our net interest margin at September 30, 2015 and 2014 was 3.82% and 3.49%, respectively.

 

57 

 

Net Interest Income Tables

 

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine month periods ended September 30, 2015 and 2014, respectively, as well as changes in fully taxable equivalent net interest margin for the three and nine month periods ended September 30, 2015, versus September 30, 2014.

 

Table 1:  Analysis of Net Interest Margin

(FTE =Fully Taxable Equivalent)

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
(In thousands)  2015  2014  2015  2014
             
Interest income  $85,199   $45,215   $221,624   $134,092 
FTE adjustment   2,172    1,702    6,332    5,089 
Interest income – FTE   87,371    46,917    227,956    139,181 
Interest expense   6,523    3,443    16,780    10,403 
Net interest income – FTE  $80,848   $43,474   $211,176   $128,778 
                     
Yield on earning assets – FTE   5.20%   4.71%   4.94%   4.77%
Cost of interest bearing liabilities   0.48%   0.44%   0.45%   0.44%
Net interest spread – FTE   4.72%   4.27%   4.49%   4.33%
Net interest margin – FTE   4.82%   4.36%   4.58%   4.41%

 

Table 2:  Changes in Fully Taxable Equivalent Net Interest Margin

 

(In thousands)  Three Months Ended
September 30,
2015 vs. 2014
  Nine Months Ended
September 30,
2015 vs. 2014
           
Increase due to change in earning assets  $38,522   $92,647 
Increase (decrease) due to change in earning asset yields   1,932    (3,872)
Decrease due to change in interest bearing liabilities   (2,540)   (5,779)
Decrease due to change in interest rates paid on interest bearing liabilities   (540)   (598)
Increase in net interest income  $37,374   $82,398 

 

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Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three months ended September 30, 2015 and 2014.  The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods.  The analysis is presented on a fully taxable equivalent basis.  Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

 

Table 3:  Average Balance Sheets and Net Interest Income Analysis

 

   Three Months Ended September 30,
   2015  2014
   Average  Income/  Yield/  Average  Income/  Yield/
($ in thousands)  Balance  Expense  Rate(%)  Balance  Expense  Rate(%)
                   
ASSETS                              
Earning assets:                              
Interest bearing balances due from banks  $206,467   $122    0.23   $288,258   $132    0.18 
Federal funds sold   19,086    15    0.31    6,794    12    0.70 
Investment securities - taxable   1,209,985    4,901    1.61    789,252    2,043    1.03 
Investment securities - non-taxable   357,048    5,582    6.20    321,760    4,369    5.39 
Mortgage loans held for sale   26,379    291    4.38    24,942    269    4.28 
Assets held in trading accounts   6,401    4    0.25    6,841    3    0.17 
Loans   4,835,068    76,456    6.27    2,518,185    40,089    6.32 
Total interest earning assets   6,660,434    87,371    5.20    3,956,032    46,917    4.71 
Non-earning assets   947,333              482,775           
Total assets  $7,607,767             $4,438,807           
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY                              
Liabilities:                              
Interest bearing liabilities                              
Interest bearing transaction and savings accounts  $3,600,930   $2,222    0.24   $1,869,095   $771    0.16 
Time deposits   1,397,928    1,936    0.55    1,013,326    1,461    0.57 
Total interest bearing deposits   4,998,858    4,158    0.33    2,882,421    2,232    0.31 
Federal funds purchased and securities sold under agreement to repurchase   109,311    55    0.20    108,357    55    0.20 
Other borrowings   197,832    1,812    3.63    117,664    996    3.36 
Subordinated debentures   61,851    498    3.19    20,620    160    3.08 
Total interest bearing liabilities   5,367,852    6,523    0.48    3,129,062    3,443    0.44 
Non-interest bearing liabilities:                              
Non-interest bearing deposits   1,121,078              828,340           
Other liabilities   74,696              38,950           
Total liabilities   6,563,626              3,996,352           
Stockholders’ equity   1,044,141              442,455           
Total liabilities and stockholders’ equity  $7,607,767             $4,438,807           
Net interest spread             4.72              4.27 
Net interest margin       $80,848    4.82        $43,474    4.36 

 

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   Nine Months Ended September 30,
   2015  2014
   Average  Income/  Yield/  Average  Income/  Yield/
($ in thousands)  Balance  Expense  Rate(%)  Balance  Expense  Rate(%)
                   
ASSETS                              
Earning assets:                              
Interest bearing balances due from banks  $295,476   $561    0.25   $417,709   $691    0.22 
Federal funds sold   50,618    118    0.31    2,721    16    0.79 
Investment securities - taxable   1,152,756    12,352    1.43    725,088    6,050    1.12 
Investment securities - non-taxable   349,511    16,184    6.19    318,724    13,046    5.47 
Mortgage loans held for sale   26,230    813    4.14    15,637    506    4.33 
Assets held in trading accounts   6,591    11    0.22    6,968    13    0.25 
Loans   4,289,339    197,917    6.17    2,416,443    118,859    6.58 
Total interest earning assets   6,170,521    227,956    4.94    3,903,290    139,181    4.77 
Non-earning assets   866,014              499,947           
Total assets  $7,036,535             $4,403,237           
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY                              
Liabilities:                              
Interest bearing liabilities                              
Interest bearing transaction and savings accounts  $3,274,344   $5,701    0.23   $1,844,679   $2,185    0.16 
Time deposits   1,346,879    5,596    0.56    1,053,271    4,552    0.58 
Total interest bearing deposits   4,621,223    11,297    0.33    2,897,950    6,737    0.31 
Federal funds purchased and securities sold under agreement to repurchase   115,713    177    0.20    108,303    194    0.24 
Other borrowings   186,955    4,014    2.87    117,111    2,995    3.42 
Subordinated debentures   53,506    1,292    3.23    20,620    477    3.09 
Total interest bearing liabilities   4,977,397    16,780    0.45    3,143,984    10,403    0.44 
Non-interest bearing liabilities:                              
Non-interest bearing deposits   1,064,273              795,665           
Other liabilities   63,171              41,649           
Total liabilities   6,104,841              3,981,298           
Stockholders’ equity   931,694              421,939           
Total liabilities and stockholders’ equity  $7,036,535             $4,403,237           
Net interest spread             4.49              4.33 
Net interest margin       $211,176    4.58        $128,778    4.41 

 

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Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine month periods ended September 30, 2015, as compared to the same period of the prior year.  The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

 

Table 4:  Volume/Rate Analysis

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015 over 2014  2015 over 2014
(In thousands, on a fully     Yield/        Yield/   
taxable equivalent basis)  Volume  Rate  Total  Volume  Rate  Total
                   
Increase (decrease) in:                              
                               
Interest income:                              
Interest bearing balances due from banks  $(42)  $32   $(10)  $(222)  $92   $(130)
Federal funds sold   13    (10)   3    118    (16)   102 
Investment securities - taxable   1,388    1,470    2,858    4,252    2,050    6,302 
Investment securities - non-taxable   510    703    1,213    1,330    1,808    3,138 
Mortgage loans held for sale   15    7    22    330    (23)   307 
Assets held in trading accounts   -    1    1    (1)   (1)   (2)
Loans   36,638    (271)   36,367    86,840    (7,782)   79,058 
Total   38,522    1,932    40,454    92,647    (3,872)   88,775 
                               
Interest expense:                              
Interest bearing transaction and savings accounts   944    507    1,451    2,188    1,328    3,516 
Time deposits   535    (60)   475    1,226    (182)   1,044 
Federal funds purchased and securities sold under agreements to repurchase   -    -    -    12    (29)   (17)
Other borrowings   729    87    816    1,560    (541)   1,019 
Subordinated debentures   332    6    338    793    22    815 
Total   2,540    540    3,080    5,779    598    6,377 
Increase (decrease) in net interest income  $35,982   $1,392   $37,374   $86,868   $(4,470)  $82,398 

 

PROVISION FOR LOAN LOSSES

 

The provision for loan losses represents management's determination of the amount necessary to be charged against the current period's earnings in order to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk inherent in the loan portfolio. The level of provision to the allowance is based on management's judgment, with consideration given to the composition, maturity and other qualitative characteristics of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loan loss experience. It is management's practice to review the allowance on a monthly basis, and, after considering the factors previously noted, to determine the level of provision made to the allowance.

 

The provision for loan losses for the three month period ended September 30, 2015, was $1.6 million, compared to $1.1 million for the three month period ended September 30, 2014, an increase of $500,000. The provision for loan losses for the nine month period ended September 30, 2015, was $5.8 million, compared to $3.6 million for the nine month period ended September 30, 2014, an increase of $2.2 million. See Allowance for Loan Losses section for additional information.

 

The provision increase resulted from several reasons. Our increased organic legacy loan growth rate required additional allowance. Significant loan growth in our new Missouri and Tennessee markets, both from new loans and from acquired loans migrating to legacy, required an allowance to be established through a provision. Finally, a $133,000 and $737,000 provision were recorded on acquired loans during the three and nine months ended September 30, 2015 as a result of a shortage in our credit mark on certain purchased credit impaired loans.

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NON-INTEREST INCOME

 

Total non-interest income was $23.5 million for the three month period ended September 30, 2015, an increase of $7.5 million, or 46.5%, compared to $16.0 million for the same period in 2014. Total non-interest income was $67.0 million for the nine month period ended September 30, 2015, an increase of $26.3 million, or 64.6%, compared to $40.7 million for the same period in 2014.

 

Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and credit card fees.  Non-interest income also includes income on the sale of mortgage loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance, gains (losses) from sales of securities and gains (losses) related to FDIC-assisted transactions and covered assets.

 

Table 5 shows non-interest income for the three and nine month periods ended September 30, 2015 and 2014, respectively, as well as changes in 2015 from 2014.

 

Table 5:  Non-Interest Income

 

   Three Months  2015  Nine Months  2015
   Ended September 30  Change from  Ended September 30  Change from
(In thousands)  2015  2014  2014  2015  2014  2014
Trust income  $2,215   $1,838   $377    20.51%  $6,536   $4,929   $1,607    32.60%
Service charges on deposit accounts   8,488    6,238    2,250    36.07    22,881    19,098    3,783    19.81 
Other service charges and fees   3,089    808    2,281    282.30    8,044    2,490    5,554    223.05 
Mortgage lending income   3,446    1,812    1,634    90.18    9,156    3,885    5,271    135.68 
Investment banking income   663    284    379    133.45    1,808    620    1,188    191.61 
Debit and credit card fees   6,879    5,769    1,110    19.24    19,013    17,213    1,800    10.46 
Bank owned life insurance income   748    411    337    82.00    2,066    1,117    949    84.96 
Gain (loss) on sale of securities   40    (18)   58    -322.22    2    20    (18)   -90.00 
Gain on sale of banking operations   2,110    -    2,110    100.00    2,110    -    2,110    100.00 
Net (loss) on assets covered by FDIC loss share agreements   (9,085)   (3,744)   (5,341)   142.65    (14,812)   (17,303)   2,491    -14.40 
Net gain on sale of premises held for sale   153    856    (703)   -82.13    153    3,167    (3,014)   -95.17 
Other income   4,743    1,781    2,962    166.31    9,999    5,452    4,547    83.40 
Total non-interest income  $23,489   $16,035   $7,454    46.49%  $66,956   $40,688   $26,268    64.56%

 

Recurring fee income (service charges, trust fees and credit card fees) for the three month period ended September 30, 2015, was $20.7 million, an increase of $6.0 million from the three month period ended September 30, 2014.  Service charges on deposit accounts increased by $2.3 million or 36.07% and other service charges and fees increased by $2.3 million, or 282.30%. The majority of the increase in recurring fee income was due to the additions of accounts from the Delta Trust, Community First and Liberty acquisitions.

 

Mortgage lending income increased by $1.6 million for the three months ended September 30, 2015 compared to last year, due primarily to additional lenders and customers as a result of the Delta Trust, Community First and Liberty acquisitions. Investment banking income increased by $379,000, due primarily to the addition of the retail investment banking operation of Delta Trust.

 

A gain of $2.1 million was recorded on the sale of the banking operations located in Salina, Kansas consisting of three branches that occurred in August 2015. Included with the sale was $5.3 million in loans and $77.8 million in deposits.

 

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Net loss on assets covered by FDIC loss share agreements increased by $5.3 million due primarily to the $7.5 million expense related to the termination of the loss share agreements. This expense was partially offset by a $2.1 million decrease in the indemnification asset.

 

NON-INTEREST EXPENSE

 

Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for the operation of the Company.  Management remains committed to controlling the level of non-interest expense, through the continued use of expense control measures that have been installed.  We utilize an extensive profit planning and reporting system involving all subsidiaries.  Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets.  These profit plans are subject to extensive initial reviews and monitored by management on a monthly basis.  Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met.  We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements.

 

Non-interest expense for the three months ended September 30, 2015 was $67.9 million, an increase of $23.6 million, or 53.1%, from the same period in 2014. We incurred additional expenses of $458,000 in the three months ended September 30, 2015 related to the closure of twelve underperforming branches in the second quarter as part of our branch right sizing initiative, compared with $151,000 in branch right sizing expenses in the same period of 2014. We also incurred merger related costs of $857,000 in 2015, compared with $3.6 million in 2014. Normalizing for the nonrecurring merger related costs and branch right sizing expenses, non-interest expense for the three months ended September 30, 2015 increased $26.2 million, or 64.93 %, from the same period in 2014, primarily due to the incremental operating expenses of the acquired Community First, Liberty and Delta Trust franchises.

 

Non-interest expense for the nine months ended September 30, 2015 was $190.1 million, an increase of $61.4 million, or 47.7%, from the same period in 2014. The most significant impact to non-interest expense were the following nonrecurring items.

 

First, we saw a $6.3 million increase in merger related costs from last year. Included in the nine months ended September 30, 2015 were $12.5 million in merger related costs, primarily from our February acquisitions of Liberty and Community First. In the same period of 2014 we recorded $6.3 million of merger related costs associated with our Metropolitan and Delta Trust acquisitions. We consolidated our six subsidiary banks into Simmons Bank in 2014, and recorded $0.6 million of charter consolidation costs.

 

Second, branch right sizing expense for the nine months ended September 30, 2015 decreased by $1.1 million from the same period in 2014. We had $3.2 million of branch right sizing expense in 2015 from our twelve branch closings. For the same period in 2014, we had expenses of $4.3 million associated with the closure and maintenance of eleven legacy Simmons branches as part of our initial branch right sizing strategy related to the November 2013 acquisition of Metropolitan.

 

Normalizing for the nonrecurring merger related costs and branch right sizing, non-interest expense for the nine months ended September 30, 2015 increased $56.8 million, or 48.3%, from the same period in 2014, primarily due to the incremental operating expenses of the acquired franchises.

 

Salaries and employee benefits increased by $16.5 million and $35.3 million for the three and nine months ended September 30, 2015. Occupancy expense increased by $1.6 million and $3.1 million for the same periods, while furniture and equipment expense increased by $1.8 million and $4.0 million from the same periods in 2014. These increases, along with the increases in several other operating expense categories, were a result of the Delta Trust, Liberty and Community First acquisitions.

 

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Table 6 below shows non-interest expense for the three and nine month periods ended September 30, 2015 and 2014, respectively, as well as changes in 2015 from 2014.

 

Table 6:  Non-Interest Expense

 

   Three Months  2015  Nine Months  2015
   Ended September 30  Change from  Ended September 30  Change from
(In thousands)  2015  2014  2014  2015  2014  2014
Salaries and employee benefits  $37,417   $20,892   $16,525    79.10%  $99,662   $64,338   $35,324    54.90%
Occupancy expense, net   4,812    3,204    1,608    50.19    13,440    10,338    3,102    30.01 
Furniture and equipment expense   4,202    2,363    1,839    77.82    10,621    6,592    4,029    61.12 
Other real estate and foreclosure expense   2,297    1,864    433    23.23    3,694    3,112    582    18.70 
Deposit insurance   1,013    877    136    15.51    2,979    2,630    349    13.27 
Merger related costs   857    3,628    (2,771)   -76.38    12,523    6,255    6,269    100.24 
Other operating expenses:                                        
Professional services   2,111    2,201    (90)   -4.09    6,248    5,447    801    14.71 
Postage   1,079    853    226    26.49    3,097    2,603    494    18.98 
Telephone   1,521    774    747    96.51    3,698    2,179    1,519    69.71 
Credit card expenses   2,309    2,231    78    3.50    6,579    6,553    26    0.40 
Operating supplies   687    507    180    35.50    1,693    1,473    220    14.94 
Amortization of intangibles   1,265    454    811    178.63    3,552    1,374    2,178    158.52 
Branch right sizing expense   458    151    307    203.31    3,237    4,329    (1,092)   -25.23 
Other expense   7,884    4,355    3,529    81.03    19,085    11,534    7,550    65.45 
Total non-interest expense  $67,912   $44,354   $23,558    53.11%  $190,108   $128,757   $61,351    47.65%

 

LOAN PORTFOLIO

 

Our legacy loan portfolio, excluding loans acquired, averaged $2.39 billion and $1.82 billion during the first nine months of 2015 and 2014, respectively.  As of September 30, 2015, total loans, excluding loans acquired, were $2.84 billion, an increase of $785.6 million from December 31, 2014.  The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).

 

When we make a credit decision on an acquired loan not covered by FDIC loss share as a result of the loan maturing or renewing, the outstanding balance of that loan migrates from loans acquired to legacy loans. Our legacy loan growth from December 31, 2014 to September 30, 2015 included approximately $197 million in balances that migrated from acquired loans during the period. These migrated loan balances are included in the legacy loan balances as of September 30, 2015.

 

We seek to manage our credit risk by diversifying our 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 loan losses and regularly reviewing loans through the internal loan review process.  The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region.  We seek to use diversification within the loan portfolio to reduce 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.  We use the allowance for loan losses as a method to value the loan portfolio at its estimated collectible amount.  Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits.

 

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The balances of loans outstanding, excluding loans acquired, at the indicated dates are reflected in Table 7, according to type of loan.

 

Table 7:  Loan Portfolio

 

(In thousands)  September 30,
2015
  December 31,
2014
           
Consumer:          
Credit cards  $171,701   $185,380 
Other consumer   182,472    103,402 
Total consumer   354,173    288,782 
Real estate:          
Construction   253,761    181,968 
Single family residential   623,089    455,563 
Other commercial   1,037,559    714,797 
Total real estate   1,914,409    1,352,328 
Commercial:          
Commercial   394,422    291,820 
Agricultural   170,257    115,658 
Total commercial   564,679    407,478 
Other   6,017    5,133 
Total loans, excluding loans acquired, before allowance for loan losses  $2,839,278   $2,053,721 

 

Consumer loans consist of credit card loans and other consumer loans.  Consumer loans were $354.2 million at September 30, 2015, or 12.5% of total loans, compared to $288.8 million, or 14.1% of total loans at December 31, 2014.  The increase in consumer loans from December 31, 2014, to September 30, 2015, was due to growth in direct and indirect consumer loans which was partially offset by the seasonal decline in our credit card portfolio, as expected.

 

Real estate loans consist of construction loans, single-family residential loans and commercial real estate loans.  Real estate loans were $1.914 billion at September 30, 2015, or 67.4% of total loans, compared to the $1.352 billion, or 65.9%, of total loans at December 31, 2014, an increase of $562.1 million.

 

Commercial loans consist of non-agricultural commercial loans and agricultural loans.  Commercial loans were $564.7 million at September 30, 2015, or 19.9% of total loans, compared to $407.5 million, or 19.8% of total loans at December 31, 2014, an increase of $157.2 million.  Non-agricultural commercial loans increased to $394.4 million, a $102.6 million, or 35.2%, growth from December 31, 2014. Agricultural loans increased to $170.3 million, a $54.6 million, or 47.2%, growth primarily due to seasonality of the portfolio, which normally peaks in the third quarter and is at its lowest point at the end of the first quarter.

 

LOANS ACQUIRED

 

On February 27, 2015, we completed the acquisition of Liberty and issued 5,181,337 shares of the Company’s common stock valued at approximately $212.2 million as of February 27, 2015 in exchange for all outstanding shares of Liberty common stock. Included in the acquisition were loans with a fair value of $780.7 million.

 

On February 27, 2015, we also completed the acquisition of Community First and issued 6,552,915 shares of the Company’s 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. We also issued $30.9 million of preferred stock in exchange for all outstanding shares of Community First preferred stock. Included in the acquisition were loans with a fair value of $1.1 billion.

 

On August 31, 2014, we completed the acquisition of Delta Trust, and issued 1,629,424 shares of the Company’s common stock valued at approximately $65.0 million as of August 29, 2014, plus $2.4 million in cash in exchange for all outstanding shares of Delta Trust common stock. Included in the acquisition were loans with a fair value of $311.7 million.

 

On November 25, 2013, we completed the acquisition of Metropolitan, in which the Company purchased all the stock of Metropolitan for $53.6 million in cash. The acquisition was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code. Included in the acquisition were loans with a fair value of $457.4 million and foreclosed assets with a fair value of $42.9 million.

 

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On September 30, 2013 we acquired a $9.8 million credit card portfolio for a premium of $1.3 million.

 

On October 19, 2012, we acquired certain assets and assumed certain deposits and other liabilities of Excel Bank of Sedalia, Missouri, in an FDIC-assisted transaction. On September 14, 2012, the Company acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Truman Bank of St. Louis, Missouri, in an FDIC-assisted transaction. In 2010, we acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of two other failed banks in FDIC-assisted transactions. Loans comprise the majority of the assets acquired in the FDIC-assisted transactions. The majority of the loans acquired, along with the majority of the foreclosed assets acquired, were subject to loss share agreements with the FDIC whereby SFNB was indemnified against 80% of losses. These loans and foreclosed assets, as well as the related indemnification asset from the FDIC, were presented as covered assets in the accompanying consolidated financial statements.

 

On September 15, 2015, we entered into an agreement with the FDIC to terminate all loss share agreements. 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. As a result, we have reclassified loans previously covered by FDIC loss share to acquired loans not covered and reclassified foreclosed assets previously covered by FDIC loss share to foreclosed assets not covered.

 

Table 8:  Assets Acquired

 

(in thousands)  September 30,
2015
  December 31,
2014
       
Consumer:          
  Other consumer  $100,080   $8,514 
Total consumer   100,080    8,514 
Real estate:          
Construction   116,302    46,911 
Single family residential   618,031    175,970 
Other commercial   988,831    390,877 
Total real estate   1,723,164    613,758 
Commercial:          
Commercial   164,942    56,134 
Agricultural   25,630    4,507 
Total commercial   190,572    60,641 
Other   -    - 
Total loans acquired (1)  $2,013,816   $682,913 

_______________________________________________

(1)  Loans acquired are reported net of a $954,000 allowance at September 30, 2015.  Loans acquired include $106.9 million (net of a $954,000 allowance) of loans covered by FDIC loss share agreements at December 31, 2014.

 

Approximately $2.0 billion of the loans acquired in the Liberty, Community First, Metropolitan and Delta Trust acquisitions were evaluated and are being accounted for in accordance with 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. We evaluated the remaining loans purchased in conjunction with the acquisitions of Liberty, Community First, Metropolitan and Delta Trust 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. Because some loans we evaluated, previously covered by loss share agreements, were determined to have experienced impairment in the estimated credit quality or cash flows during 2014, we recorded a provision to establish a $954,000 allowance for loan losses for covered purchased impaired loans.  With the termination of our FDIC loss share agreements, the $954,000 allowance has been reclassified as allowance on acquired loans, not covered by loss share. Some purchased impaired loans were determined to have experienced additional impairment upon disposition or foreclosure in 2015. During the three and nine months ended September 30, 2015, we recorded a $133,000 and $737,000 provision, respectively, for these loans with a subsequent charge-off, resulting in no increase to the allowance for loan losses for purchased impaired loans at September 30, 2015. See Note 2 and Note 5 of the Notes to Consolidated Financial Statements for further discussion of loans acquired.

 

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ASSET QUALITY

 

A loan is considered impaired when it is probable that we will not receive all amounts due according to the contractual terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and nonaccrual loans) and certain other loans identified by management that are still performing.

 

Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. Simmons Bank recognizes income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses.

 

Credit card loans are classified as impaired when payment of interest or principal is 90 days past due. Litigation accounts are placed on nonaccrual until such time as deemed uncollectible. Credit card loans are generally charged off when payment of interest or principal exceeds 180 days past due, but are turned over to the credit card recovery department, to be pursued until such time as they are determined, on a case-by-case basis, to be uncollectible.

 

Total non-performing assets, excluding all loans acquired and foreclosed assets covered by FDIC loss share agreements, increased by $7.1 million from December 31, 2014 to September 30, 2015.  Foreclosed assets held for sale (legacy and acquired) increased by $3.2 million. During the nine months ended September 30, 2015,$6.1 million of previously closed branch buildings and land was reclassified to OREO from premises held for sale. There was no deterioration or further write-down of these properties. This increase was partially offset by the reduction in other foreclosed assets of $2.9 million. Under ASC Topic 360, there is a one year maximum holding period to classify premises as held for sale. Nonaccrual loans increased by $3.3 million during the period, primarily CRE loans. Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired non-covered foreclosed assets, as a percent of total assets were 0.89% at September 30, 2015, compared to 1.30% at December 31, 2014.

 

From time to time, certain borrowers of all types are experiencing declines in income and cash flow.  As a result, many borrowers are seeking to reduce contractual cash outlays, the most prominent being debt payments.  In an effort to preserve our net interest margin and earning assets, we are open to working with existing customers in order to maximize the collectability of the debt.

 

When we restructure a loan to a borrower that is experiencing financial difficulty and grant a concession that we would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR.  The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

 

Under ASC Topic 310-10-35 – Subsequent Measurement, a TDR is considered to be impaired, and an impairment analysis must be performed.  We assess the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determine 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.  Our TDR balance was $4.3 million at September 30, 2015, an increase of $1.08 million from December 31, 2014.  The majority of our TDRs remain in the CRE portfolio.

 

We return 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.

 

We continue to maintain good asset quality, compared to the industry.  The allowance for loan losses as a percent of total legacy loans was 1.07% as of September 30, 2015.  Non-performing loans equaled 0.59% of total legacy loans.  Non-performing assets were 0.86% of total assets, a 39 basis point improvement from December 31, 2014.  The allowance for loan losses was 181% of non-performing loans.  Our annualized net charge-offs to total loans for the first nine months of 2015 was 0.21%.  Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.12%.  Annualized net credit card charge-offs to total credit card loans were 1.30%, compared to 1.27% during the full year 2014, and more than 150 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

 

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Table 9 presents information concerning non-performing assets, including nonaccrual loans and foreclosed assets held for sale (excluding all loans acquired and excluding foreclosed assets covered by FDIC loss share).

 

Table 9:  Non-performing Assets

 

($ in thousands)  September 30,
2015
  December 31,
2014
           
Nonaccrual loans (1)  $15,305   $12,038 
Loans past due 90 days or more (principal or interest payments)   1,506    961 
Total non-performing loans   16,811    12,999 
Other non-performing assets:          
Foreclosed assets held for sale   48,073    44,856 
Other non-performing assets   172    97 
Total other non-performing assets   48,245    44,953 
Total non-performing assets  $65,056   $57,952 
           
Performing TDRs  $1,955   $2,233 
Allowance for loan losses to non-performing loans   181%   223%
Non-performing loans to total loans   0.59%   0.63%
Non-performing assets to total assets (2)   0.86%   1.25%

_______________________________________

(1)Includes nonaccrual TDRs of approximately $2.4 million at September 30, 2015 and $1.0 million at December 31, 2014.
(2)Excludes all loans acquired and excludes foreclosed assets acquired, covered by FDIC loss share agreements, except for their inclusion in total assets.

 

There was no interest income on nonaccrual loans recorded for the three and nine month periods ended September 30, 2015 and 2014.

 

At September 30, 2015, impaired loans, net of government guarantees and loans acquired, were $17.2 million compared to $14.7 million at December 31, 2014.  On an ongoing basis, management evaluates the underlying collateral on all impaired loans and allocates specific reserves, where appropriate, in order to absorb potential losses if the collateral were ultimately foreclosed.

 

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ALLOWANCE FOR LOAN LOSSES

 

Overview

 

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 our 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.

 

Specific Allocations

 

A loan is considered impaired when it is probable that we 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, our 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.

 

General Allocations

 

The general allocation is calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) other factors and trends that will affect specific loans and categories of loans. We established 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. 

 

Reserve for Unfunded Commitments

 

In addition to the allowance for loan losses, we have established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level sufficient to absorb losses arising from unfunded loan commitments. The adequacy of the reserve for unfunded commitments is determined monthly based on methodology similar to our methodology for determining the allowance for loan losses. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense 

 

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An analysis of the allowance for loan losses is shown in Table 10.

 

Table 10:  Allowance for Loan Losses

 

(In thousands)  2015  2014
       
Balance, beginning of year  $29,028   $27,442 
Loans charged off:          
Credit card   2,350    2,329 
Other consumer   1,183    1,220 
Real estate   735    2,484 
Commercial   761    734 
Total loans charged off   5,029    6,767 
Recoveries of loans previously charged off:          
Credit card   667    676 
Other consumer   398    376 
Real estate   83    1,510 
Commercial   178    201 
Total recoveries   1,326    2,763 
Net loans charged off   3,703    4,004 
Provision for loan losses (1)   5,055    3,638 
Balance, September 30 (2)  $30,380    27,076 
           
Loans charged off:          
Credit card        859 
Other consumer        783 
Real estate        429 
Commercial        318 
Total loans charged off        2,389 
Recoveries of loans previously charged off:          
Credit card        220 
Other consumer        94 
Real estate        295 
Commercial        125 
Total recoveries        734 
Net loans charged off        1,655 
Provision for loan losses        3,607 
Balance, end of year (2)       $29,028 

_______________________________________

(1)Provision for loan losses of $737,000 attributable to loans acquired, was excluded from this table for 2015 (total year-to-date provision for loan losses for the nine months ended September 30, 2015 is $5,792,000). The $737,000 was subsequently charged-off, resulting in an increase in the allowance related to loans acquired.
(2)Allowance for loan losses at September 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 and December 31, 2014 was $31,334,000 and $29,982,000, respectively.

 

Provision for Loan Losses

 

The amount of provision to the allowance during the three and nine months ended September 30, 2015 and 2014, and for the year ended December 31, 2014, was based on management's judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loss experience.  It is management's practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance. 

 

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Allowance for Loan Losses Allocation

 

As of September 30, 2015, the allowance for loan losses reflects an increase of approximately $1.4 million from December 31, 2014, while total loans, excluding loans acquired, increased by $785.6 million over the same nine month period.  The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix.

 

The following table sets forth the sum of the amounts of the allowance for loan losses attributable to individual loans within each category, or loan categories in general, excluding loans acquired. The table also reflects the percentage of loans in each category to the total loan portfolio, excluding loans acquired, for each of the periods indicated. These allowance amounts have been computed using the Company’s internal grading system, specific impairment analysis, qualitative and quantitative factor allocations. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories. We had no allocation of our allowance to loans acquired for any of the periods presented.

 

Table 11:  Allocation of Allowance for Loan Losses

 

   September 30, 2015  December 31, 2014
   Allowance  % of  Allowance  % of
($ in thousands)  Amount  loans (1)  Amount  loans (1)
             
Credit cards  $3,933    6.1%  $5,445    9.1%
Other consumer   1,366    6.4%   1,427    5.0%
Real estate   19,287    67.4%   15,161    65.9%
Commercial   5,519    19.9%   6,962    19.8%
Other   275    0.2%   33    0.2%
Total  $30,380    100.0%  $29,028    100.0%

_______________________________________

(1) Percentage of loans in each category to total loans, excluding loans acquired.

 

DEPOSITS

 

Deposits are our primary source of funding for earning assets and are primarily developed through our network of over 100 financial centers.  We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits.  Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits.  As of September 30, 2015, core deposits comprised 88.8% of our total deposits.

 

We continually monitor the funding requirements along with competitive interest rates in the markets we serve.  Because of our community banking philosophy, our executives in the local markets establish the interest rates offered on both core and non-core deposits.  This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet the funding requirements.  We believe we are paying a competitive rate when compared with pricing in those markets.

 

We manage our interest expense through deposit pricing and do not anticipate a significant change in total deposits. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs.  We can also utilize brokered deposits as an additional source of funding to meet liquidity needs.

 

Our total deposits as of September 30, 2015, were $6.100 billion, an increase of $2.229 billion from December 31, 2014. The increase is primarily the result of the Liberty and Community First acquisitions.  We have continued our strategy to move more volatile time deposits to less expensive, revenue enhancing transaction accounts. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $4.735 billion at September 30, 2015, compared to $2.896 billion at December 31, 2014, a $1.839 billion increase. Total time deposits increased $390 million to $1.355 billion at September 30, 2015, from $965 million at December 31, 2014. In an attempt to utilize some of our excess liquidity, we have priced deposits in a manner to encourage a reduction in non-relationship time deposits. We had $1.5 million and $7.4 million of brokered deposits at September 30, 2015, and December 31, 2014, respectively.

 

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OTHER BORROWINGS AND SUBORDINATED DEBENTURES

 

Our total debt was $235.3 million and $135.3 million at September 30, 2015 and December 31, 2014, respectively. The outstanding balance for September 30, 2015 includes $60.0 million in FHLB short-term advances, $72.0 million in FHLB long-term advances, $41.4 million in notes payable and $61.9 million of trust preferred securities. The outstanding balance for December 31, 2014 included $71.6 million in FHLB long-term advances, $43.1 million in notes payable and $20.6 million of trust preferred securities.

 

The $41.4 million notes payable is unsecured debt from correspondent banks used as partial funding for our Metropolitan acquisition in 2013. These notes carry a 3.25% floating rate to be repaid by December 31, 2016. During the nine months ended September 30, 2015, we increased total debt by $100.0 million from December 31, 2014 primarily due to adding $190.7 million in FHLB borrowings and $41.0 million in subordinated debentures as part of the Liberty and Community First acquisitions. Of this debt, $131.7 million was subsequently repaid during the period.

 

During October 2015, we borrowed $52.3 million from correspondent banks at a rate of 3.58% with quarterly principal and interest payments. The debt has a 10 year amortization with a 5 year balloon payment due in October 2020. We used $36 million of this borrowing to refinance the debt issued during the fourth quarter of 2013.

 

CAPITAL

 

Overview

 

At September 30, 2015, total capital was $1.045 billion.  Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities.  At September 30, 2015, our common equity to assets ratio was 13.42%, up 277 basis points from year-end 2014.

 

Preferred Stock

 

On February 27, 2009, at a special meeting, our shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value.  The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000.  

 

On February 27, 2015, as part of the acquisition of Community First, the Company issued 30,852 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (“Simmons Series A Preferred Stock”) in exchange for the outstanding shares of Community First Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Community First Series C Preferred Stock”). The preferred stock is held by the United States Department of the Treasury (“Treasury”) as the Community First Series C Preferred Stock was issued when Community First entered into a Small Business Lending Fund Securities Purchase Agreement with the Treasury.  The Simmons Series A Preferred Stock qualifies as Tier 1 capital and will pay quarterly dividends.  The rate will remain fixed at 1% through February 18, 2016, at which time it will convert to a fixed rate of 9%. We plan to redeem the Simmons Series A Preferred Stock in the first quarter of 2016.

 

Stock Repurchase

 

During 2012, we announced the adoption by the Board of Directors of a new stock repurchase program. The program authorizes the repurchase of up to 850,000 additional shares of Class A common stock, or approximately 5% of the shares outstanding at that time. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. We intend to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes. We suspended our stock repurchases in August of 2013, with 154,136 shares remaining available for repurchase under the program.

 

On March 4, 2014 the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). Subsequently, on June 18, 2014 the Company filed Amendment No. 1 to the shelf registration statement. After becoming effective, the shelf registration statement allows us to raise capital from time to time, up to an aggregate of $300 million, through the sale of common stock, preferred stock, stock warrants, stock rights or a combination thereof, subject to market conditions. Specific terms and prices are determined at the time of any offering under a separate prospectus supplement that we are required to file with the SEC at the time of the specific offering.

 

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Cash Dividends

 

We declared cash dividends on our common stock of $0.69 per share for the first nine months of 2015 compared to $0.66 per share for the first nine months of 2014, an increase of $0.03, or 4.6%.  The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors.  Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above.  However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all.

 

Parent Company Liquidity

 

The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and the share repurchase plan.  The primary sources for meeting these liquidity needs are the current cash on hand at the Parent Company and the future dividends received from Simmons Bank.  Payment of dividends by the subsidiary bank is subject to various regulatory limitations.  See the Liquidity and Market Risk Management discussions of Item 3 – Quantitative and Qualitative Disclosure About Market Risk for additional information regarding the parent company’s liquidity.

 

Risk Based Capital

 

Our bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).  Management believes that, as of September 30, 2015, we meet all capital adequacy requirements to which we are subject.

 

As of the most recent notification from regulatory agencies, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the institutions’ categories.

 

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Our risk-based capital ratios at September 30, 2015 and December 31, 2014 are presented in Table 12 below:

 

Table 12:  Risk-Based Capital

 

   September 30,  December 31,
($ in thousands)  2015  2014
           
Tier 1 capital:          
Stockholders’ equity  $1,045,441   $494,319 
Trust preferred securities   61,906    20,000 
Goodwill and core deposit premiums   (314,735)   (112,545)
Unrealized gain on available-for-sale securities, net of income taxes   (2,718)   1,336 
Total Tier 1 capital   789,894    403,110 
Tier 2 capital:          
Qualifying unrealized gain on available-for-sale equity securities   -    2 
Qualifying allowance for loan losses   34,097    32,073 
Total Tier 2 capital   34,097    32,075 
Total risk-based capital  $823,991   $435,185 
           
Risk weighted assets  $4,986,641   $3,002,270 
           
Assets for leverage ratio  $7,293,113   $4,593,924 
           
Ratios at end of period:          
Common equity Tier 1 ratio (CET1)   13.98%   N/A 
Tier 1 leverage ratio   10.83%   8.77%
Tier 1 risk-based capital ratio   15.84%   13.43%
Total risk-based capital ratio   16.52%   14.50%
Minimum guidelines:          
Common equity Tier 1 ratio   4.50%   N/A 
Tier 1 leverage ratio   4.00%   4.00%
Tier 1 risk-based capital ratio   6.00%   4.00%
Total risk-based capital ratio   8.00%   8.00%
Well capitalized guidelines:          
Common equity Tier 1 ratio   6.50%   N/A 
Tier 1 leverage ratio   5.00%   5.00%
Tier 1 risk-based capital ratio   8.00%   6.00%
Total risk-based capital ratio   10.00%   10.00%

 

Regulatory Capital Changes

 

In July 2013, the Company’s primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banks. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the current U.S. risk-based capital rules.

 

The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach.

 

The Basel III Capital Rules expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate.

 

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The final rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules became effective for the Company and Simmons Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. As of September 30, 2015, the Company and its subsidiary bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

See the section titled Recently Issued Accounting Pronouncements in Note 1, Basis of Presentation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on the Company’s ongoing financial position and results of operation.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this quarterly report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “estimate,” “expect,” “foresee,” “believe,” “may,” “might,” “will,” “would,” “could” or “intend,” future or conditional verb tenses, and variations or negatives of such terms.  These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, allowance for loan losses, the effect of certain new accounting standards on the Company’s financial statements, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy, efficiency initiatives, legal and regulatory limitations and compliance and competition.

 

These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions, governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; the failure of assumptions underlying the establishment of reserves for possible loan losses; and those factors set forth under Item 1A. Risk-Factors of this report and other cautionary statements set forth elsewhere in this report.   Many of these factors are beyond our ability to predict or control.  In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance.

 

We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof.  However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements.  We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this section.

 

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RECONCILIATION OF NON-GAAP MEASURES

 

The table below presents computations of core earnings (net income excluding nonrecurring items {gain on sale of merchant services, gain on sale of banking operations, loss on FDIC loss share termination, merger related costs, charter consolidation costs and branch right sizing}) and diluted core earnings per share (non-GAAP). Nonrecurring items are included in financial results presented in accordance with generally accepted accounting principles (“GAAP”).

 

The Company believes the exclusion of these nonrecurring items in expressing earnings and certain other financial measures, including “core earnings”, provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. This non-GAAP financial measure is also used by management to assess the performance of the Company’s business, because management does not consider these nonrecurring items to be relevant to ongoing financial performance.  Management and the Board of Directors utilize “core earnings” (non-GAAP) for the following purposes:

 

•   Preparation of the Company’s operating budgets

•   Monthly financial performance reporting

•   Monthly “flash” reporting of consolidated results (management only)

•   Investor presentations of Company performance

 

The Company believes the presentation of “core earnings” on a diluted per share basis, “diluted core earnings per share” (non-GAAP), provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance.  This non-GAAP financial measure is also used by management to assess the performance of the Company’s business, because management does not consider these nonrecurring items to be relevant to ongoing financial performance on a per share basis.  Management and the Board of Directors utilize “diluted core earnings per share” (non-GAAP) for the following purposes:

 

•   Calculation of annual performance-based incentives for certain executives

•   Calculation of long-term performance-based incentives for certain executives

•   Investor presentations of Company performance

 

The Company believes that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management and the Board of Directors.

 

“Core earnings” and “diluted core earnings per share” (non-GAAP) have inherent limitations, are not required to be uniformly applied and are not audited.  To mitigate these limitations, the Company has procedures in place to identify and approve each item that qualifies as nonrecurring to ensure that the Company’s “core” results are properly reflected for period-to-period comparisons.  Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a Company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.  In particular, a measure of earnings that excludes nonrecurring items does not represent the amount that effectively accrues directly to stockholders (i.e., nonrecurring items are included in earnings and stockholders’ equity).

 

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See Table 13 below for the reconciliation of non-GAAP financial measures, which exclude nonrecurring items for the periods presented.

 

Table 13:  Reconciliation of Core Earnings (non-GAAP)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
($ in thousands)  2015  2014  2015  2014
             
Net Income  $21,598   $8,788   $50,325   $23,049 
Nonrecurring items:                    
Gain on sale of merchant services   -    -    -    (1,000)
Gain on sale of banking operations   (2,110)   -    (2,110)   - 
Loss on FDIC loss share termination   7,476    -    7,476    - 
Merger related costs   857    3,628    12,523    6,255 
Branch right sizing (1)   304    (705)   3,084    1,162 
Charter consolidation costs   -    196    -    610 
Tax effect (2)   (2,560)   (1,223)   (7,589)   (2,746)
Net nonrecurring items   3,967    1,896    13,384    4,281 
Core earnings (non-GAAP)  $25,565   $10,684   $63,709   $27,330 
                     
Diluted earnings per share  $0.72   $0.52   $1.83   $1.39 
Nonrecurring items:                    
Gain on sale of merchant services   -    -    -    (0.06)
Gain on sale of banking operations   (0.07)   -    (0.07)   - 
Loss on FDIC loss share termination   0.25    -    0.27    - 
Merger related costs (1)   0.03    0.21    0.46    0.37 
Branch right sizing   0.01    (0.04)   0.11    0.08 
Charter consolidation costs   -    0.01    -    0.04 
Tax effect (2)   (0.09)   (0.07)   (0.28)   (0.17)
Net nonrecurring items   0.13    0.11    0.49    0.26 
Diluted core earnings per share (non-GAAP)  $0.85   $0.63   $2.32   $1.65 

_______________________________________

(1) Branch right sizing includes gain on sale of previously closed branches of $153 and $3,167 for 2015 and 2014, respectively.

(2) Effective tax rate of 39.225%, adjusted for non-deductible merger related costs.

 

Item 3.         Quantitative and Qualitative Disclosure About Market Risk

 

Parent Company

 

The Company has leveraged its investment in subsidiary bank and depends upon the dividends paid to it, as the sole shareholder of the subsidiary bank, as a principal source of funds for dividends to shareholders, stock repurchase and debt service requirements.  At September 30, 2015, undivided profits of the Company's subsidiary bank was approximately $254.1 million, of which approximately $30.4 million was available for the payment of dividends to the Company without regulatory approval.  In addition to dividends, other sources of liquidity for the Company are the sale of equity securities and the borrowing of funds.

 

Subsidiary Bank

 

Generally speaking, our subsidiary bank relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash used in investing activities.  Typical of most banking companies, significant financing activities include: deposit gathering; use of short-term borrowing facilities, such as federal funds purchased and repurchase agreements; and the issuance of long-term debt.  The bank’s primary investing activities include loan originations and purchases of investment securities, offset by loan payoffs and investment maturities.

 

Liquidity represents an institution's ability to provide funds to satisfy demands from depositors and borrowers, by either converting assets into cash or accessing new or existing sources of incremental funds.  A major responsibility of management is to maximize net interest income within prudent liquidity constraints.  Internal corporate guidelines have been established to constantly measure liquid assets, as well as relevant ratios concerning earning asset levels and purchased funds.  The management and board of directors of the subsidiary bank monitor these same indicators and make adjustments as needed.

 

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Liquidity Management

 

The objective of our liquidity management is to access adequate sources of funding to ensure that cash flow requirements of depositors and borrowers are met in an orderly and timely manner.  Sources of liquidity are managed so that reliance on any one funding source is kept to a minimum.  Our liquidity sources are prioritized for both availability and time to activation.

 

Our liquidity is a primary consideration in determining funding needs and is an integral part of asset/liability management. Pricing of the liability side is a major component of interest margin and spread management.  Adequate liquidity is a necessity in addressing this critical task.  There are five primary and secondary sources of liquidity available to the Company.  The particular liquidity need and timeframe determine the use of these sources.

 

The first source of liquidity available to the Company is Federal funds.  Federal funds, primarily from downstream correspondent banks, are available on a daily basis and are used to meet the normal fluctuations of a dynamic balance sheet.  In addition, the Company and our subsidiary bank has approximately $225 million in Federal funds lines of credit from upstream correspondent banks that can be accessed, when needed.  Historical monitoring of these funds has made it possible for us to project seasonal fluctuations and structure our funding requirements on a month-to-month basis.

 

A second source of liquidity is the retail deposits available through our subsidiary bank throughout Arkansas, Kansas, Missouri and Tennessee. Although this method can be a more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs.

 

Third, our subsidiary bank has lines of credits available with the Federal Home Loan Bank.  While we use portions of those lines to match off longer-term mortgage loans, we also use those lines to meet liquidity needs.  Approximately $1.1 billion of these lines of credit are currently available, if needed.

 

Fourth, we use a laddered investment portfolio that ensures there is a steady source of intermediate term liquidity.  These funds can be used to meet seasonal loan patterns and other intermediate term balance sheet fluctuations.  Approximately 47.5% of the investment portfolio is classified as available-for-sale.  We also use securities held in the securities portfolio to pledge when obtaining public funds.

 

Finally, we have the ability to access large deposits from both the public and private sector to fund short-term liquidity needs.

 

We believe the various sources available are ample liquidity for short-term, intermediate-term and long-term liquidity.

 

Market Risk Management

 

Market risk arises from changes in interest rates.  We have risk management policies to monitor and limit exposure to market risk.  In asset and liability management activities, policies designed to minimize structural interest rate risk are in place.  The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified.

 

Interest Rate Sensitivity

 

Interest rate risk represents the potential impact of interest rate changes on net income and capital resulting from mismatches in repricing opportunities of assets and liabilities over a period of time. A number of tools are used to monitor and manage interest rate risk, including simulation models and interest sensitivity gap analysis. Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital. As a means of limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed-rate assets and liabilities, change pricing schedules and manage investment maturities during future security purchases.

 

The simulation model incorporates management’s assumptions regarding the level of interest rates or balance changes for indeterminate maturity deposits for a given level of market rate changes. These assumptions have been developed through anticipated pricing behavior. Key assumptions in the simulation models include the relative timing of prepayments, cash flows and maturities. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of a change in interest rates on net income or capital. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

 

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As of September 30, 2015, the model simulations projected that 100 and 200 basis point increases in interest rates would result in a negative variance in net interest income of -0.48% and -0.32%, respectively, relative to the base case over the next 12 months, while decreases in interest rates of 100 basis points would result in a positive variance in net interest income of 0.27% relative to the base case over the next 12 months. The likelihood of a decrease in interest rates in excess of 50 basis points as of September 30, 2015 is considered remote given current interest rate levels. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

 

The table below presents our sensitivity to net interest income at September 30, 2015:  

 

Table 14: Net Interest Income Sensitivity

 

Interest Rate Scenario  % Change from Base
    
Up 200 basis points   -0.32%
Up 100 basis points   -0.48%
Down 100 basis points   0.27%

 

Item 4.         Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's current disclosure controls and procedures were effective for the period.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2015, which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II:        Other Information

 

Item 1A.         Risk Factors

 

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of our Form 10-K for the year ended December 31, 2014.  In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Form 10-K, which could materially and adversely affect the Company’s business, ongoing financial condition and results of operations.  The risks described are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also adversely affect our business, ongoing financial condition or results of operations.

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Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

 

(c) Issuer Purchases of Equity Securities.  The Company made no purchases of its common stock during the three months ended September 30, 2015.

 

Item 6.        Exhibits

 

 Exhibit No.Description
   
2.1Purchase and Assumption Agreement, dated as of May 14, 2010, among Federal Insurance Deposit Corporation, Receiver of Southwest Community Bank, Springfield, Missouri, Federal Deposit Insurance Corporation and Simmons First National Bank (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K, as amended, for May 19, 2010 (File No. 000-06253)).

 

2.2Purchase and Assumption Agreement, dated as of October 15, 2010, among Federal Insurance Deposit Corporation, Receiver of Security Savings Bank F.S.B., Olathe, Kansas, Federal Deposit Insurance Corporation and Simmons First National Bank (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K, as amended, for October 21, 2010 (File No. 000-06253)).

 

2.3Purchase and Assumption Agreement Whole Bank All Deposits, among Federal Insurance Deposit Corporation, Receiver of Truman Bank, St. Louis, Missouri, Federal Deposit Insurance Corporation, and Simmons First National Bank, Pine Bluff, Arkansas, dated as of September 14, 2012 (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K, as amended, for September 20, 2012 (File No. 000-06253)).

 

2.4Loan Sale Agreement, by and between Federal Deposit Insurance Corporation, as Receiver for Truman Bank, St. Louis, Missouri, and Simmons First National Bank, Pine Bluff, Arkansas, dated as of September 14, 2012 (incorporated by reference to Exhibit 2.2 to Simmons First National Corporation’s Current Report on Form 8-K, as amended, for September 20, 2012 (File No. 000-06253)).

 

2.5Purchase and Assumption Agreement Whole Bank All Deposits, among Federal Insurance Deposit Corporation, Receiver of Excel Bank, Sedalia, Missouri, Federal Deposit Insurance Corporation, and Simmons First National Bank, Pine Bluff, Arkansas, dated as of October 19, 2012 (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K, as amended, for October 25, 2012 (File No. 000-06253)).

 

2.6Stock Purchase Agreement by and between Simmons First National Corporation and Rogers Bancshares, Inc., dated as of September 10, 23013 (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K for September 12, 2013 (File No. 000-06253)).

 

2.7Agreement and Plan of Merger, dated as of March 24, 2014, by and between Simmons First National Corporation and Delta Trust & Banking Corporation(incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus filed by Simmons First National Corporation on July 23, 2014 (File No. 000-06253)).

 

2.8Agreement and Plan of Merger, dated as of May 6, 2014, by and between Simmons First National Corporation and Community First Bancshares, Inc., as amended on September 11, 2014 (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus filed by Simmons First National Corporation on October 8, 2014 (File No. 000-06253)).

 

2.9Agreement and Plan of Merger, dated as of May 27, 2014, by and between Simmons First National Corporation and Liberty Bancshares, Inc., as amended on September 11, 2014 (incorporated by reference to Annex B to the Joint Proxy Statement/Prospectus filed by Simmons First National Corporation on October 8, 2014 (File No. 000-06253)).

 

3.1Restated Articles of Incorporation of Simmons First National Corporation (incorporated by reference to Exhibit 3.1 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2009 (File No. 000-06253)).

 

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3.2Amended By-Laws of Simmons First National Corporation (incorporated by reference to Exhibit 3.2 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2013 (File No. 000-06253)).

 

3.3Certificate of Designation of Senior Non-Cumulative Perpetual Preferred Stock, Series A of Simmons First National Corporation, dated February 27, 2015 (incorporated by reference to Exhibit 3.1to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.1Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as administrative trustees, with respect to Simmons First Capital Trust II (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.2Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust II (incorporated by reference to Exhibit 10.2 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.3Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust II (incorporated by reference to Exhibit 10.3 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.4Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as administrative trustees, with respect to Simmons First Capital Trust III (incorporated by reference to Exhibit 10.4 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.5Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust III (incorporated by reference to Exhibit 10.5 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.6Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust III (incorporated by reference to Exhibit 10.6 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.7Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as administrative trustees, with respect to Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.7 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.8Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.8 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.9Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.9 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

4.10Indenture, dated as of June 23, 2005, between Community First Bancshares, Inc., and Deutsche Bank Trust Company Americas, as trustee, relating to subordinated debentures due June 30, 2035 (incorporated by reference to Exhibit 4.1to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

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4.11First Supplemental Indenture, dated as of February 27, 2015, to Indenture, dated as of June 23, 2005, between Simmons First National Corporation and Deutsche Bank Trust Company Americas , as trustee (incorporated by reference to Exhibit 4.2to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.12Indenture, dated as of September 10, 2007, between Community First Bancshares, Inc., and Wilmington Trust Company, as trustee, relating to subordinated debentures due September 15, 2037 (incorporated by reference to Exhibit 4.3to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.13First Supplemental Indenture, dated as of February 27, 2015, to Indenture, dated as of September 10, 2007, between Simmons First National Corporation and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 4.4to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.14Indenture, dated as of December 5, 2003, between Liberty Bancshares, Inc., and U. S. Bank National Association, as trustee, relating to subordinated debentures due December 5, 2033 (incorporated by reference to Exhibit 4.5to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.15First Supplemental Indenture, dated as of February 27, 2015, to Indenture, dated as of December 5, 2003, between Simmons First National Corporation and U. S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.6to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.16Indenture, dated as of October 13, 2004, between Liberty Bancshares, Inc., and Wilmington Trust Company, as trustee, relating to subordinated debentures due October 18, 2034 (incorporated by reference to Exhibit 4.7to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.17First Supplemental Indenture, dated as of February 27, 2015, to Indenture, dated as of October 13, 2004, between Simmons First National Corporation and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 4.8to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.18Indenture, dated as of March 23, 2007, between Liberty Bancshares, Inc., and Wilmington Trust Company, as trustee, relating to subordinated debentures due June 6, 2037 (incorporated by reference to Exhibit 4.9to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

4.19First Supplemental Indenture, dated as of February 27, 2015, to Indenture, dated as of March 23, 2007, between Simmons First National Corporation and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 4.10 to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

10.1Notice of discretionary bonuses to J. Thomas May, David L. Bartlett, Robert A. Fehlman, Marty D. Casteel and Robert C. Dill (incorporated by reference to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.2Deferred Compensation Agreements, adopted January 25, 2010, between Simmons First National Corporation and Robert A. Fehlman and Marty D. Casteel (incorporated by reference to Exhibits 10.2 and 10.3 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.3Simmons First National Corporation Executive Retention Program, adopted January 25, 2010, and notice of retention bonuses to David Bartlett, Robert A. Fehlman and Marty D. Casteel (incorporated by reference to Exhibit 10.4 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

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10.4Simmons First National Corporation Executive Stock Incentive Plan – 2010, adopted January 25, 2010 (incorporated by reference to Exhibit 10.5 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.5Deferred Compensation Agreement for Marty D. Casteel (incorporated by reference to Exhibit 10.3 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.6Simmons First National Corporation Executive Retention Program (incorporated by reference to Exhibit 10.4 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.7Simmons First National Corporation Executive Stock Incentive Plan - 2010 (incorporated by reference to Exhibit 10.5 to Simmons First National Corporation’s Current Report on Form 8-K for January 25, 2010 (File No. 000-06253)).

 

10.8Change in Control Agreement for J. Thomas May (incorporated by reference to Exhibit 10(a) to Simmons First National Corporation’s Quarterly Report on Form 10-Q filed August 9, 2001 (File No. 000-06253)).

 

10.9Change in Control Agreement for Robert A. Fehlman (incorporated by reference to Exhibit 10.3 to Simmons First National Corporation’s Current Report on Form 8-K filed January 29, 2010 (File No. 000-06253)).

 

10.10Change in Control Agreement for David Bartlett (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed March 2, 2006 (File No. 000-06253)).

 

10.11Change in Control Agreement for Marty D. Casteel (incorporated by reference to Exhibit 10.2 to Simmons First National Corporation’s Current Report on Form 8-K filed January 29, 2010 (File No. 000-06253)).

 

10.12Change in Control Agreement for Robert Dill (incorporated by reference to Exhibit 10.21 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.13Amendment to Change in Control Agreement for Robert C. Dill (incorporated by reference to Exhibit 10.22 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.14Amended and Restated Deferred Compensation Agreement for J. Thomas May (incorporated by reference to Exhibit 10.23 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.15First Amendment to the Amended and Restated Deferred Compensation Agreement for J. Thomas May (incorporated by reference to Exhibit 10.24 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.16Second Amendment to the Amended and Restated Deferred Compensation Agreement for J. Thomas May (incorporated by reference to Exhibit 10.25 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.17Executive Salary Continuation Agreement for David L. Bartlett (incorporated by reference to Exhibit 10.26 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

10.18409A Amendment to the Simmons First Bank of Hot Springs Executive Salary Continuation Agreement for David Bartlett (incorporated by reference to Exhibit 10.27 to Simmons First National Corporation’s Amendment to the Annual Report on Form 10-K/A for the Year ended December 31, 2009 (File No. 000-06253)).

 

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10.19Simmons First National Corporation Incentive and Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.1 to Simmons First National Corporation’s Registration Statement on Form S-8 filed May 19, 2006 (File No. 333-134276)).

 

10.20Simmons First National Corporation Executive Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to Simmons First National Corporation’s Registration Statement on Form S-8 filed May 19, 2006 (File No. 333-134301)).

 

10.21Simmons First National Corporation Executive Stock Incentive Plan – 2001 (incorporated by reference to Definitive Additional Materials to Simmons First National Corporation’s Definitive Proxy Materials on Schedule 14A filed April 2, 2001 (File No. 000-06253)).

 

10.22Simmons First National Corporation Executive Stock Incentive Plan – 2006 (incorporated by reference to Exhibit 1.2 to Simmons First National Corporation’s Definitive Proxy Materials on Schedule 14A filed March 10, 2006 (File No. 000-06253)).

 

10.23First Amendment to Simmons First National Corporation Executive Stock Incentive Plan – 2006 (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed June 4, 2007 (File No. 000-06253)).

 

10.24Simmons First National Corporation Outside Director's Stock Incentive Plan - 2006 (incorporated by reference to Exhibit 1.3 to Simmons First National Corporation’s Definitive Proxy Materials on Schedule 14A filed March 10, 2006 (File No. 000-06253)).

 

10.25Amended and Restated Simmons First National Corporation Outside Director's Stock Incentive Plan - 2006 (incorporated by reference to Exhibit 1.1 to Simmons First National Corporation’s Definitive Proxy Materials on Schedule 14A filed March 10, 2008 (File No. 000-06253)).

 

10.26Simmons First National Corporation Dividend Reinvestment Plan (incorporated by reference to Exhibit 4.1 to Simmons First National Corporation’s Registration Statement on Form S-3D filed May 20, 1998 (File No. 333-53119)).

 

10.27Simmons First National Corporation Amended and Restated Dividend Reinvestment Plan (incorporated by reference to Exhibit 4.1 to Simmons First National Corporation’s Registration Statement on Form S-3D filed July 14, 2004 (File No. 333-117350)).

 

10.28Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed November 12, 2009 (File No. 000-06253)).

 

10.29Simmons First National Corporation Executive Stock Incentive Plan - 2010 (incorporated by reference to Exhibit 99.1 to Simmons First National Corporation’s Registration Statement on Form S-8 filed January 28, 2013 (File No. 333-186254)).

 

10.30Simmons First National Corporation Chief Executive Officer Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed February 28, 2014 (File No. 000-6253)).

 

10.31Simmons First National Corporation Outside Director Stock Incentive Plan - 2014 (incorporated by reference to Exhibit 10.2 to Simmons First National Corporation’s Current Report on Form 8-K filed February 28, 2014 (File No. 000-6253)).

 

10.32Small Business Lending Fund Securities Purchase Agreement, dated as of August 18, 2011, between the United States Department of the Treasury and Community First Bancshares, Inc. (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

10.33Assignment and Assumption of Liabilities Agreement, dated February 27, 2015 between Simmons First National Corporation and Community First Bancshares, Inc. (incorporated by reference to Exhibit 10.2 to Simmons First National Corporation’s Current Report on Form 8-K on October 8, 2014 (File No. 000-06253)).

 

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10.34Simmons First National Corporation 2015 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed December 19, 2014 (File No. 000-06253)).

 

10.35Simmons First National Corporation 2015 Incentive Plan (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K filed April 28, 2015 (File No. 000-06253)).

 

10.36Termination Agreement among Federal Deposit Insurance Corporation, as Receiver of Southwest Community Bank, Springfield, Missouri; Receiver of Security Savings Bank F.S.B., Olathe, Kansas; Receiver of Truman Bank, St. Louis, Missouri; and Receiver of Excel Bank, Sedalia, Missouri; Federal Deposit Insurance Corporation and Simmons First National Bank, dated as of September 15, 2015 (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K for September 16, 2015 (File No. 000-06253)).

 

12.1Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Dividend.*

 

14Code of Ethics, dated December 2003, for CEO, CFO, controller and other accounting officers (incorporated by reference to Exhibit 14 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 000-06253)).

 

15.1Awareness Letter of BKD, LLP.*

 

31.1Rule 13a-15(e) and 15d-15(e) Certification – George A. Makris, Jr., Chairman and Chief Executive Officer.*

 

31.2Rule 13a-15(e) and 15d-15(e) Certification – Robert A. Fehlman, Senior Executive Vice President, Chief Financial Officer and Treasurer.*

 

31.3Rule 13a-15(e) and 15d-15(e) Certification – David W. Garner, Executive Vice President, Controller and Chief Accounting Officer.*

 

32.1Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – George A. Makris, Jr., Chairman and Chief Executive Officer.*

 

32.2Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Robert A. Fehlman, Senior Executive Vice President, Chief Financial Officer and Treasurer.*

 

32.3Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – David W. Garner, Executive Vice President, Controller and Chief Accounting Officer.*

 

101.INSXBRL Instance Document.**

 

101.SCHXBRL Taxonomy Extension Schema.**

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase.**

 

101.DEFXBRL Taxonomy Extension Definition Linkbase.**

 

101.LABXBRL Taxonomy Extension Labels Linkbase.**

 

101.PREXBRL Taxonomy Extension Presentation Linkbase.**

 

* Filed herewith

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SIMMONS FIRST NATIONAL CORPORATION

(Registrant)

 

 

 

Date: November 9, 2015                   /s/ George A. Makris, Jr.                
  George A. Makris, Jr.
  Chairman and Chief Executive Officer
   
   
   
Date: November 9, 2015                   /s/ Robert A. Fehlman                    
  Robert A. Fehlman
  Senior Executive Vice President,
  Chief Financial Officer and Treasurer
   
   
   
Date: November 9, 2015                   /s/ David W. Garner                    
  David W. Garner
  Executive Vice President, Controller
  and Chief Accounting Officer
   

 

 

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