SIMMONS FIRST NATIONAL CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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	71601
Pine Bluff	(Zip Code)
Arkansas
(Address of principal executive offices)

(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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	SFNC	The Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

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



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

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

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

The number of shares outstanding of the Registrant’s Common Stock as of November 4, 2019, was 96,654,900.

Simmons First National Corporation

Quarterly Report on Form 10-Q

September 30, 2019

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	9
	Report of Independent Registered Public Accounting Firm	50
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	77
Item 4.	Controls and Procedures	79

Part II:	Other Information
Item 1.	Legal Proceedings	79
Item 1A.	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	*
Item 5.	Other Information	*
Item 6.	Exhibits	80

Signatures		82

___________________

* No reportable information under this item.


Part I:	Financial Information


Item 1.	Financial Statements (Unaudited)

Simmons First National Corporation

Consolidated Balance Sheets

September 30, 2019 and December 31, 2018



	September 30,			December 31,
(In thousands, except share data)	2019			2018
	(Unaudited)
ASSETS
Cash and non-interest bearing balances due from banks	$	161,440		$	171,792
Interest bearing balances due from banks and federal funds sold	368,530			661,666
Cash and cash equivalents	529,970			833,458
Interest bearing balances due from banks - time	5,041			4,934
Investment securities:
Held-to-maturity	42,237			289,194
Available-for-sale	2,356,134			2,151,752
Total investments	2,398,371			2,440,946
Mortgage loans held for sale	50,099			26,799
Loans:
Legacy loans	9,643,365			8,430,388
Allowance for loan losses	(65,993		)	(56,599		)
Loans acquired, net of discount and allowance	3,359,587			3,292,783
Net loans	12,936,959			11,666,572
Premises and equipment	378,678			295,060
Foreclosed assets and other real estate owned	19,576			25,565
Interest receivable	53,966			49,938
Bank owned life insurance	234,655			193,170
Goodwill	926,648			845,687
Other intangible assets	101,149			91,334
Other assets	123,399			69,874
Total assets	$	17,758,511		$	16,543,337

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing transaction accounts	$	3,044,330		$	2,672,405
Interest bearing transaction accounts and savings deposits	7,337,571			6,830,191
Time deposits	3,086,108			2,896,156
Total deposits	13,468,009			12,398,752
Federal funds purchased and securities sold under agreements to repurchase	116,536			95,792
Other borrowings	1,098,395			1,345,450
Subordinated debentures	354,223			353,950
Accrued interest and other liabilities	174,277			102,959
Total liabilities	15,211,440			14,296,903

Stockholders’ equity:
Common stock, Class A, $0.01 par value; 175,000,000 shares authorized at September 30, 2019 and December 31, 2018; 96,613,855 and 92,347,643 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	966			923
Surplus	1,708,058			1,597,944
Undivided profits	814,338			674,941
Accumulated other comprehensive income (loss)	23,709			(27,374		)
Total stockholders’ equity	2,547,071			2,246,434
Total liabilities and stockholders’ equity	$	17,758,511		$	16,543,337

See Condensed Notes to Consolidated Financial Statements.

Simmons First National Corporation

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2019 and 2018



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2019		2018		2019		2018
	(Unaudited)				(Unaudited)
INTEREST INCOME
Loans	$	179,971	$	162,438	$	517,533	$	456,041
Interest bearing balances due from banks and federal funds sold	1,586		1,405		4,861		3,828
Investment securities	15,367		14,640		49,273		41,558
Mortgage loans held for sale	382		501		924		964
TOTAL INTEREST INCOME	197,306		178,984		572,591		502,391

INTEREST EXPENSE
Deposits	36,936		24,390		102,482		58,448
Federal funds purchased and securities sold under agreements to repurchase	249		104		642		302
Other borrowings	5,381		6,240		18,393		16,520
Subordinated notes and debentures	4,576		5,282		13,528		12,350
TOTAL INTEREST EXPENSE	47,142		36,016		135,045		87,620

NET INTEREST INCOME	150,164		142,968		437,546		414,771
Provision for loan losses	21,973		10,345		38,337		28,528

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	128,191		132,623		399,209		386,243

NON-INTEREST INCOME
Trust income	6,108		6,277		17,610		17,148
Service charges on deposit accounts	10,825		10,837		31,450		31,245
Other service charges and fees	1,308		1,201		3,909		5,968
Mortgage lending income	4,509		1,521		10,988		7,773
SBA lending income	956		304		2,348		1,627
Investment banking income	513		664		1,491		2,312
Debit and credit card fees	7,059		6,820		20,369		25,721
Bank owned life insurance income	1,302		1,105		3,357		3,310
Gain on sale of securities, net	7,374		54		12,937		53
Other income	43,821		4,942		52,083		14,151
TOTAL NON-INTEREST INCOME	83,775		33,725		156,542		109,308

NON-INTEREST EXPENSE
Salaries and employee benefits	52,065		55,515		164,560		167,550
Occupancy expense, net	8,342		7,713		22,736		22,594
Furniture and equipment expense	4,898		3,761		12,462		12,184
Other real estate and foreclosure expense	1,125		538		2,353		2,940
Deposit insurance	—		2,248		4,550		6,232
Merger related costs	2,556		804		11,548		3,980
Other operating expenses	37,879		29,674		100,808		81,353
TOTAL NON-INTEREST EXPENSE	106,865		100,253		319,017		296,833

INCOME BEFORE INCOME TAXES	105,101		66,095		236,734		198,718
Provision for income taxes	23,275		10,902		51,289		38,651

NET INCOME	81,826		55,193		185,445		160,067
Preferred stock dividends	—		—		326		—
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	81,826	$	55,193	$	185,119	$	160,067
BASIC EARNINGS PER SHARE	$	0.85	$	0.60	$	1.95	$	1.74
DILUTED EARNINGS PER SHARE	$	0.84	$	0.59	$	1.94	$	1.72

See Condensed Notes to Consolidated Financial Statements.

Simmons First National Corporation

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2019 and 2018



	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2019		2018			2019		2018
	(Unaudited)					(Unaudited)
NET INCOME	$	81,826	$	55,193		$	185,445	$	160,067

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) arising during the period on available-for-sale securities	18,736		(10,583		)	79,547		(41,612		)
Unrealized holding gain on the transfer of held-to-maturity securities to available-for-sale per ASU 2017-12	—		—			2,547		—
Less: Reclassification adjustment for realized gains (losses) included in net income	7,374		54			12,937		53
Other comprehensive gain (loss), before tax effect	11,362		(10,637		)	69,157		(41,665		)
Less: Tax effect of other comprehensive income (loss)	2,969		(2,780		)	18,074		(10,889		)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	8,393		(7,857		)	51,083		(30,776		)

COMPREHENSIVE INCOME	$	90,219	$	47,336		$	236,528	$	129,291

See Condensed Notes to Consolidated Financial Statements.

Simmons First National Corporation

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2019 and 2018



(In thousands)	September 30, 2019			September 30, 2018
	(Unaudited)
OPERATING ACTIVITIES
Net income	$	185,445		$	160,067
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	25,462			20,810
Provision for loan losses	38,337			28,528
Gain on sale of investments	(12,937		)	(53		)
Net accretion of investment securities and assets	(35,272		)	(41,423		)
Net amortization (accretion) on borrowings	273			(471		)
Stock-based compensation expense	9,316			8,448
(Gain) loss on sale of foreclosed assets held for sale	(16		)	150
Gain on sale of mortgage loans held for sale	(14,196		)	(9,675		)
Loss (gain) on sale of loans	4,451			(10		)
Gain on sale of Visa, Inc. class B common stock	(42,860		)	—
Fair value write-down of closed branches	—			954
Deferred income taxes	10,933			7,316
Income from bank owned life insurance	(3,438		)	(3,310		)
Originations of mortgage loans held for sale	(499,178		)	(424,751		)
Proceeds from sale of mortgage loans held for sale	490,674			410,269
Changes in assets and liabilities:
Interest receivable	(679		)	(7,798		)
Lease right-of-use assets	(1,370		)	—
Other assets	3,802			(24,695		)
Accrued interest and other liabilities	10,881			23,821
Income taxes payable	18,722			3,956
Net cash provided by operating activities	188,350			152,133

INVESTING ACTIVITIES
Net originations of loans	(299,013		)	(1,034,175		)
Proceeds from sale of loans	104,587			24,977
Decrease (increase) in due from banks - time	395			(640		)
Purchases of premises and equipment, net	(37,523		)	(17,084		)
Proceeds from sale of foreclosed assets held for sale	16,139			20,739
Proceeds from sale of available-for-sale securities	561,374			7,726
Proceeds from maturities of available-for-sale securities	405,090			197,464
Purchases of available-for-sale securities	(593,700		)	(634,791		)
Proceeds from maturities of held-to-maturity securities	29,179			46,515
Purchases of held-to-maturity securities	—			(1,172		)
Purchases of bank owned life insurance	—			(4,000		)
Proceeds from bank owned life insurance death benefits	1,310			616
Disposition of assets and liabilities held for sale	1,245			(58,295		)
Purchase of Reliance Bancshares, Inc.	(37,017		)	—
Net cash provided by (used in) investing activities	152,066			(1,452,120		)

FINANCING ACTIVITIES
Net change in deposits	(156,010		)	995,631
Proceeds from issuance of subordinated notes	—			326,355
Repayments of subordinated debentures	—			(94,915		)
Dividends paid on preferred stock	(326		)	—
Dividends paid on common stock	(45,722		)	(41,766		)
Net change in other borrowed funds	(404,455		)	40,893
Net change in federal funds purchased and securities sold under agreements to repurchase	6,598			(13,231		)
Net shares issued under stock compensation plans	(3,301		)	1,756
Shares issued under employee stock purchase plan	1,312			1,026
Retirement of preferred stock	(42,000		)	—
Net cash (used in) provided by financing activities	(643,904		)	1,215,749

DECREASE IN CASH AND CASH EQUIVALENTS	(303,488		)	(84,238		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	833,458			598,042

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	529,970		$	513,804

See Condensed Notes to Consolidated Financial Statements.

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Three Months Ended September 30, 2019 and 2018



(In thousands, except share data)	Preferred Stock		Common Stock		Surplus		Accumulated Other Comprehensive Income (Loss)			Undivided Profits			Total
Three Months Ended September 30, 2019
Balance, June 30, 2019 (Unaudited)	$	—	$	966	$	1,705,262	$	15,316		$	747,969		$	2,469,513

Comprehensive income	—		—		—		8,393			81,826			90,219
Stock-based compensation plans, net – 23,199 shares	—		—		2,796		—			—			2,796
Dividends on common stock – $0.16 per share	—		—		—		—			(15,457		)	(15,457		)

Balance, September 30, 2019 (Unaudited)	$	—	$	966	$	1,708,058	$	23,709		$	814,338		$	2,547,071

Three Months Ended September 30, 2018
Balance, June 30, 2018 (Unaudited)	$	—	$	923	$	1,594,342	$	(40,183	)	$	591,826		$	2,146,908

Comprehensive income	—		—		—		(7,857		)	55,193			47,336
Stock-based compensation plans, net – 14,245 shares	—		—		2,919		—			—			2,919
Dividends on common stock – $0.15 per share	—		—		—		—			(13,844		)	(13,844		)

Balance, September 30, 2018 (Unaudited)	$	—	$	923	$	1,597,261	$	(48,040	)	$	633,175		$	2,183,319

See Condensed Notes to Consolidated Financial Statements.

Simmons First National Corporation

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2019 and 2018



(In thousands, except share data)	Preferred Stock			Common Stock		Surplus		Accumulated Other Comprehensive Income (Loss)			Undivided Profits			Total
Nine Months Ended September 30, 2019
Balance, December 31, 2018	$	—		$	923	$	1,597,944	$	(27,374	)	$	674,941		$	2,246,434

Comprehensive income	—			—		—		51,083			185,445			236,528
Stock issued for employee stock purchase plan – 60,413 shares	—			1		1,311		—			—			1,312
Stock-based compensation plans, net – 206,176 shares	—			2		6,013		—			—			6,015
Stock issued for Reliance acquisition – 3,999,623 shares	42,000			40		102,790		—			—			144,830
Preferred stock retirement	(42,000		)	—		—		—			—			(42,000		)
Dividends on preferred stock	—			—		—		—			(326		)	(326		)
Dividends on common stock – $0.48 per share	—			—		—		—			(45,722		)	(45,722		)

Balance, September 30, 2019 (Unaudited)	$	—		$	966	$	1,708,058	$	23,709		$	814,338		$	2,547,071

Nine Months Ended September 30, 2018
Balance, December 31, 2017	$	—		$	920	$	1,586,034	$	(17,264	)	$	514,874		$	2,084,564

Comprehensive income	—			—		—		(30,776		)	160,067			129,291
Stock issued for employee stock purchase plan – 39,782 shares	—			—		1,026		—			—			1,026
Stock-based compensation plans, net – 226,715 shares	—			3		10,201		—			—			10,204
Dividends on common stock – $0.45 per share	—			—		—		—			(41,766		)	(41,766		)

Balance, September 30, 2018 (Unaudited)	$	—		$	923	$	1,597,261	$	(48,040	)	$	633,175		$	2,183,319

See Condensed Notes to Consolidated Financial Statements.

SIMMONS FIRST NATIONAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS

Description of Business and Organizational Structure

Simmons First National Corporation (the “Company”) is a financial holding company headquartered in Pine Bluff, Arkansas, and the parent company of Simmons Bank, an Arkansas state-chartered bank that began as a community bank in 1903. Simmons Bank is the parent company of Simmons First Insurance Services, Inc. (an insurance agency) and Simmons First Insurance Services of TN, LLC (an insurance agency). The Company through its subsidiaries, conducts banking operations from 212 financial centers conveniently located in communities throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company, through its subsidiaries, offers consumer, real estate and commercial loans; checking, savings and time deposits; and specialized products and services (such as credit cards, trust and fiduciary services, investments, agricultural finance lending, equipment lending, insurance and small business administration (“SBA”) lending).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosures for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2018, was derived from audited financial statements. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of interim results of operations, including normal recurring accruals. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 27, 2019.

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

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

Recently Adopted Accounting Standards

Cloud Computing Arrangements – In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”), that amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance states that only qualifying costs incurred during the application development stage can be capitalized. The effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with the applicable guidance. At the time of adoption, entities will be required to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. The Company early adopted ASU 2018-15 in the first quarter 2019 and elected to apply the guidance prospectively to all software implementation costs incurred after the date of adoption. As of September 30, 2019, $1.1 million of applicable software implementation costs have been capitalized and have not had a material impact on our financial position or results of operations.

Derivatives and Hedging: Targeted Improvements - In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), that changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in order to better align a company’s risk management activities and financial reporting for hedging relationships. In summary, this amendment 1) expands the types of transactions eligible for hedge accounting; 2) eliminates the separate measurement and presentation of hedge ineffectiveness; 3) simplifies the requirements around the assessment of hedge effectiveness; 4) provides companies more time to finalize hedge documentation; and 5) enhances presentation and disclosure requirements. The effective date was for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. All transition requirements and elections should be applied to existing hedging relationships on the date of adoption and the effects should be reflected as of the beginning of the fiscal year of adoption. As part of this new guidance, entities are allowed to designate as the hedged item, an amount that is not expected to be affected by prepayments, defaults or other events affecting the timing and amount of cash flows in a closed portfolio of prepayable financial instruments (this is referred to as the “last-of-layer” method). Under the last-of-layer method, entities are able to reclassify, only at the time of adoption, eligible callable debt securities from held-to-maturity to available-for-sale without tainting its intentions to hold future debt securities to maturity. The available-for-sale security must be reported at fair value and any unrealized gain or loss must be recorded as an adjustment to other comprehensive income upon adoption. The Company evaluated its held-to-maturity portfolio during the first quarter 2019 and identified certain municipal bonds with a fair value of $216.4 million that met the last-of-layer criteria under ASU 2017-12 and as a result, reclassified those to available-for-sale and recorded an unrealized gain of $2.5 million during the first quarter 2019.

Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), that eliminates Step 2 from the goodwill impairment test which required entities to compare the implied fair value of goodwill to its carrying amount. Under the amendments, the goodwill impairment will be measured as the excess of the reporting unit’s carrying amount over its fair value. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The effective date is for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual impairment tests beginning in 2017. The Company early adopted ASU 2017-04 during the second quarter 2019 to coincide with the Company’s formal impairment analysis. See Note 7, Goodwill and Other Intangible Assets, for additional information.

Leases - In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance results in a more consistent representation of the rights and obligations arising from leases by requiring lessees to recognize the lease asset and lease liabilities that arise from leases in the consolidated balance sheet and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. The effective date was for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 requires entities to adopt the new lease standard using a modified retrospective transition method, meaning an entity initially applies the new lease standard at the beginning of the earliest period presented in the financial statements. Due to complexities associated with using this method, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to relieve entities of the requirement to present prior comparative years’ results when they adopt the new lease standard and giving entities the option to recognize the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings. Adoption of ASU 2016-02 resulted in the recognition of right-of-use assets of $32.8 million and right-of-use liabilities of $32.8 million on the consolidated balance sheet with no material impact to the results of operations. The Company has elected to adopt the guidance using the optional transition method, which allows for a modified retrospective method of adoption with a cumulative effect adjustment to retained earnings without restating comparable periods. The Company also elected the relief package of practical expedients for which there is no requirement to reassess existence of leases, their classification, and initial direct costs as well as an exemption for short-term leases with a term of less than one year, whereby the Company did not recognize a lease liability or right-of-use asset on the consolidated balance sheet but instead will recognize lease payments as an expense over the lease term as appropriate. See Note 6, Right-of-Use Lease Assets and Lease Liabilities, for additional information related to the Company’s right-of-use lease obligations.

Recently Issued Accounting Standards

Fair Value Measurement Disclosures – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), that eliminates, amends and adds disclosure requirements for fair value measurements. These amendments are part of FASB’s disclosure review project and they are expected to reduce costs for preparers while providing more decision-useful information for financial statement users. The eliminated disclosure requirements include the 1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; 2) the policy of timing of transfers between levels of the fair value hierarchy; and 3) the valuation processes for Level 3 fair value measurements. Among other modifications, the amended disclosure requirements remove the term “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities and clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Under the new disclosure requirements, entities must disclose the changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its fair value disclosures.

Credit Losses on Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current US GAAP with a methodology (the current expected credit losses, or “CECL”, methodology) that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. This methodology replaces the multiple existing impairment methods in current guidance, which generally require that a loss be incurred before it is recognized. Within the life cycle of a loan or other financial asset, this new guidance will generally result in the earlier recognition of the provision for credit losses and the related allowance for credit losses than current practice. For available-for-sale debt securities that the Company intends to hold and where fair value is less than cost, credit-related impairment, if any, will be recognized through an allowance for credit losses and adjusted each period for changes in credit risk.

The effective date for these amendments is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a cross functional team that continues to assess its data and system needs and evaluate the potential impact of adopting the new guidance. The Company anticipates a significant change in the processes and procedures to calculate the loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In December 2018, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation (“FDIC”) issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13 that provides an option to phase in over a three year period on a straight line basis the day-one impact on earnings and tier one capital. Due to this final rule from the regulatory agencies, the Company is continuing to research and study options for recording a one-time adjustment or structuring any capital impact over an allowable period of time. The impact will be reflected as an adjustment to beginning retained earnings, net of income taxes, at adoption.

Based on a preliminary analysis performed, the Company previously disclosed that the allowance for credit losses was estimated to increase by approximately 130% to 170% over the allowance based on June 30, 2019 loan balances. When purchase discounts are considered, the increase is expected to be 10% to 30% over the June 30, 2019 total credit coverage ratio. These estimates were based upon the Company’s analysis of current macroeconomic conditions, assumptions and forecasts at the point in time at which the initial guidance was given and did not include the impact of the Company’s acquisition of The Landrum Company. When factoring in the Company’s recent acquisition of The Landrum Company (see Note 2, Acquisitions, for additional information regarding the acquisition), the allowance for credit losses is estimated to increase by approximately 165% to 215% over the allowance and when purchase discounts are considered, the increase is expected to be 5% to 25% over the total credit coverage ratio.

These estimates are subject to change based on continuing review and challenge of the models, methodologies and judgments. The impact at adoption will also be influenced by the loan portfolio composition and quality at the adoption date, as well as, macroeconomic conditions and forecast at that time. The adoption of ASU 2016-13 in 2020 could also impact the Company’s ongoing earnings, perhaps materially.

Implementation efforts for the adoption of CECL have been underway, including model development and validation, fulfillment of additional data needs for new disclosures and reporting requirements, and drafting of accounting policies. Model validations and user acceptance testing commenced in the first quarter of 2019, with loss forecast modeling taking place in the third quarter of 2019. The Company intends to utilize a single macroeconomic scenario in estimating expected credit losses. Reasonable and supportable forecast periods and methods to revert to historical averages to arrive at lifetime expected credit losses vary by product. The Company has completed decisions around model methodologies, and relevant elections are being finalized.

There have been no other significant changes to the Company’s accounting policies from the 2018 Form 10-K. Presently, the Company is not aware of any other changes to the Accounting Standards Codification that will have a material impact on its present or future financial position or results of operations.

NOTE 2: ACQUISITIONS

Reliance Bancshares, Inc.

On April 12, 2019, the Company completed its merger with Reliance Bancshares, Inc. (“Reliance”), headquartered in the St. Louis, Missouri, metropolitan area, pursuant to the terms of the Agreement and Plan of Merger (“Reliance Agreement”), dated November 13, 2018, as amended February 11, 2019. In the merger, each outstanding share of Reliance common stock, as well as each Reliance common stock equivalent was canceled and converted into the right to receive shares of the Company’s common stock and/or cash in accordance with the terms of the Reliance Agreement. In addition, each share of Reliance’s Series A Preferred Stock and Series B Preferred Stock was converted into the right to receive one share of Simmons’ comparable Series A Preferred Stock or Series B Preferred Stock, respectively, and each share of Reliance’s Series C Preferred Stock was converted into the right to receive one share of Simmons’ comparable Series C Preferred Stock (unless the holder of such Series C Preferred Stock elected to receive alternate consideration in accordance with the Reliance Agreement). The Company issued 3,999,623 shares of its common stock and paid $62.7 million in cash to effect the merger. The Company also issued $42.0 million of preferred stock in exchange for all outstanding shares of Reliance preferred stock. On May 13, 2019, the Company redeemed all of the preferred stock issued in connection with the merger, and paid all accrued and unpaid dividends up to the date of redemption. On October 29, 2019, the Company amended its Amended and Restated Articles of Incorporation to cancel the Series C Preferred Stock, having 140 authorized shares, of which no shares have ever been issued or outstanding.

Prior to the merger, Reliance conducted banking business from 22 branches located in Missouri and Illinois. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $1.5 billion in assets, including approximately $1.1 billion in loans (inclusive of loan discounts), and approximately $1.2 billion in deposits. Contemporaneously with the completion of the Reliance merger, Reliance Bank was merged into Simmons Bank, with Simmons Bank as the surviving institution.

Goodwill of $81.0 million was recorded as a result of the transaction. The merger strengthened the Company’s market share and brought forth additional opportunities in the Company’s St. Louis metropolitan area footprint, 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 Reliance transaction, as of the acquisition date, is as follows:



(In thousands)	Acquired from Reliance			Fair Value Adjustments			Fair Value
Assets Acquired
Cash and due from banks	$	25,693		$	—		$	25,693
Due from banks - time	502			—			502
Investment securities	287,983			(1,763		)	286,220
Loans acquired	1,138,527			(41,657		)	1,096,870
Allowance for loan losses	(10,808		)	10,808			—
Foreclosed assets	11,092			(5,180		)	5,912
Premises and equipment	32,452			(3,001		)	29,451
Bank owned life insurance	39,348			—			39,348
Core deposit intangible	—			18,350			18,350
Other assets	25,165			5,001			30,166
Total assets acquired	$	1,549,954		$	(17,442	)	$	1,532,512

Liabilities Assumed
Deposits:
Non-interest bearing transaction accounts	$	108,845		$	(33	)	$	108,812
Interest bearing transaction accounts and savings deposits	639,798			—			639,798
Time deposits	478,415			(1,758		)	476,657
Total deposits	1,227,058			(1,791		)	1,225,267
Securities sold under agreement to repurchase	14,146			—			14,146
Other borrowings	162,900			(5,500		)	157,400
Accrued interest and other liabilities	8,185			936			9,121
Total liabilities assumed	1,412,289			(6,355		)	1,405,934
Equity	137,665			(95,665		)	42,000
Total equity assumed	137,665			(95,665		)	42,000
Total liabilities and equity assumed	$	1,549,954		$	(102,020	)	$	1,447,934
Net assets acquired							84,578
Purchase price							165,539
Goodwill							$	80,961

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

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

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

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

Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan

was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

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

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

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

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

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

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

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

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

FHLB and other borrowings – The fair value of Federal Home Loan Bank (“FHLB”) and other borrowings 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 estimated fair value of that liability at the date of acquisition.

The Landrum Company (Subsequent Event - Acquisition)

On July 30, 2019, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with The Landrum Company (“Landrum”), headquartered in Columbia, Missouri. The merger was completed on October 31, 2019, at which time The Landrum Company was merged with and into the Company, with the Company continuing as the surviving corporation. Pursuant to the terms of the Agreement, the shares of Landrum Class A Common Voting Stock, par value $0.01 per share, and Landrum Class B Common Nonvoting Stock, par value $0.01 per share, were converted into the right to receive, in the aggregate, approximately 17,350,000 shares of the Company’s common stock and each share of Landrum’s series E preferred stock was converted into the right to receive one share of the Company’s comparable series D preferred stock.

Prior to the acquisition, Landrum conducted banking business from 39 branches located in Missouri, Oklahoma and Texas. As of September 30, 2019, Landrum had approximately $3.3 billion in assets, $2.0 billion in loans and $2.9 billion in deposits.

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the merger. Due to the recent October 31, 2019 closing, management remains in the early stages of reviewing the estimated fair values and evaluating the assumed tax positions of this merger. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction over the next few months, within one year of the merger.

NOTE 3: INVESTMENT SECURITIES

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



	September 30, 2019									December 31, 2018
(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	$	—	$	—	$	—		$	—	$	16,990	$	—	$	(49	)	$	16,941
Mortgage-backed securities	11,549		93		(42		)	11,600		13,346		5		(412		)	12,939
State and political subdivisions	28,692		931		—			29,623		256,863		3,029		(954		)	258,938
Other securities	1,996		83		—			2,079		1,995		17		—			2,012
Total HTM	$	42,237	$	1,107	$	(42	)	$	43,302	$	289,194	$	3,051	$	(1,415	)	$	290,830

Available-for-Sale
U.S. Government agencies	$	177,712	$	1,629	$	(1,202	)	$	178,139	$	157,523	$	518	$	(3,740	)	$	154,301
Mortgage-backed securities	1,332,130		9,405		(3,741		)	1,337,794		1,552,487		3,097		(32,684		)	1,522,900
State and political subdivisions	658,984		22,290		(72		)	681,202		320,142		171		(5,470		)	314,843
Other securities	158,280		719		—			158,999		157,471		2,251		(14		)	159,708
Total AFS	$	2,327,106	$	34,043	$	(5,015	)	$	2,356,134	$	2,187,623	$	6,037	$	(41,908	)	$	2,151,752

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

Certain investment securities are valued at less than their historical cost. Total fair value of these investments at September 30, 2019 and December 31, 2018, was $710.6 million and $1.7 billion, which is approximately 29.6% and 70.3%, respectively, of the Company’s combined AFS and HTM investment portfolios.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019:



	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
Mortgage-backed securities	$	3,408	$	(15	)	$	2,575	$	(27	)	$	5,983	$	(42	)
State and political subdivisions	635		—			15		—			650		—
Total HTM	$	4,043	$	(15	)	$	2,590	$	(27	)	$	6,633	$	(42	)

Available-for-Sale
U.S. Government agencies	$	16,662	$	(36	)	$	90,974	$	(1,166	)	$	107,636	$	(1,202	)
Mortgage-backed securities	133,538		(528		)	435,207		(3,213		)	568,745		(3,741		)
State and political subdivisions	24,278		(41		)	3,297		(31		)	27,575		(72		)
Total AFS	$	174,478	$	(605	)	$	529,478	$	(4,410	)	$	703,956	$	(5,015	)

The declines reflected in the preceding table primarily resulted from the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. Management does not have the intent to sell these securities, and management believes it is more likely than not the Company will not have to sell these securities before recovery of their amortized cost basis less any current period credit losses.

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

Management has the ability and intent to hold the securities classified as HTM until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of September 30, 2019, management also had the ability and intent to hold the securities classified as AFS for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2019, management believes the impairments detailed in the table above are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

Income earned on securities for the three and nine months ended September 30, 2019 and 2018, is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Taxable:
Held-to-maturity	$	248	$	528	$	975	$	1,641
Available-for-sale	10,166		10,364		34,422		29,614

Non-taxable:
Held-to-maturity	83		1,828		1,334		5,661
Available-for-sale	4,870		1,920		12,542		4,642
Total	$	15,367	$	14,640	$	49,273	$	41,558

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



	Held-to-Maturity				Available-for-Sale
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	5,039	$	5,057	$	7,599	$	7,605
After one through five years	17,346		17,703		70,442		70,750
After five through ten years	5,561		5,858		139,421		142,101
After ten years	2,742		3,084		632,504		652,404
Securities not due on a single maturity date	11,549		11,600		1,332,130		1,337,794
Other securities (no maturity)	—		—		145,010		145,480
Total	$	42,237	$	43,302	$	2,327,106	$	2,356,134

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $1.12 billion at September 30, 2019 and $1.02 billion at December 31, 2018.

There were approximately $7.6 million of gross realized gains and $3,000 of gross realized losses from the sale of securities during the three months ended September 30, 2019, and approximately $12.9 million of gross realized gains and $3,000 of gross realized losses from the sale of securities during the nine months ended September 30, 2019. During the third quarter 2019, the Company sold approximately $89 million of bonds as part of a plan to rebalance its investment portfolio resulting in a net gain on the sale of securities of $7.3 million. The gross realized gains recognized for the nine months ended September 30, 2019 is primarily due to the bond sale conducted during the third quarter 2019 as previously discussed and the adjustments made to the bond portfolio during the first quarter based upon projected cash flow changes. There were approximately $41,000 of gross realized gains and no gross realized losses from the sale of securities during the three months ended September 30, 2018, and approximately $54,000 of gross realized gains and $1,000 of gross realized losses from the sale of securities during the nine months ended September 30, 2018.

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

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2019, the Company’s loan portfolio was $13.00 billion, compared to $11.72 billion at December 31, 2018. The various categories of loans are summarized as follows:



(In thousands)	September 30, 2019		December 31, 2018
Consumer:
Credit cards	$	195,083	$	204,173
Other consumer	208,643		201,297
Total consumer	403,726		405,470
Real Estate:
Construction	1,712,858		1,300,723
Single family residential	1,448,455		1,440,443
Other commercial	3,630,708		3,225,287
Total real estate	6,792,021		5,966,453
Commercial:
Commercial	1,894,819		1,774,909
Agricultural	213,753		164,514
Total commercial	2,108,572		1,939,423
Other	339,046		119,042
Loans	9,643,365		8,430,388
Loans acquired, net of discount and allowance ⁽¹⁾	3,359,587		3,292,783
Total loans	$	13,002,952	$	11,723,171

_____________________________

(1) See Note 5, Loans Acquired, for segregation of loans acquired by loan class.

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

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

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

overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length. The Company monitors these loans closely.

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

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless 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, 2019		December 31, 2018
Consumer:
Credit cards	$	521	$	296
Other consumer	1,634		2,159
Total consumer	2,155		2,455
Real estate:
Construction	1,805		1,269
Single family residential	16,191		11,939
Other commercial	16,985		7,205
Total real estate	34,981		20,413
Commercial:
Commercial	35,018		10,049
Agricultural	567		1,284
Total commercial	35,585		11,333
Total	$	72,721	$	34,201

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, 2019
Consumer:
Credit cards	$	958	$	650	$	1,608	$	193,475	$	195,083	$	130
Other consumer	3,383		694		4,077		204,566		208,643		14
Total consumer	4,341		1,344		5,685		398,041		403,726		144
Real estate:
Construction	3,690		613		4,303		1,708,555		1,712,858		—
Single family residential	10,022		6,395		16,417		1,432,038		1,448,455		—
Other commercial	8,009		3,385		11,394		3,619,314		3,630,708		—
Total real estate	21,721		10,393		32,114		6,759,907		6,792,021		—
Commercial:
Commercial	4,999		10,990		15,989		1,878,830		1,894,819		11
Agricultural	285		349		634		213,119		213,753		—
Total commercial	5,284		11,339		16,623		2,091,949		2,108,572		11
Other	—		—		—		339,046		339,046		—
Total	$	31,346	$	23,076	$	54,422	$	9,588,943	$	9,643,365	$	155

December 31, 2018
Consumer:
Credit cards	$	1,033	$	506	$	1,539	$	202,634	$	204,173	$	209
Other consumer	4,264		896		5,160		196,137		201,297		4
Total consumer	5,297		1,402		6,699		398,771		405,470		213
Real estate:
Construction	533		308		841		1,299,882		1,300,723		—
Single family residential	7,769		4,127		11,896		1,428,547		1,440,443		—
Other commercial	3,379		2,773		6,152		3,219,135		3,225,287		—
Total real estate	11,681		7,208		18,889		5,947,564		5,966,453		—
Commercial:
Commercial	4,472		5,105		9,577		1,765,332		1,774,909		11
Agricultural	467		1,055		1,522		162,992		164,514		—
Total commercial	4,939		6,160		11,099		1,928,324		1,939,423		11
Other	—		—		—		119,042		119,042		—
Total	$	21,917	$	14,770	$	36,687	$	8,393,701	$	8,430,388	$	224

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

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

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



(In thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
September 30, 2019											Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
Consumer:
Credit cards	$	521	$	521	$	—	$	521	$	—	$	423	$	40	$	370	$	110
Other consumer	1,783		1,634		—		1,634		—		1,603		9		1,730		33
Total consumer	2,304		2,155		—		2,155		—		2,026		49		2,100		143
Real estate:
Construction	1,898		1,708		97		1,805		—		1,972		10		1,946		38
Single family residential	17,526		13,985		2,206		16,191		31		15,920		85		14,812		287
Other commercial	15,642		4,200		11,007		15,207		628		11,739		77		10,365		201
Total real estate	35,066		19,893		13,310		33,203		659		29,631		172		27,123		526
Commercial:
Commercial	50,712		10,153		23,930		34,083		4,620		32,020		176		26,379		511
Agricultural	583		450		116		566		—		873		3		1,010		20
Total commercial	51,295		10,603		24,046		34,649		4,620		32,893		179		27,389		531
Total	$	88,665	$	32,651	$	37,356	$	70,007	$	5,279	$	64,550	$	400	$	56,612	$	1,200



December 31, 2018											Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
Consumer:
Credit cards	$	296	$	296	$	—	$	296	$	—	$	283	$	35	$	259	$	60
Other consumer	2,311		2,159		—		2,159		—		3,561		28		4,109		96
Total consumer	2,607		2,455		—		2,455		—		3,844		63		4,368		156
Real estate:
Construction	1,344		784		485		1,269		211		1,411		11		1,747		41
Single family residential	12,906		11,468		616		12,084		36		13,577		98		13,550		315
Other commercial	8,434		5,442		5,458		10,900		—		12,282		108		14,284		332
Total real estate	22,684		17,694		6,559		24,253		247		27,270		217		29,581		688
Commercial:
Commercial	10,361		7,254		4,628		11,882		437		11,840		108		9,533		222
Agricultural	2,419		1,180		—		1,180		—		1,355		12		1,470		34
Total commercial	12,780		8,434		4,628		13,062		437		13,195		120		11,003		256
Total	$	38,071	$	28,583	$	11,187	$	39,770	$	684	$	44,309	$	400	$	44,952	$	1,100

At September 30, 2019 and December 31, 2018, impaired loans, net of government guarantees and excluding loans acquired, totaled $70.0 million and $39.8 million, respectively. Allocations of the allowance for loan losses relative to impaired loans were $5.3 million and $684,000 at September 30, 2019 and December 31, 2018, respectively. Approximately $400,000 and $1,200,000 of interest income was recognized on average impaired loans of $64.6 million and $56.6 million for the three and nine months ended September 30, 2019. Interest income recognized on impaired loans on a cash basis during the three and nine months ended September 30, 2019 and 2018 was not material.

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

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

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

The following table presents a summary of TDRs, 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, 2019
Real estate:
Construction	—	$	—	1	$	97	1	$	97
Single-family residential	6	549		10	627		16	1,176
Other commercial	2	3,166		2	950		4	4,116
Total real estate	8	3,715		13	1,674		21	5,389
Commercial:
Commercial	4	2,804		3	84		7	2,888
Total commercial	4	2,804		3	84		7	2,888
Total	12	$	6,519	16	$	1,758	28	$	8,277

December 31, 2018
Real estate:
Construction	—	$	—	3	$	485	3	$	485
Single-family residential	6	230		10	616		16	846
Other commercial	2	3,306		2	1,027		4	4,333
Total real estate	8	3,536		15	2,128		23	5,664
Commercial:
Commercial	4	2,833		6	718		10	3,551
Total commercial	4	2,833		6	718		10	3,551
Total	12	$	6,369	21	$	2,846	33	$	9,215

The following table presents loans that were restructured as TDRs during the three and nine months ended September 30, 2019 and 2018, 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 and Nine Months Ended September 30, 2019
Real estate:
Single-family residential	1	$	330	$	330	$	330	$	—	$	—
Total real estate	1	330		330		330		—		—
Total	1	$	330	$	330	$	330	$	—	$	—

Three Months Ended September 30, 2018
Real estate:
Construction	1	$	99	$	98	$	98	$	—	$	—
Other commercial	2	392		390		390		—		212
Total real estate	3	491		488		488		—		212
Commercial:
Commercial	3	2,363		2,358		2,358		—		190
Total commercial	3	2,363		2,358		2,358		—		190
Total	6	$	2,854	$	2,846	$	2,846	$	—	$	402

Nine Months Ended September 30, 2018
Consumer:
Other consumer	1	$	91	$	91	$	91	$	—	$	—
Total consumer	1	91		91		91		—		—
Real estate:
Construction	1	99		98		98		—		—
Single-family residential	1	61		62		62		—		—
Other commercial	2	392		390		390		—		212
Total real estate	4	552		550		550		—		212
Commercial:
Commercial	3	2,363		2,358		2,358		—		190
Total commercial	3	2,363		2,358		2,358		—		190
Total	8	$	3,006	$	2,999	$	2,999	$	—	$	402

During the three and nine months ended September 30, 2019, the Company modified 1 loan with a recorded investment of $330,000 prior to modification which was deemed troubled debt restructuring. The restructured loan was modified by deferring amortized principal payments, changing the maturity date and requiring interest-only payments for a period of up to 12 months. Also, there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure.

During the three months ended September 30, 2018, the Company modified 6 loans with a recorded investment of $2.9 million and during the nine months ended September 30, 2018, the Company modified 8 loans with a recorded investment of $3.0 million prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity date and requiring interest-only payments for a period of up to 12 months. Based on the fair value of the collateral, a specific reserve of $402,000 was determined necessary for these loans. Also, there was no immediate

financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

There were four loans consisting of commercial and real estate construction loans, considered TDRs for which a payment default occurred during the nine months ended September 30, 2019. The Company charged off approximately $552,000 for these loans. There was one commercial real estate loan for which a payment default occurred during the nine months ended September 30, 2018. A charge-off of $66,300 was recorded for this loan and $294,300 was transferred to OREO. The Company defines a payment default as a payment received more than 90 days after its due date.

In addition to the TDRs that occurred during the periods provided in the preceding tables, the Company had TDRs with pre-modification loan balances, specifically in commercial real estate, of $294,300 at September 30, 2018, for which OREO was received in full or partial satisfaction of the loans. There were no TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three or nine month periods ended September 30, 2019. At September 30, 2019 and December 31, 2018, the Company had $3,925,000 and $3,899,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At September 30, 2019 and December 31, 2018, the Company had $4,401,000 and $3,530,000, respectively, of OREO secured by residential real estate properties.

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

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


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


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


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

•

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

•

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

•

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

•

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

•

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

Loans acquired are evaluated using this internal grading system. Loans acquired are evaluated individually and include purchased credit impaired loans of $3.1 million and $4.1 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of September 30, 2019 and December 31, 2018, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $37.4 million and $50.4 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at September 30, 2019 and December 31, 2018, respectively.

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

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8. Loans may be classified, but not considered impaired, due to one of the following reasons: (1) The Company has established minimum dollar amount thresholds for loan impairment testing. Loans rated 6 – 8 that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans. (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans. Total classified loans, excluding loans accounted for under ASC Topic 310-30, were $146.2 million and $119.0 million, as of September 30, 2019 and December 31, 2018, respectively.

The following table presents a summary of loans by credit risk rating as of September 30, 2019 and December 31, 2018, 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, 2019
Consumer:
Credit cards	$	194,433	$	—	$	650	$	—	$	—	$	195,083
Other consumer	206,647		—		1,996		—		—		208,643
Total consumer	401,080		—		2,646		—		—		403,726
Real estate:
Construction	1,705,376		1,456		6,026		—		—		1,712,858
Single family residential	1,422,086		3,246		23,119		4		—		1,448,455
Other commercial	3,571,706		33,030		25,972		—		—		3,630,708
Total real estate	6,699,168		37,732		55,117		4		—		6,792,021
Commercial:
Commercial	1,837,374		10,420		47,025		—		—		1,894,819
Agricultural	213,072		69		612		—		—		213,753
Total commercial	2,050,446		10,489		47,637		—		—		2,108,572
Other	339,046		—		—		—		—		339,046
Loans acquired	3,272,024		46,796		40,639		128		—		3,359,587
Total	$	12,761,764	$	95,017	$	146,039	$	132	$	—	$	13,002,952



(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
December 31, 2018
Consumer:
Credit cards	$	203,667	$	—	$	506	$	—	$	—	$	204,173
Other consumer	198,840		—		2,457		—		—		201,297
Total consumer	402,507		—		2,963		—		—		405,470
Real estate:
Construction	1,296,988		1,910		1,825		—		—		1,300,723
Single family residential	1,420,052		1,628		18,528		235		—		1,440,443
Other commercial	3,193,289		17,169		14,829		—		—		3,225,287
Total real estate	5,910,329		20,707		35,182		235		—		5,966,453
Commercial:
Commercial	1,742,002		8,357		24,550		—		—		1,774,909
Agricultural	162,824		75		1,615		—		—		164,514
Total commercial	1,904,826		8,432		26,165		—		—		1,939,423
Other	119,042		—		—		—		—		119,042
Loans acquired	3,187,083		51,255		54,097		348		—		3,292,783
Total	$	11,523,787	$	80,394	$	118,407	$	583	$	—	$	11,723,171

Allowance for Loan Losses

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

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for legacy loans for the three and nine months ended September 30, 2019. 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, 2019
Balance, beginning of period ⁽²⁾	$	21,739		$	34,917		$	3,951		$	2,460		$	63,067
Provision for loan losses ⁽¹⁾	19,150			2,405			946			(528		)	21,973
Charge-offs	(17,729		)	(907		)	(1,117		)	(1,059		)	(20,812		)
Recoveries	65			55			223			1,422			1,765
Net charge-offs	(17,664		)	(852		)	(894		)	363			(19,047		)
Balance, September 30, 2019 ⁽²⁾	$	23,225		$	36,470		$	4,003		$	2,295		$	65,993

Nine Months Ended September 30, 2019
Balance, beginning of period ⁽²⁾	$	20,514		$	29,743		$	3,923		$	2,419		$	56,599
Provision for loan losses ⁽¹⁾	23,980			7,929			2,644			1,320			35,873
Charge-offs	(21,564		)	(1,552		)	(3,298		)	(3,497		)	(29,911		)
Recoveries	295			350			734			2,053			3,432
Net charge-offs	(21,269		)	(1,202		)	(2,564		)	(1,444		)	(26,479		)
Balance, September 30, 2019 ⁽²⁾	$	23,225		$	36,470		$	4,003		$	2,295		$	65,993

Period-end amount allocated to:
Loans individually evaluated for impairment	$	4,620		$	659		$	—		$	—		$	5,279
Loans collectively evaluated for impairment	18,605			35,811			4,003			2,295			60,714
Balance, September 30, 2019 ⁽²⁾	$	23,225		$	36,470		$	4,003		$	2,295		$	65,993

(1) Provision for loan losses of $0 and $2,464,000 attributable to loans acquired was excluded from this table for the three and nine months ended September 30, 2019, respectively (total provision for loan losses for the three and nine months ended September 30, 2019 was $21,973,000 and $38,337,000). There were $515,000 and $2,862,000 in charge-offs for loans acquired during the three and nine months ended September 30, 2019, respectively, and recoveries of $900,000 for loans acquired during the nine month period ended September 30, 2019, resulting in an ending balance in the allowance related to loans acquired of $597,000.

(2) Allowance for loan losses at September 30, 2019 includes $597,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at June 30, 2019 and December 31, 2018 includes $1,112,000 and $95,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at September 30, 2019 was $66,590,000 and total allowance for loan losses at June 30, 2019 and December 31, 2018 was $64,179,000 and $56,694,000, respectively.

Activity in the allowance for loan losses for the three and nine months ended September 30, 2018 was as follows:



(In thousands)	Commercial			Real Estate			Credit Card			Other Consumer and Other			Total
Three Months Ended September 30, 2018
Balance, beginning of period ⁽⁴⁾	$	15,767		$	28,904		$	3,822		$	3,239		$	51,732
Provision for loan losses ⁽³⁾	3,589			5,308			719			729			10,345
Charge-offs	(592		)	(4,952		)	(919		)	(1,321		)	(7,784		)
Recoveries	450			210			229			176			1,065
Net charge-offs	(142		)	(4,742		)	(690		)	(1,145		)	(6,719		)
Balance, September 30, 2018 ⁽⁴⁾	$	19,214		$	29,470		$	3,851		$	2,823		$	55,358

Nine Months Ended September 30, 2018
Balance, beginning of period ⁽⁴⁾	$	7,007		$	27,281		$	3,784		$	3,596		$	41,668
Provision for loan losses ⁽³⁾	14,772			7,133			2,219			2,567			26,691
Charge-offs	(3,143		)	(5,568		)	(2,930		)	(3,743		)	(15,384		)
Recoveries	578			624			778			403			2,383
Net charge-offs	(2,565		)	(4,944		)	(2,152		)	(3,340		)	(13,001		)
Balance, September 30, 2018 ⁽⁴⁾	$	19,214		$	29,470		$	3,851		$	2,823		$	55,358

Period-end amount allocated to:
Loans individually evaluated for impairment	$	191		$	268		$	—		$	—		$	459
Loans collectively evaluated for impairment	19,023			29,202			3,851			2,823			54,899
Balance, September 30, 2018 ⁽⁴⁾	$	19,214		$	29,470		$	3,851		$	2,823		$	55,358

Period-end amount allocated to:
Loans individually evaluated for impairment	$	437		$	247		$	—		$	—		$	684
Loans collectively evaluated for impairment	20,077			29,496			3,923			2,419			55,915
Balance, December 31, 2018⁽⁵⁾	$	20,514		$	29,743		$	3,923		$	2,419		$	56,599

______________________

(3) Provision for loan losses of $0 and $1,837,000 attributable to loans acquired was excluded from this table for the three and nine months ended September 30, 2018, respectively (total provision for loan losses for the three and nine months ended September 30, 2018 was $10,345,000 and $28,528,000, respectively). There were $699,000 and $910,000 in charge-offs for loans acquired during the three and nine months ended September 30, 2018, respectively, resulting in an ending balance in the allowance related to loans acquired of $1,345,000.

(4) Allowance for loan losses at September 30, 2018, June 30, 2018 and December 31, 2017 includes $1,345,000, $2,044,000 and $418,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at September 30, 2018, June 30, 2018 and December 31, 2017 was $56,703,000, $53,776,000 and $42,086,000, respectively.

(5) Allowance for loan losses at December 31, 2018 includes $95,000 allowance for loans acquired (not shown in the table above). The total allowance for loan losses at December 31, 2018 was $56,694,000.

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, 2019
Loans individually evaluated for impairment	$	34,649	$	33,203	$	521	$	1,634	$	70,007
Loans collectively evaluated for impairment	2,073,923		6,758,818		194,562		546,055		9,573,358
Balance, end of period	$	2,108,572	$	6,792,021	$	195,083	$	547,689	$	9,643,365

December 31, 2018
Loans individually evaluated for impairment	$	13,062	$	24,253	$	296	$	2,159	$	39,770
Loans collectively evaluated for impairment	1,926,361		5,942,200		203,877		318,180		8,390,618
Balance, end of period	$	1,939,423	$	5,966,453	$	204,173	$	320,339	$	8,430,388

NOTE 5: LOANS ACQUIRED

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

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

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

During the second quarter 2019, the Company evaluated $1.097 billion of net loans ($1.127 billion gross loans less $30.6 million discount) purchased in conjunction with the acquisition of Reliance, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20. The Company evaluated the remaining $176,000 of net loans ($385,000 gross loans less $209,000 discount) purchased in conjunction with the acquisition of Reliance for impairment in accordance with the provisions of ASC Topic 310-30.

The following table reflects the carrying value of all loans acquired as of September 30, 2019 and December 31, 2018:



	Loans Acquired
(In thousands)	September 30, 2019		December 31, 2018
Consumer:
Other consumer	$	7,431	$	15,658
Real estate:
Construction	362,000		429,605
Single family residential	504,490		566,188
Other commercial	2,134,973		1,848,679
Total real estate	3,001,463		2,844,472
Commercial:
Commercial	349,821		430,914
Agricultural	872		1,739
Total commercial	350,693		432,653
Total loans acquired ⁽¹⁾	$	3,359,587	$	3,292,783

________________________

(1) Loans acquired are reported net of a $597,000 and $95,000 allowance at September 30, 2019 and December 31, 2018, respectively.

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



(In thousands)	September 30, 2019		December 31, 2018

Consumer:
Other consumer	$	71	$	140
Real estate:
Construction	48		114
Single family residential	4,492		6,603
Other commercial	1,029		1,167
Total real estate	5,569		7,884
Commercial:
Commercial	1,636		13,578
Agricultural	23		38
Total commercial	1,659		13,616
Total	$	7,299	$	21,640

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



(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing

September 30, 2019
Consumer:
Other consumer	$	131	$	36	$	167	$	7,264	$	7,431	$	4
Real estate:
Construction	30		12		42		361,958		362,000		—
Single family residential	3,664		1,790		5,454		499,036		504,490		17
Other commercial	1,888		943		2,831		2,132,142		2,134,973		—
Total real estate	5,582		2,745		8,327		2,993,136		3,001,463		17
Commercial:
Commercial	607		724		1,331		348,490		349,821		—
Agricultural	—		—		—		872		872		—
Total commercial	607		724		1,331		349,362		350,693		—

Total	$	6,320	$	3,505	$	9,825	$	3,349,762	$	3,359,587	$	21



December 31, 2018
Consumer:
Other consumer	$	337	$	49	$	386	$	15,272	$	15,658	$	2
Real estate:
Construction	8,283		27		8,310		421,295		429,605		—
Single family residential	4,706		3,049		7,755		558,433		566,188		—
Other commercial	168		577		745		1,847,934		1,848,679		—
Total real estate	13,157		3,653		16,810		2,827,662		2,844,472		—
Commercial:
Commercial	1,302		9,542		10,844		420,070		430,914		—
Agricultural	31		5		36		1,703		1,739		—
Total commercial	1,333		9,547		10,880		421,773		432,653		—

Total	$	14,827	$	13,249	$	28,076	$	3,264,707	$	3,292,783	$	2

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



(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total

September 30, 2019
Consumer:
Other consumer	$	7,285	$	—	$	146	$	—	$	—	$	7,431
Real estate:
Construction	344,075		17,874		51		—		—		362,000
Single family residential	492,826		1,224		10,312		128		—		504,490
Other commercial	2,085,649		26,207		23,117		—		—		2,134,973
Total real estate	2,922,550		45,305		33,480		128		—		3,001,463
Commercial:
Commercial	341,385		1,491		6,945		—		—		349,821
Agricultural	804		—		68		—		—		872
Total commercial	342,189		1,491		7,013		—		—		350,693

Total	$	3,272,024	$	46,796	$	40,639	$	128	$	—	$	3,359,587



December 31, 2018
Consumer:
Other consumer	$	15,380	$	—	$	278	$	—	$	—	$	15,658
Real estate:
Construction	393,122		27,621		8,862		—		—		429,605
Single family residential	553,460		2,081		10,299		348		—		566,188
Other commercial	1,822,179		9,137		17,363		—		—		1,848,679
Total real estate	2,768,761		38,839		36,524		348		—		2,844,472
Commercial:
Commercial	401,300		12,416		17,198		—		—		430,914
Agricultural	1,642		—		97		—		—		1,739
Total commercial	402,942		12,416		17,295		—		—		432,653

Total	$	3,187,083	$	51,255	$	54,097	$	348	$	—	$	3,292,783

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

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

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, 2019 and 2018.



	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,461		$	3,487		$	1,460		$	4,050
Additions	—			—			—			175
Accretable yield adjustments	10			—			38			—
Accretion	(12		)	12			(39		)	39
Payments and other reductions, net	—			(422		)	—			(1,187		)
Balance, ending	$	1,459		$	3,077		$	1,459		$	3,077



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,382		$	13,995		$	620		$	17,116
Additions	—			—			—			—
Accretable yield adjustments	717			—			1,895			—
Accretion	(635		)	635			(1,051		)	1,051
Payments and other reductions, net	—			(9,664		)	—			(13,201		)
Balance, ending	$	1,464		$	4,966		$	1,464		$	4,966

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan loss for loans acquired resulting in a total allowance on loans acquired of $597,000 at September 30, 2019 and $95,000 at December 31, 2018. The provision on loans acquired for the three and nine months ended September 30, 2019 was $0 and $2,464,000, respectively. The provision on loans acquired for the three and nine months ended September 30, 2018 was $0 and $1,837,000, respectively.

NOTE 6: RIGHT-OF-USE LEASE ASSETS AND LEASE LIABILITIES

As of the first quarter 2019, the Company accounts for its leases in accordance with ASC Topic 842, Leases, which requires recognition of most leases, including operating leases, with a term greater than 12 months, on the balance sheet. At lease commencement, the lease contract is reviewed to determine whether the contract is a finance lease or an operating lease; a lease liability is recognized on a discounted basis, related to the Company’s obligation to make lease payments; and a right-of-use asset is also recognized related to the Company’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for lease and non-lease components (such as taxes, insurance and common area maintenance costs) separately as such amounts are generally readily determinable under the lease contracts. Lease payments over the expected term are discounted using the Company’s FHLB advance rates for borrowings of similar term. If it is reasonably certain that a renewal or termination option will be exercised, the effects of such options are included in the determination of the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company’s leases are classified as operating leases with a term, including expected renewal or termination options, greater than one year, and are related to certain office facilities and office equipment. As of September 30, 2019, right-of-use lease assets included in premises and equipment are $34.1 million and lease liabilities included in other liabilities are $34.3 million. During the three and nine months ended September 30, 2019, the Company recognized lease expense of $2.8 million and $8.1 million, respectively, and the weighted average discount rate was 3.47%. At September 30, 2019, the weighted average remaining lease term was 8.63 years.

See the Recently Adopted Accounting Standards section of Note 1, Preparation of Interim Financial Statements, for additional information related to the adoption of ASC Topic 842.

NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is tested annually, or more often than annually, if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $926.6 million at September 30, 2019 and $845.7 million at December 31, 2018.

The Company recorded $81.0 million of goodwill during the second quarter 2019 as a result of its acquisition of Reliance. Goodwill impairment was neither indicated nor recorded during the nine months ended September 30, 2019 or the year ended December 31, 2018.

Core deposit premiums are amortized over periods ranging from 10 years to 15 years and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $18.4 million were recorded during the second quarter 2019 as part of the Reliance acquisition. Additionally, intangible assets are being amortized over various periods ranging from 10 years to 15 years.

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at September 30, 2019 and December 31, 2018, were as follows:



(In thousands)	September 30, 2019			December 31, 2018
Goodwill	$	926,648		$	845,687
Core deposit premiums:
Gross carrying amount	124,334			105,984
Accumulated amortization	(33,918		)	(26,177		)
Core deposit premiums, net	90,416			79,807
Books of business intangible:
Gross carrying amount	15,234			15,234
Accumulated amortization	(4,501		)	(3,707		)
Books of business intangible, net	10,733			11,527
Other intangible assets, net	101,149			91,334
Total goodwill and other intangible assets	$	1,027,797		$	937,021

The Company’s estimated remaining amortization expense on intangibles as of September 30, 2019 is as follows:



(In thousands)	Year	Amortization Expense
	Remainder of 2019	$	2,947
	2020	11,776
	2021	11,714
	2022	11,662
	2023	11,379
	Thereafter	51,671
	Total	$	101,149

NOTE 8: TIME DEPOSITS

Time deposits include approximately $1.679 billion and $1.443 billion of certificates of deposit of $100,000 or more at September 30, 2019, and December 31, 2018, respectively. Of this total approximately $777.5 million and $753.2 million of certificates of deposit were over $250,000 at September 30, 2019 and December 31, 2018, respectively.

NOTE 9: INCOME TAXES

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



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Income taxes currently payable	$	17,282	$	5,638	$	40,356	$	31,335
Deferred income taxes	5,993		5,264		10,933		7,316
Provision for income taxes	$	23,275	$	10,902	$	51,289	$	38,651

The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their appropriate tax effects, are as follows:



(In thousands)	September 30, 2019		December 31, 2018
Deferred tax assets:
Loans acquired	$	15,906	$	12,536
Allowance for loan losses	16,332		13,947
Valuation of foreclosed assets	2,706		1,474
Tax NOLs from acquisition	18,021		7,242
Deferred compensation payable	2,572		2,707
Accrued equity and other compensation	8,340		8,182
Acquired securities	2,598		397
Unrealized loss on available-for-sale securities	—		9,196
Other	5,409		7,042
Gross deferred tax assets	71,884		62,723



(In thousands)	September 30, 2019			December 31, 2018
Deferred tax liabilities:
Goodwill and other intangible amortization	$	(34,304	)	$	(30,471	)
Accumulated depreciation	(16,587		)	(13,361		)
Unrealized gain on available-for-sale securities	(6,811		)	—
Other	(5,304		)	(5,360		)
Gross deferred tax liabilities	(63,006		)	(49,192		)

Net deferred tax asset, included in other assets	$	8,878		$	13,531

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown for the periods indicated below:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
Computed at the statutory rate (21%)	$	22,071		$	13,880		$	49,646		$	41,731
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit	2,956			986			5,721			4,073
Tax exempt interest income	(1,105		)	(833		)	(3,090		)	(2,292		)
Tax exempt earnings on BOLI	(225		)	(186		)	(619		)	(562		)
Federal tax credits	(730		)	—			(2,188		)	—
Other differences, net	308			(2,945		)	1,819			(4,299		)
Actual tax provision	$	23,275		$	10,902		$	51,289		$	38,651

The Company follows ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in 2019 and in future years. The Company expects to fully realize its deferred tax assets in the future.

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

Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company has engaged in two tax-free reorganization transactions in which acquired net operating losses are limited pursuant to Section 382. In total, approximately $85.9 million of federal net operating losses subject to the IRC Section 382 annual limitation are expected to be utilized by the Company, of which $53.6 million is related to the Reliance acquisition during second quarter 2019. All of the acquired Reliance net operating losses are expected to be fully utilized by 2029, with the remaining acquired net operating loss carryforwards expected to be fully utilized by 2036.

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 2015 tax year and forward. The Company’s various state income tax returns are generally open from the 2015 and later tax return years based on individual state statute of limitations.

NOTE 10: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

The gross amount of recognized liabilities for repurchase agreements was $116.3 million and $95.5 million at September 30, 2019 and December 31, 2018, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2019 and December 31, 2018 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, 2019
Repurchase agreements:
U.S. Government agencies	$	116,286	$	—	$	—	$	—	$	116,286

December 31, 2018
Repurchase agreements:
U.S. Government agencies	$	95,542	$	—	$	—	$	—	$	95,542

NOTE 11: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

Debt at September 30, 2019 and December 31, 2018 consisted of the following components:



(In thousands)	September 30, 2019			December 31, 2018
Other Borrowings
FHLB advances, net of discount, due 2019 to 2033, 1.38% to 7.37% secured by real estate loans	$	1,098,395		$	1,345,450
Revolving credit agreement, due 10/4/2019, floating rate of 1.50% above the one month LIBOR rate, unsecured	—			—
Total other borrowings	1,098,395			1,345,450

Subordinated Notes and Debentures
Subordinated notes payable, due 4/1/2028, fixed-to-floating rate (fixed rate of 5.00% through 3/31/2023, floating rate of 2.15% above the three month LIBOR rate, reset quarterly)	330,000			330,000
Trust preferred securities, net of discount, due 9/15/2037, floating rate of 1.37% above the three month LIBOR rate, reset quarterly	10,310			10,310
Trust preferred securities, net of discount, due 6/6/2037, floating rate of 1.57% above the three month LIBOR rate, reset quarterly, callable without penalty	10,310			10,310
Trust preferred securities, due 12/15/2035, floating rate of 1.45% above the three month LIBOR rate, reset quarterly, callable without penalty	6,702			6,702
Unamortized debt issuance costs	(3,099		)	(3,372		)
Total subordinated notes and debentures	354,223			353,950
Total other borrowings and subordinated debt	$	1,452,618		$	1,699,400

In March 2018, the Company issued $330.0 million in aggregate principal amount, of 5.00% Fixed-to-Floating Rate Subordinated Notes (“the Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.6 million in debt issuance costs related to the offering during March 2018. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 215 basis points, payable quarterly in arrears. The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its general creditors. The Notes are obligations of Simmons First National Corporation only and are not obligations of, and are not guaranteed by, any of its subsidiaries. During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Credit Agreement (described below), certain trust preferred securities, both discussed below, and unsecured debt from correspondent banks. The Notes qualify for Tier 2 capital treatment.

In 2017, the Company entered into a Revolving Credit Agreement with U.S. Bank National Association (the “Credit Agreement”) and executed an unsecured Revolving Credit Note pursuant to which the Company may borrow, prepay and re-borrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. The Credit Agreement contained customary representations, warranties, and covenants of the Company, including, among other things, covenants that impose various financial ratio requirements. In October 2018, the Company and U.S. Bank National Association entered into a First Amendment to the Credit Agreement, which extended the expiration date from October 5, 2018 to October 4, 2019, reduced the $75.0 million to $50.0 million, and increased the commitment fee on the unused portion from an annual rate of 0.25% to 0.30%. In December 2018, the Company entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants are evaluated on a consolidated basis. All amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company were due and payable on October 4, 2019. The balance due under the Credit Agreement at September 30, 2019 and October 4, 2019 was $0. The Company did not renew the Credit Agreement upon the expiration date.

At September 30, 2019, the Company had $1.09 billion of FHLB advances outstanding with original or expected maturities of one year or less, of which $1.03 billion are FHLB Owns the Option (“FOTO”) advances. FOTO advances are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. Typically, FOTO exercise dates follow a specified lockout period at the beginning of the term when FHLB cannot terminate the FOTO advance. If FHLB exercises its option to terminate the FOTO advance at one of the specified option exercise dates, there is no termination or prepayment fee, and replacement funding will be available at then-prevailing market rates, subject to FHLB’s credit and collateral requirements. The Company’s FOTO advances outstanding at the end of the third quarter have maturity dates of ten years to fifteen years with lockout periods that have expired and, as a result, are considered and monitored by the Company as short-term advances. The possibility of the FHLB exercising the options is analyzed by the Company along with the market expected rate outcome.

The Company had total FHLB advances of $1.10 billion at September 30, 2019, with approximately $3.1 billion of additional advances available from the FHLB. The FHLB advances are secured by mortgage loans and investment securities totaling approximately $5.4 billion at September 30, 2019.

The trust preferred securities are tax-advantaged issues that qualified for Tier 1 capital treatment until December 31, 2017, when the Company reached $15 billion in assets. They still qualify for inclusion as Tier 2 capital at September 30, 2019. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payments on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in the aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

The Company’s long-term debt includes subordinated debt and long-term FHLB advances with an original maturity of greater than one year. Aggregate annual maturities of long-term debt at September 30, 2019, are as follows:



(In thousands)	Year	Annual Maturities
	2019	$	356
	2020	2,105
	2021	1,804
	2022	948
	2023	925
	Thereafter	361,480
	Total	$	367,618

NOTE 12: CONTINGENT LIABILITIES

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

NOTE 13: CAPITAL STOCK

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

On March 19, 2018, the Company filed a shelf registration with the SEC. The shelf registration statement provides increased flexibility and more efficient access to raise capital from time to time through the sale of common stock, preferred stock, debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, units 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.

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

On July 23, 2012, the Company approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares (split adjusted) of Common Stock. On October 22, 2019, the Company announced a new stock repurchase program that replaces the program approved on July 23, 2012. See Note 22, Subsequent Events, for additional information regarding this subsequent event. The Company had no repurchases of its common stock pursuant to the repurchase program during the three and nine month periods ended September 30, 2019.

On April 12, 2019, as part of the acquisition of Reliance, the Company issued 40,000 shares of Simmons Series A Preferred Stock and 2,000 shares Simmons Series B Preferred Stock in exchange for the outstanding shares of Reliance’s Series A Preferred Stock and Series B Preferred Stock. On May 13, 2019, the Company redeemed all of the preferred stock, including accrued and unpaid dividends.

NOTE 14: UNDIVIDED PROFITS

The Company’s subsidiary bank is subject to legal limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Commissioner of the Arkansas State Bank Department is required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent (75%) of the total of its net profits, as defined, for that year combined with seventy-five percent (75%) of its retained net profits of the preceding year. At September 30, 2019, the Company’s subsidiary bank had approximately $128.8 million available for payment of dividends to the Company, without prior regulatory approval.

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

The Company and Bank must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and was phased in over a four year period (increasing by that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019). As of September 30, 2019, the Company and its subsidiary bank met all capital adequacy requirements under the Basel III Capital Rules. The Company’s CET1 ratio was 10.25% at September 30, 2019.

NOTE 15: STOCK BASED COMPENSATION

The Company’s Board of Directors has adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or 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, 2019:



	Stock Options Outstanding				Non-vested Stock Awards Outstanding				Non-vested Stock Units Outstanding
(Shares in thousands)	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Grant-Date Fair Value		Number of Shares		Weighted Average Grant-Date Fair Value
Balance, January 1, 2019	695		$	22.42	72		$	21.45	817		$	27.65
Granted	—		—		—		—		516		26.07
Stock options exercised	(1	)	10.65		—		—		—		—
Stock awards/units vested (earned)	—		—		(39	)	20.12		(334	)	26.45
Forfeited/expired	—		—		(2	)	21.82		(90	)	28.29

Balance, September 30, 2019	694		$	22.43	31		$	23.16	909		$	27.18

Exercisable, September 30, 2019	694		$	22.43

The following table summarizes information about stock options under the plans outstanding at September 30, 2019:



					Options Outstanding			Options Exercisable
Range of Exercise Prices					Number of Shares (In thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Number of Shares (In thousands)	Weighted Average Exercise Price
$	9.46	—	$	9.46	1	2.30	$9.46	1	$9.46
10.65		—	10.65		3	3.32	10.65	3	10.65
10.76		—	10.76		2	0.30	10.76	2	10.76
20.29		—	20.29		71	5.25	20.29	71	20.29
20.36		—	20.36		3	5.13	20.36	3	20.36
22.20		—	22.20		74	5.48	22.20	74	22.20
22.75		—	22.75		436	5.86	22.75	436	22.75
23.51		—	23.51		97	6.30	23.51	97	23.51
24.07		—	24.07		7	5.96	24.07	7	24.07
$	9.46	—	$	24.07	694	5.78	$22.43	694	$22.43

The table below summarizes the Company’s performance stock unit activity for the nine months ended September 30, 2019:



(In thousands)	Performance Stock Units
Non-vested, January 1, 2019	177
Granted	118
Vested (earned)	(93	)
Forfeited	(3	)
Non-vested, September 30, 2019	199

Stock-based compensation expense was $9,316,000 and $9,818,000 during the nine months ended September 30, 2019 and 2018, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was no unrecognized stock-based compensation expense related to stock options at September 30, 2019. Unrecognized stock-based compensation expense related to non-vested stock awards and stock units was $16,269,000 at September 30, 2019. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.7 years.

The intrinsic value of stock options outstanding and stock options exercisable at September 30, 2019 was $1,717,000 and $1,714,000, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $24.90 as of September 30, 2019, and the exercise price multiplied by the number of options outstanding. The total intrinsic value of stock options exercised during the nine months ended September 30, 2019 and September 30, 2018, was $6,000 and $1,155,000, respectively.

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. There were no stock options granted during the nine months ended September 30, 2019 and 2018.

NOTE 16: EARNINGS PER SHARE (“EPS”)

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

The computation of earnings per share is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2019		2018		2019		2018
Net income available to common stockholders	$	81,826	$	55,193	$	185,119	$	160,067

Average common shares outstanding	96,608		92,290		95,090		92,246
Average potential dilutive common shares	360		551		360		551
Average diluted common shares	96,968		92,841		95,450		92,797

Basic earnings per share	$	0.85	$	0.60	$	1.95	$	1.74
Diluted earnings per share	$	0.84	$	0.59	$	1.94	$	1.72

There were no stock options excluded from the earnings per share calculation due to the related exercise price exceeding the average market price for the three and nine months ended September 30, 2019 and 2018.

NOTE 17: ADDITIONAL CASH FLOW INFORMATION

The following is a summary of the Company’s additional cash flow information:



	Nine Months Ended September 30,
(In thousands)	2019		2018
Interest paid	$	130,904	$	78,987
Income taxes (refunded) paid	34,028		25,576
Transfers of loans to foreclosed assets held for sale	3,666		7,745
Transfers of premises to foreclosed assets and other real estate owned	556		3,690
Right-of use lease assets obtained in exchange for lessee operating lease liabilities (adoption of ASU 2016-02)	32,757		—

NOTE 18: OTHER INCOME AND OTHER OPERATING EXPENSES

Other income for the three and nine months ended September 30, 2019 was $43.8 million and $52.1 million, respectively, and primarily consisted of the gain on sale of Visa Inc. class B common stock of $42.9 million. Other income for the three and nine months ended September 30, 2018 was $4.9 million and $14.2 million, respectively.

Other operating expenses consist of the following:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Professional services	$	4,310	$	4,616	$	12,125	$	13,896
Postage	1,471		1,262		4,642		4,103
Telephone	2,507		1,248		5,605		4,217
Credit card expense	4,200		3,405		11,822		9,820
Marketing	7,021		2,912		12,514		6,334
Software and technology	6,531		4,733		16,607		10,716
Operating supplies	493		585		1,671		1,917
Amortization of intangibles	2,947		2,772		8,535		8,394
Branch right sizing expense	160		970		3,092		1,049
Other expense	8,239		7,171		24,195		20,907
Total other operating expenses	$	37,879	$	29,674	$	100,808	$	81,353

NOTE 19: CERTAIN TRANSACTIONS

From time to time, the Company and its subsidiaries have made loans, other extensions of credit, and vendor contracts to directors, officers, their associates and members of their immediate families. Additionally, some directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary bank, Simmons Bank. Such loans and other extensions of credit, deposits and vendor contracts (which were not material) 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 unrelated persons or through a competitive bid process. Further, in management’s opinion, these extensions of credit did not involve more than normal risk of collectability or present other unfavorable features.

NOTE 20: COMMITMENTS AND CREDIT RISK

The Company grants agri-business, commercial and residential loans to customers primarily throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas, 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, 2019, the Company had outstanding commitments to extend credit aggregating approximately $598,992,000 and $3,310,794,000 for credit card commitments and other loan commitments. At December 31, 2018, the Company had outstanding commitments to extend credit aggregating approximately $560,863,000 and $3,455,471,000 for credit card commitments and other loan commitments, respectively.

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 $49,447,000 and $39,101,000 at September 30, 2019, and December 31, 2018, respectively, with terms ranging from 9 months to 15 years. At September 30, 2019 and December 31, 2018, the Company had no deferred revenue under standby letter of credit agreements.

NOTE 21: 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.

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.

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, the Company periodically checks 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 for the Company’s 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 U.S. Treasury securities, if any, 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.

Derivative instruments – The Company’s derivative instruments are reported at fair value utilizing Level 2 inputs. The Company obtains fair value measurements from dealer quotes.

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 recurring basis as of September 30, 2019 and December 31, 2018.



				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, 2019
Available-for-sale securities
U.S. Government agencies	$	178,139		$	—	$	178,139		$	—
Mortgage-backed securities	1,337,794			—		1,337,794			—
State and political subdivisions	681,202			—		681,202			—
Other securities	158,999			—		158,999			—
Derivative asset	14,377			—		14,377			—
Derivative liability	(14,478		)	—		(14,478		)	—

December 31, 2018
Available-for-sale securities
U.S. Government agencies	$	154,301		$	—	$	154,301		$	—
Mortgage-backed securities	1,522,900			—		1,522,900			—
States and political subdivisions	314,843			—		314,843			—
Other securities	159,708			—		159,708			—
Derivative asset	6,242			—		6,242			—
Derivative liability	(5,283		)	—		(5,283		)	—

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 is performed on all loans over $1.5 million rated Substandard or worse, all existing impaired loans regardless of size and all TDRs. 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 and other real estate owned – Foreclosed assets and other real estate owned 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 and other real estate owned is estimated using Level 3 inputs based on unobservable market data. As of September 30, 2019 and December 31, 2018, the fair value of foreclosed assets and other real estate owned less estimated costs to sell was $19.6 million and $25.6 million, respectively.

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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.



			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, 2019
Impaired loans ^{(1) (2)} (collateral dependent)	$	46,903	$	—	$	—	$	46,903
Foreclosed assets and other real estate owned ⁽¹⁾	15,046		—		—		15,046

December 31, 2018
Impaired loans ^{(1) (2)} (collateral dependent)	$	17,789	$	—	$	—	$	17,789
Foreclosed assets and other real estate owned ⁽¹⁾	23,714		—		—		23,714

________________________

(1)These amounts represent the resulting carrying amounts on the consolidated balance sheets for impaired collateral dependent loans and foreclosed assets and other real estate owned for which fair value re-measurements took place during the period.

(2)Specific allocations of $1,297,000 and $2,738,000 were related to the impaired collateral dependent loans for which fair value re-measurements took place during the periods ended September 30, 2019 and December 31, 2018, 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 each class of financial instruments not previously disclosed.

Cash and cash equivalents – The carrying amount for cash and cash equivalents approximates fair value (Level 1).

Interest bearing balances due from banks – 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).

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 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. Additional factors considered include 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. The fair value of loans is estimated on an exit price basis incorporating the above factors (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 and short-term debt – 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.

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, 2019
Financial assets:
Cash and cash equivalents	$	529,970	$	529,970	$	—	$	—	$	529,970
Interest bearing balances due from banks - time	5,041		—		5,041		—		5,041
Held-to-maturity securities	42,237		—		43,302		—		43,302
Mortgage loans held for sale	50,099		—		—		50,099		50,099
Interest receivable	53,966		—		53,966		—		53,966
Legacy loans, net	9,577,372		—		—		9,505,701		9,505,701
Loans acquired, net	3,359,587		—		—		3,334,446		3,334,446

Financial liabilities:
Non-interest bearing transaction accounts	3,044,330		—		3,044,330		—		3,044,330
Interest bearing transaction accounts and savings deposits	7,337,571		—		7,337,571		—		7,337,571
Time deposits	3,086,108		—		—		3,080,775		3,080,775
Federal funds purchased and securities sold under agreements to repurchase	116,536		—		116,536		—		116,536
Other borrowings	1,098,395		—		1,099,171		—		1,099,171
Subordinated notes and debentures	354,223		—		366,289		—		366,289
Interest payable	15,404		—		15,404		—		15,404

December 31, 2018
Financial assets:
Cash and cash equivalents	$	833,458	$	833,458	$	—	$	—	$	833,458
Interest bearing balances due from banks - time	4,934		—		4,934		—		4,934
Held-to-maturity securities	289,194		—		290,830		—		290,830
Mortgage loans held for sale	26,799		—		—		26,799		26,799
Interest receivable	49,938		—		49,938		—		49,938
Legacy loans, net	8,373,789		—		—		8,280,690		8,280,690
Loans acquired, net	3,292,783		—		—		3,256,174		3,256,174

Financial liabilities:
Non-interest bearing transaction accounts	2,672,405		—		2,672,405		—		2,672,405
Interest bearing transaction accounts and savings deposits	6,830,191		—		6,830,191		—		6,830,191
Time deposits	2,896,156		—		—		2,872,342		2,872,342
Federal funds purchased and securities sold under agreements to repurchase	95,792		—		95,792		—		95,792
Other borrowings	1,345,450		—		1,342,868		—		1,342,868
Subordinated debentures	353,950		—		355,812		—		355,812
Interest payable	9,897		—		9,897		—		9,897

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.

NOTE 22: SUBSEQUENT EVENTS

On October 22, 2019, the Company announced that its Board of Directors authorized a new stock repurchase program (the “Program”) under which the Company may repurchase up to $60,000,000 of its Class A common stock currently issued and outstanding. The Program will terminate on October 31, 2021 (unless terminated sooner). The new Program replaces the Company’s existing stock repurchase program, which was announced on July 23, 2012.

Under the Program, the Company may repurchase shares of its common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by the Company’s management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of the Company’s common stock, corporate considerations, the Company’s working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate the Company to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. The Company anticipates funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow.

On October 29, 2019, the Company filed its Amended and Restated Articles of Incorporation (“Amended Articles”) with the Arkansas Secretary of State. The Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share (“Series D Preferred Stock”) out of the Company’s authorized preferred stock. The Amended Articles also canceled the Company’s 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C (“Series C Preferred Stock”), having 140 authorized shares, of which no shares have ever been issued or outstanding. The Amended Articles were effective as of October 29, 2019.

Please refer to Note 2, Acquisitions, for a discussion of the Company’s recent acquisition of The Landrum Company that closed on October 31, 2019.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee, Board of Directors and Stockholders

Simmons First National Corporation

Pine Bluff, Arkansas

Results of Review of Interim Financial Statements

We have reviewed the condensed consolidated balance sheet of Simmons First National Corporation (“the Company”) as of September 30, 2019, and the related condensed consolidated statements of income, comprehensive income and stockholders’ equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and cash flows for the nine-month periods ended September 30, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information or statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed 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) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2018, 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 February 27, 2019, 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, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures 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 PCAOB, 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.

/s/ BKD, LLP

Little Rock, Arkansas

November 7, 2019


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, 2019 was $81.8 million, or $0.84 diluted earnings per share, increases of $26.6 million and $0.25, respectively, compared to the third quarter 2018. Included in both third quarter 2019 and 2018 results, were non-core items related to our acquisitions, early retirement program expenses and branch right sizing initiatives. Excluding all non-core items, core earnings for the three months ended September 30, 2019 were $84.0 million, or $0.87 core diluted earnings per share, compared to $56.5 million, or $0.61 core diluted earnings per share for the three months ended September 30, 2018. See “Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

We are very pleased with our operating results this quarter. We continue to have very strong loan demand opportunities throughout our footprint although our customers are displaying cautious optimism regarding the uncertainty in the world economy and interest rate adjustments. We had several notable events during the third quarter 2019 that affected our operating results. First, provision expense increased $15 million primarily related to the charge-off of a participation interest in a shared national credit to White Star Petroleum, LLC (“White Star”) (further discussed below in “Provision for Loan Losses”). Second, we sold Visa Inc. class B common stock resulting in a gain of $42.9 million, and in connection with that sale, we contributed $4 million to the Simmons First Foundation so it may continue its work to provide community development grants throughout our footprint. Third, we sold $114 million of primarily commercial real estate (“CRE”) loans resulting in a net loss of $5.1 million.

Net income for the nine months ended September 30, 2019 was $185.1 million, or $1.94 diluted earnings per share, increases of $25.1 million and $0.22, respectively, compared to the same period in 2018. Excluding all non-core items, core earnings for the nine months ended September 30, 2019 were $198.5 million, or $2.08 core diluted earnings per share, compared to $163.8 million, or $1.76 core diluted earnings per share, for the same period in 2018. See “Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

In April 2019, we completed the acquisition of Reliance Bancshares, Inc. (“Reliance”). Contemporaneously with the Reliance acquisition, Reliance’s subsidiary bank, Reliance Bank, was merged with and into Simmons Bank, with Simmons Bank as the surviving entity. We are excited about the Reliance transaction and the opportunities we now have in the St. Louis market due to our increased presence. See Note 2, Acquisitions, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report, for additional information related to this acquisition.

In 2018, we announced our Next Generation Banking (“NGB”) strategic initiative that we believe positions us to provide competitive banking services well into the future. Through this program, we have evaluated the primary information technology systems and functions that support our operations and are improving or replacing many of them with updated and/or enhanced banking technologies. This initiative will, among other things, assist us in our efforts to create a differentiated experience for our customers across all channels, including digital.

We are beginning to see real changes as a result of our NGB investments. For example, we accomplished a major milestone in the third quarter 2019 when we successfully completed the migration of our core banking platform to our vendor hosted environment. The transition was very successful and has increased security and the reliability of our systems. In addition, in October 2019, we successfully launched our new mobile banking application. Our new application makes us a formidable competitor in mobile banking, and customer response to date has been very positive. We will continue to expand customer offerings through our digital channel.

Stockholders’ equity as of September 30, 2019 was $2.5 billion, book value per share was $26.36 and tangible book value per share was $15.73. Our ratio of stockholders’ equity to total assets was 14.3% and the ratio of tangible stockholders’ equity to tangible assets was 9.1% at September 30, 2019. See “Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures. The Company’s Tier I leverage ratio of 9.1%, 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).

Total loans, including loans acquired, were $13.003 billion at September 30, 2019, compared to $13.127 billion at June 30, 2019 and $11.723 billion at December 31, 2018. During the third quarter 2019, we reduced our real estate loan portfolio as part of an effort to manage our CRE concentration. The increase in our overall loan balance since year-end 2018 was primarily due to the Reliance Bank merger completed in April 2019.

As mentioned above, during the quarter we incurred a loss related to the White Star bankruptcy. The White Star loss is disappointing and contrary to the credit culture at Simmons. Because we were only a participant in the shared national credit, we were limited both in our ability to act unilaterally and in our access to timely information. We have learned some valuable lessons from this experience. We have made changes to our credit underwriting and approval processes that are consistent with our conservative

credit culture. We will work to exit all purchased syndicated energy credits. Currently we have $187 million in syndicated energy loans in which Simmons is not the lead bank. We expect to exit at least $120 million of these credits by the second quarter of next year.

At September 30, 2019, the allowance for loan losses for legacy loans was $66.0 million. The allowance for loan losses for loans acquired was $597,000 and the acquired loan discount credit mark was $60.4 million. The allowances for loan losses and credit marks provide a total of $127.0 million of coverage, which equates to a total coverage ratio of 1.0% of gross loans. The ratio of credit mark and related allowance to loans acquired was 1.8%.

On October 31, 2019, we completed our previously announced acquisition of The Landrum Company. We are excited about the expanded market presence in several states as a result of this acquisition.

Simmons First National Corporation is an Arkansas-based financial holding company that, as of September 30, 2019, has approximately $17.8 billion in consolidated assets and, through its subsidiaries, conducts financial operations throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.

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 loans, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of stock-based compensation 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) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that will affect specific loans and categories of loans. 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.

Refer to the Recently Issued Accounting Standards section in Note 1, Preparation of Interim Financial Statements, in the accompanying Condensed Notes to Consolidated Financial Statements for discussion regarding the pending accounting

pronouncement that will replace the current incurred loss accounting model for the allowance for loan losses, which will be effective on January 1, 2020.

Acquisition Accounting, Loans Acquired

We account for our acquisitions under Accounting Standards Codification (“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 loans acquired is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. 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.

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 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. All loans acquired 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 loan.

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 on recorded goodwill, if any, will be recorded as operating expenses.

Stock-based Compensation 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, restricted stock awards, restricted stock units and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or bonus shares granted to directors, officers and other key employees.

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 15, 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.

The adoption of ASU 2016-09 – Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, decreased the effective tax rate during 2018 as the new standard impacted how the income tax effects associated with stock-based compensation are recognized.

IMPACTS OF GROWTH

During 2017, through both internal growth and acquisitions, the assets of the Company exceeded the $10 billion threshold.

The Dodd-Frank Act and associated Federal Reserve regulations cap the interchange rate on debit card transactions that can be charged by banks that, together with their affiliates, have at least $10 billion in assets at $0.21 per transaction plus five basis points multiplied by the value of the transaction. The cap goes into effect July 1st of the year following the year in which a bank reaches the $10 billion asset threshold. Simmons Bank, when viewed together with its affiliates, had assets in excess of $10 billion at December 31, 2017, and therefore, became subject to the interchange rate cap effective July 1, 2018. The interchange rate cap resulted in a $5.9 million reduction in debit card fees for year-to-date 2019 when compared to the same period of 2018.

As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply, and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt is included as total Tier 2 capital.

The Dodd-Frank Act also previously required banks and bank holding companies with more than $10 billion in assets to conduct annual stress tests, report the results to regulators and publicly disclose such results. As a result of regulatory reform signed into law during the second quarter of 2018, the Company and Simmons Bank are no longer required to conduct an annual stress test of capital under the Dodd-Frank Act. In anticipation of becoming subject to this requirement, the Company and Simmons Bank had begun the necessary preparations, including undertaking a gap analysis, implementing enhancements to the audit and compliance departments, and investing in various information technology systems.

Additionally, the Dodd-Frank Act established the Bureau of Consumer Financial Protection (the “CFPB”) and granted it supervisory authority over banks with total assets of more than $10 billion. Simmons Bank, with assets now exceeding $10 billion, is subject to CFPB oversight with respect to its compliance with federal consumer financial laws. Simmons Bank will continue to be subject to the oversight of its other regulators with respect to matters outside the scope of the CFPB’s jurisdiction. The CFPB has broad rule-making, supervisory and examination authority, as well as expanded data collecting and enforcement powers, all of which is expected to impact the operations of Simmons Bank.

It is also important to note that the Dodd-Frank Act changed how the FDIC calculates deposit insurance premiums payable by insured depository institutions. The Dodd-Frank Act directed the FDIC to amend its assessment regulations so that assessments are generally based upon a depository institution’s average total consolidated assets less the average tangible equity of the insured depository institution during the assessment period. Assessments were previously based on the amount of an institution’s insured deposits. Now that Simmons Bank exceeds $10 billion in total assets, it is subject to the assessment rates assigned to larger banks which may result in higher deposit insurance premiums.

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 26.135% for periods beginning January 1, 2018.

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 65% of our loan portfolio and approximately 75% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 54% of our loans and 80% of our time deposits will reprice in the next year.

Net Interest Income Quarter-to-Date Analysis

For the three month period ended September 30, 2019, net interest income on a fully taxable equivalent basis was $152.0 million, an increase of $7.6 million, or 5.3%, over the same period in 2018. The increase in net interest income was the result of a $18.8 million increase in interest income partially offset by a $11.1 million increase in interest expense.

The increase in interest income primarily resulted from a $17.6 million increase in interest income on loans and an increase of $1.1 million in interest income on investment securities. The increase in loan volume during 2019 generated $19.5 million of additional interest income, primarily from our Reliance acquisition completed during April 2019, while a 7 basis point decline in yield resulted in a $1.9 million decrease in interest income.

Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our loans acquired, as discussed in Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Each quarter, we estimate the cash flows expected to be collected from the loans acquired, 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 the three months ended September 30, 2019 and 2018, interest income included $9.3 million and $10.0 million, respectively, for the yield accretion recognized on loans acquired.

The $11.1 million increase in interest expense is due to the growth in deposit accounts from organic growth as well as the Reliance acquisition, and, although the Federal Reserve did lower interest rates during the third quarter 2019, the rates were higher in the third quarter 2019 when compared to the same quarter in 2018. Interest expense increased $4.2 million due to deposit growth primarily from the Reliance acquisition and $8.4 million due to the increase in yield of 35 basis points on deposit accounts. These increases were partially offset by a reduction in FHLB borrowings in third quarter 2019 compared to the same quarter in 2018.

Net Interest Income Year-to-Date Analysis

For the nine month period ended September 30, 2019, net interest income on a fully taxable equivalent basis was $442.7 million, an increase of $24.1 million, or 5.8%, over the same period in 2018. The increase in net interest income was the result of a $71.5 million increase in interest income partially offset by a $47.4 million increase in interest expense.

The increase in interest income primarily resulted from a $61.6 million increase in interest income on loans and an increase of $9.0 million in interest income on investment securities. Increases in loan volume increased interest income by $54.5 million during the first nine months of 2019 due to both organic loan growth and our Reliance acquisition. Interest income also increased $7.1 million due to an increase in yield of 9 basis points on loans during 2019.

For the nine months ended September 30, 2019 and 2018, interest income included $26.1 million and $31.4 million, respectively, for the yield accretion recognized on loans acquired.

The $47.4 million increase in interest expense is due to growth in deposit accounts, higher cost of deposits due to the rising-rate environment during 2018 and the first half of 2019 and the increase in rates for FHLB borrowings. Interest expense increased $10.9 million due to deposit growth, $33.2 million due to the increase in yield of 48 basis points on deposit accounts and $3.2 million due to the increase in yield of 35 basis points on FHLB borrowings.

Net Interest Margin

Our net interest margin decreased 17 basis points to 3.81% for the three month period ended September 30, 2019, when compared to 3.98% for the same period in 2018. Normalized for all accretion, our core net interest margin (non-GAAP) for the three months ended September 30, 2019 and 2018 was 3.58% and 3.71%, respectively. For the nine month period ended September 30, 2019, net interest margin decreased 18 basis points to 3.86% when compared to 4.04% for the same period in 2018.

Since the first quarter of 2018, loan yield has increased 9 basis points and core loan yield has increased 24 basis points while cost of interest bearing deposits has risen 66 basis points and the cost of borrowed funds has increased 82 basis points. The decrease in both the net interest margin and the core net interest margin for the three and nine month periods ended September 30, 2019 is a direct result of the prior rising rate environment. We expect continued pressure on the net interest margin from the recent Federal Reserve rate reductions due to immediate downward repricing on the portion of our loans that are variable rate while the ability to reprice deposits will lag the reductions.

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 months ended September 30, 2019 and 2018, respectively, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2019 versus September 30, 2018.

Table 1: Analysis of Net Interest Margin

(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
Interest income	$	197,306		$	178,984		$	572,591		$	502,391
FTE adjustment	1,843			1,393			5,150			3,831
Interest income – FTE	199,149			180,377			577,741			506,222
Interest expense	47,142			36,016			135,045			87,620
Net interest income – FTE	$	152,007		$	144,361		$	442,696		$	418,602

Yield on earning assets – FTE	4.99		%	4.98		%	5.04		%	4.89		%
Cost of interest bearing liabilities	1.55		%	1.29		%	1.54		%	1.10		%
Net interest spread – FTE	3.44		%	3.69		%	3.50		%	3.79		%
Net interest margin – FTE	3.81		%	3.98		%	3.86		%	4.04		%

Table 2: Changes in Fully Taxable Equivalent Net Interest Margin



	Three Months Ended September 30,			Nine Months Ended September 30,
(In thousands)	2019 vs. 2018			2019 vs. 2018
Increase due to change in earning assets	$	20,336		$	59,278
Increase due to change in earning asset yields	(1,564		)	12,241
Decrease due to change in interest bearing liabilities	(2,710		)	(10,194		)
Decrease due to change in interest rates paid on interest bearing liabilities	(8,416		)	(37,231		)
Increase in net interest income	$	7,646		$	24,094

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 and nine months ended September 30, 2019 and 2018. 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

(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%)



	Three Months Ended September 30,
	2019					2018
	Average		Income/		Yield/	Average		Income/		Yield/
(In thousands)	Balance		Expense		Rate (%)	Balance		Expense		Rate (%)
ASSETS
Earning assets:
Interest bearing balances due from banks and federal funds sold	$	344,761	$	1,586	1.83	$	373,528	$	1,405	1.49
Investment securities - taxable	1,712,672		10,414		2.41	1,775,193		10,892		2.43
Investment securities - non-taxable	681,505		6,687		3.89	539,135		5,064		3.73
Mortgage loans held for sale	39,551		382		3.83	43,554		501		4.56
Loans	13,052,943		180,080		5.47	11,641,843		162,515		5.54
Total interest earning assets	15,831,432		199,149		4.99	14,373,253		180,377		4.98
Non-earning assets	1,889,166					1,667,631
Total assets	$	17,720,598				$	16,040,884

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Interest bearing liabilities:
Interest bearing transaction and savings deposits	$	7,322,395	$	21,363	1.16	$	6,840,403	$	16,373	0.95
Time deposits	3,122,422		15,573		1.98	2,379,142		8,017		1.34
Total interest bearing deposits	10,444,817		36,936		1.40	9,219,545		24,390		1.05
Federal funds purchased and securities sold under agreements to repurchase	123,883		249		0.80	107,770		104		0.38
Other borrowings	1,127,886		5,381		1.89	1,375,052		6,240		1.80
Subordinated debt and debentures	354,178		4,576		5.13	379,168		5,282		5.53
Total interest bearing liabilities	12,050,764		47,142		1.55	11,081,535		36,016		1.29

Non-interest bearing liabilities:
Non-interest bearing deposits	3,012,544					2,679,469
Other liabilities	288,517					103,315
Total liabilities	15,351,825					13,864,319
Stockholders’ equity	2,368,773					2,176,565
Total liabilities and stockholders’ equity	$	17,720,598				$	16,040,884
Net interest spread					3.44					3.69
Net interest margin			$	152,007	3.81			$	144,361	3.98



	Nine Months Ended September 30,
	2019					2018
	Average		Income/		Yield/	Average		Income/		Yield/
(In thousands)	Balance		Expense		Rate (%)	Balance		Expense		Rate (%)
ASSETS
Earning assets:
Interest bearing balances due from banks and federal funds sold	$	338,349	$	4,861	1.92	$	378,468	$	3,828	1.35
Investment securities - taxable	1,795,103		35,397		2.64	1,714,898		31,255		2.44
Investment securities - non-taxable	632,780		18,730		3.96	505,170		13,918		3.68
Mortgage loans held for sale	29,852		924		4.14	29,111		964		4.43
Loans	12,530,348		517,829		5.53	11,209,992		456,257		5.44
Total interest earning assets	15,326,432		577,741		5.04	13,837,639		506,222		4.89
Non-earning assets	1,813,987					1,736,123
Total assets	$	17,140,419				$	15,573,762

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Interest bearing liabilities:
Interest bearing transaction and savings deposits	$	7,072,363	$	59,983	1.13	$	6,664,347	$	39,414	0.79
Time deposits	2,993,336		42,499		1.90	2,206,873		19,034		1.15
Total interest bearing deposits	10,065,699		102,482		1.36	8,871,220		58,448		0.88
Federal funds purchased and securities sold under agreements to repurchase	122,195		642		0.70	111,760		302		0.36
Other borrowings	1,209,511		18,393		2.03	1,311,781		16,520		1.68
Subordinated debt and debentures	354,088		13,528		5.11	336,990		12,350		4.90
Total interest bearing liabilities	11,751,493		135,045		1.54	10,631,751		87,620		1.10

Non-interest bearing liabilities:
Non-interest bearing deposits	2,852,687					2,673,285
Other liabilities	208,397					129,908
Total liabilities	14,812,577					13,434,944
Stockholders’ equity	2,327,842					2,138,818
Total liabilities and stockholders’ equity	$	17,140,419				$	15,573,762
Net interest spread					3.50					3.79
Net interest margin			$	442,696	3.86			$	418,602	4.04

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, 2019, as compared to the same periods 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,
	2019 vs. 2018									2019 vs. 2018
(In thousands, on a fully taxable equivalent basis)	Volume			Yield/ Rate			Total			Volume			Yield/ Rate			Total
Increase (decrease) in:
Interest income:
Interest bearing balances due from banks and federal funds sold	$	(114	)	$	295		$	181		$	(440	)	$	1,473		$	1,033
Investment securities - taxable	(382		)	(96		)	(478		)	1,506			2,636			4,142
Investment securities - non-taxable	1,388			235			1,623			3,718			1,094			4,812
Mortgage loans held for sale	(43		)	(76		)	(119		)	24			(64		)	(40		)
Loans	19,487			(1,922		)	17,565			54,470			7,102			61,572
Total	20,336			(1,564		)	18,772			59,278			12,241			71,519

Interest expense:
Interest bearing transaction and savings accounts	1,216			3,774			4,990			2,542			18,027			20,569
Time deposits	2,979			4,577			7,556			8,341			15,124			23,465
Federal funds purchased and securities sold under agreements to repurchase	18			127			145			30			310			340
Other borrowings	(1,167		)	308			(859		)	(1,361		)	3,234			1,873
Subordinated notes and debentures	(336		)	(370		)	(706		)	642			536			1,178
Total	2,710			8,416			11,126			10,194			37,231			47,425
Increase (decrease) in net interest income	$	17,626		$	(9,980	)	$	7,646		$	49,084		$	(24,990	)	$	24,094

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, assessment of current economic conditions, past due and non-performing loans and historical 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, 2019 was $22.0 million compared to $10.3 million for the same period in 2018, an increase of $11.6 million. The provision for loan losses for the nine month period ended September 30, 2019, was $38.3 million, compared to $28.5 million for the nine month period ended September 30, 2018, an increase of $9.8 million. The increase in both periods was due to the special provision made during the third quarter 2019 related to White Star. We were a participant in a shared national credit to White Star. White Star became the subject of bankruptcy proceedings earlier this year, and on September 30, 2019, the bankruptcy court authorized the sale of White Star assets through a Section 363 proceeding under the U.S. Bankruptcy Code. Our portion of the shared national credit was $19.1 million. Based upon the anticipated net proceeds from the pending bankruptcy sale, our loss recorded in third quarter 2019 was $14.7 million. As a result, we increased the provision by $15 million to increase the allowance to an appropriate level consistent with our historical ratios. See Allowance for Loan Losses section for additional information.

Additionally, the provision on loans acquired for the three and nine months ended September 30, 2019 was $0 and $2.5 million, respectively. The year-to-date provision was primarily the result of identifying certain loans during first quarter 2019, specific to an acquired portfolio in our Dallas market which were poorly structured or were poorly managed post-funding. We carefully reviewed these loans for potential losses and believe we have adequately identified any risk associated with the loans. In addition, a portion of the loans identified during the first quarter were subsequently paid off in the second quarter of 2019. The recovery on this loan was added to the allowance for acquired loans.

The provision on loans acquired for the three and nine month periods ended September 30, 2018 was $0 and $1.8 million, respectively, and was the result of a decrease in expected cash flows from the evaluation of credit marks on certain purchased credit impaired loans.

NON-INTEREST INCOME

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

Total non-interest income was $83.8 million for the three month period ended September 30, 2019, an increase of approximately $50.1 million, or 148.4%, compared to the third quarter 2018. For the nine month period ended September 30, 2019, total non-interest income was $156.5 million, an increase of approximately $47.2 million, or 43.2%, compared to the first nine months of 2018.

The majority of the increase in both the three and nine month periods ended September 30, 2019 was related to the gain on sale of the Visa Inc. class B common stock of $42.9 million. Additionally, during 2019 we have been focused on rebalancing our investment portfolio and consequently have recognized additional gains on the sale of securities in both periods. During the nine months ended September 30, 2019, we sold approximately $551 million of securities resulting in a net gain of $12.9 million. Increases in mortgage lending income were due to a strong real estate housing market driven by the recent interest rate decreases.

Debit card fees decreased $5.9 million in 2019 compared to 2018 as a direct result of the Durbin amendment that became effective for the Company during the third quarter 2018.

Table 5 shows non-interest income for the three and nine month periods ended September 30, 2019 and 2018, respectively, as well as changes in 2019 from 2018.

Table 5: Non-Interest Income



	Three Months Ended September 30,				2019 Change from					Nine Months Ended September 30,				2019 Change from
(In thousands)	2019		2018		2018					2019		2018		2018
Trust income	$	6,108	$	6,277	$	(169	)	(2.7	)%	$	17,610	$	17,148	$	462		2.7	%
Service charges on deposit accounts	10,825		10,837		(12		)	(0.1	)	31,450		31,245		205			0.7
Other service charges and fees	1,308		1,201		107			8.9		3,909		5,968		(2,059		)	(34.5	)
Mortgage lending income	4,509		1,521		2,988			196.5		10,988		7,773		3,215			41.4
SBA lending income	956		304		652			214.5		2,348		1,627		721			44.3
Investment banking income	513		664		(151		)	(22.7	)	1,491		2,312		(821		)	(35.5	)
Debit and credit card fees	7,059		6,820		239			3.5		20,369		25,721		(5,352		)	(20.8	)
Bank owned life insurance income	1,302		1,105		197			17.8		3,357		3,310		47			1.4
Gain (loss) on sale of securities, net	7,374		54		7,320			*		12,937		53		12,884			*
Gain on sale of Visa, Inc. class B common stock	42,860		—		42,860			*		42,860		—		42,860			*
Other income	961		4,942		(3,981		)	(80.6	)	9,223		14,151		(4,928		)	(34.8	)
Total non-interest income	$	83,775	$	33,725	$	50,050		148.4	%	$	156,542	$	109,308	$	47,234		43.2	%

_____________________________

* Not meaningful

Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended September 30, 2019 was $25.3 million, an increase of $165,000 from the same period in 2018. Recurring fee income for the nine month period ended September 30, 2019, was $73.3 million, a decrease of $6.7 million from the same period in 2018, primarily due to the reduction in debit card fees as previously discussed.

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. 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 monthly. 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, 2019 was $106.9 million, an increase of $6.6 million, or 6.6%, from the same period in 2018. The third quarter 2019 included $2.9 million of non-core items: $2.6 million of merger-related costs due to the Reliance acquisition, $177,000 of early retirement program expenses, and $160,000 of branch-right sizing costs. Normalizing for these non-core costs, non-interest expense for the three months ended September 30, 2019 increased $5.5 million, or 5.6%, from the same period in 2018.

Non-interest expense for the nine months ended September 30, 2019 was $319.0 million, an increase of $22.2 million, or 7.5%, from the same period in 2018. Normalizing for the non-core costs, non-interest expense for the nine months ended September 30, 2019 increased $9.1 million, or 3.1%, from the same period in 2018. As previously mentioned, our NGB technology initiative is well underway and the incremental software and technology expenditures of $5.9 million during the first nine months of 2019 were primarily related to this initiative. Additionally, marketing costs increased year over year primarily due to the $4 million donation to the Simmons First Foundation during third quarter 2019 and also incorporating a comprehensive community banking marketing philosophy over our expanded footprint during the year. The early retirement option offered to qualifying associates in the first quarter of this year contributed to the decline in salaries and employee benefit expense during 2019. The reduction in deposit insurance expense was primarily due to a credit assessment received from the FDIC during the third quarter 2019 for $2.3 million.

Table 6 below shows non-interest expense for the three and nine month periods ended September 30, 2019 and 2018, respectively, as well as changes in 2019 from 2018.

Table 6: Non-Interest Expense



	Three Months Ended September 30,				2019 Change from					Nine Months Ended September 30,				2019 Change from
(In thousands)	2019		2018		2018					2019		2018		2018
Salaries and employee benefits	$	51,888	$	55,515	$	(3,627	)	(6.5	)%	$	161,096	$	167,550	$	(6,454	)	(3.9	)%
Early retirement program	177		—		177			*		3,464		—		3,464			*
Occupancy expense, net	8,342		7,713		629			8.2		22,736		22,594		142			0.6
Furniture and equipment expense	4,898		3,761		1,137			30.2		12,462		12,184		278			2.3
Other real estate and foreclosure expense	1,125		538		587			109.1		2,353		2,940		(587		)	(20.0	)
Deposit insurance	—		2,248		(2,248		)	(100.0	)	4,550		6,232		(1,682		)	(27.0	)
Merger related costs	2,556		804		1,752			217.9		11,548		3,980		7,568			190.2
Other operating expenses:
Professional services	4,310		4,616		(306		)	(6.6	)	12,125		13,896		(1,771		)	(12.7	)
Postage	1,471		1,262		209			16.6		4,642		4,103		539			13.1
Telephone	2,507		1,248		1,259			100.9		5,605		4,217		1,388			32.9
Credit card expenses	4,200		3,405		795			23.4		11,822		9,820		2,002			20.4
Marketing	7,021		2,912		4,109			141.1		12,514		6,334		6,180			97.6
Software and technology	6,531		4,733		1,798			38.0		16,607		10,716		5,891			55.0
Operating supplies	493		585		(92		)	(15.7	)	1,671		1,917		(246		)	(12.8	)
Amortization of intangibles	2,947		2,772		175			6.3		8,535		8,394		141			1.7
Branch right sizing expense	160		970		(810		)	(83.5)		3,092		1,049		2,043			194.8
Other expense	8,239		7,171		1,068			14.9		24,195		20,907		3,288			15.7
Total non-interest expense	$	106,865	$	100,253	$	6,612		6.6	%	$	319,017	$	296,833	$	22,184		7.5	%

_____________________________

* Not meaningful

LOAN PORTFOLIO

Our legacy loan portfolio, excluding loans acquired, averaged $9.206 billion and $6.618 billion during the first nine months of 2019 and 2018, respectively. As of September 30, 2019, total loans, excluding loans acquired, were $9.64 billion, an increase of $1.21 billion from December 31, 2018. 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 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, 2018 to September 30, 2019 included $1.2 billion in balances that migrated from loans acquired during the period. These migrated loan balances are included in the legacy loan balances as of September 30, 2019.

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 appropriate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose, industry and 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.

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, 2019		December 31, 2018
Consumer:
Credit cards	$	195,083	$	204,173
Other consumer	208,643		201,297
Total consumer	403,726		405,470
Real estate:
Construction	1,712,858		1,300,723
Single family residential	1,448,455		1,440,443
Other commercial	3,630,708		3,225,287
Total real estate	6,792,021		5,966,453
Commercial:
Commercial	1,894,819		1,774,909
Agricultural	213,753		164,514
Total commercial	2,108,572		1,939,423
Other	339,046		119,042
Total loans, excluding loans acquired, before allowance for loan losses	$	9,643,365	$	8,430,388

Consumer loans consist of credit card loans and other consumer loans. Consumer loans were $403.7 million at September 30, 2019, or 4.2% of total loans, compared to $405.5 million, or 4.8% of total loans at December 31, 2018. The decrease in consumer loans from December 31, 2018, to September 30, 2019, was primarily due to the expected seasonal decline in our credit card portfolio partially offset by growth in direct consumer loans.

Real estate loans consist of construction loans, single-family residential loans and commercial real estate loans. Real estate loans were $6.792 billion at September 30, 2019, or 70.4% of total loans, compared to $5.966 billion, or 70.8%, of total loans at December 31, 2018, an increase of $825.6 million, or 13.8%. Our construction and development (“C&D”) loans increased by $412.1 million, or 31.7%, single family residential loans increased by $8.0 million, or 0.6%, and commercial real estate (“CRE”) loans increased by $405.4 million, or 12.6%. The increases are primarily due to the recent Reliance merger as well as loans migrating from the acquired loan portfolio.

Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were $2.109 billion at September 30, 2019, or 21.9% of total loans, compared to $1.939 billion, or 23.0% of total loans at December 31, 2018, an increase of $169.1 million, or 8.7%. Non-agricultural commercial loans increased to $1.895 billion, a $119.9 million increase, or 6.8%, from December 31, 2018. Agricultural loans increased to $213.8 million, a $49.2 million increase, or 29.9%, 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

As previously discussed, loans acquired are initially recorded at fair value in accordance with the fair value methodology. 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. When we make a credit decision on an acquired loan as a result of the loan maturing or renewing, the outstanding balance of that loan migrates from loans acquired to legacy loans.

On April 12, 2019, we completed the acquisition of Reliance and issued 3,999,623 shares of our common stock plus $62.7 million in cash in exchange for all outstanding shares of Reliance common stock. We also issued $42.0 million of preferred stock in exchange for all outstanding shares of Reliance preferred stock. Included in the acquisition were loans with a fair value of $1.1 billion.

Table 8 reflects the carrying value of all loans acquired as of September 30, 2019 and December 31, 2018.

Table 8: Loans Acquired



(In thousands)	September 30, 2019		December 31, 2018
Consumer:
Other consumer	$	7,431	$	15,658
Real estate:
Construction	362,000		429,605
Single family residential	504,490		566,188
Other commercial	2,134,973		1,848,679
Total real estate	3,001,463		2,844,472
Commercial:
Commercial	349,821		430,914
Agricultural	872		1,739
Total commercial	350,693		432,653
Total loans acquired ⁽¹⁾	$	3,359,587	$	3,292,783

_______________________________________

(1) Loans acquired are reported net of a $597,000 and $95,000 allowance at September 30, 2019 and December 31, 2018, respectively.

The majority of the loans originally acquired 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 acquisitions 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.

Some purchased loans were determined to have experienced credit deterioration in the first nine months of 2019. During the nine months ended September 30, 2019, we recorded approximately $2.5 million in a provision for these loans, charge-offs of $2.9 million, and recoveries of $900,000, resulting in an allowance for loan losses on loans acquired at September 30, 2019 of $597,000. The large provision recorded during the first quarter 2019 was due to our credit risk management practices identifying loans specific to an acquired portfolio in our Dallas market which were poorly structured or were poorly managed post-funding. We carefully reviewed these loans for potential losses and believe we have adequately identified any risk associated with the loans. In addition, a portion of the loans identified during the first quarter were subsequently paid off in the second quarter of 2019. See Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report for further discussion and analysis of loans acquired.

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. The subsidiary 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. When accounts reach 90 days past due and there are attachable assets, the accounts are considered for litigation. Credit card loans are generally charged off when payment of interest or principal exceeds 150 days past due. The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible.

Total non-performing assets, excluding all loans acquired, increased $32.4 million from December 31, 2018 to September 30, 2019. Nonaccrual loans increased by $38.5 million during the period, primarily commercial loans, partially offset by a decrease in foreclosed assets held for sale of $6.0 million. The nonaccrual loan increase was primarily due to two loans that became reportable as non-performing legacy loans during the quarter. One particular acquired loan migrated from loans acquired to legacy loans during the quarter, with the entire balance previously being included in the nonaccrual loans acquired total. The decrease in foreclosed assets held for sale was partially offset by foreclosed assets received from the Reliance merger. Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.56% at September 30, 2019, compared to 0.40% at December 31, 2018.

From time to time, certain borrowers are experiencing declines in income and cash flow. As a result, these 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 decreased to $8.3 million at September 30, 2019, compared to $9.2 million at December 31, 2018. The majority of our TDR balance remains in the CRE portfolio with the largest balance comprised of four relationships.

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. Strong asset quality remains a primary focus of our strategy. The allowance for loan losses as a percent of total legacy loans was 0.68% as of September 30, 2019. Non-performing loans equaled 0.76% of total loans. Non-performing assets were 0.52% of total assets, a 15 basis point increase from December 31, 2018. The allowance for loan losses was 91% of non-performing loans. Our annualized net charge-offs to total loans for the first nine months of 2019 was 0.38%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.35%. Annualized net credit card charge-offs to total credit card loans were 1.79%, compared to 1.64% during the full year 2018, and 204 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

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

Table 9: Non-performing Assets



(Dollars in thousands)	September 30, 2019			December 31, 2018
Nonaccrual loans ⁽¹⁾	$	72,721		$	34,201
Loans past due 90 days or more (principal or interest payments)	155			224
Total non-performing loans	72,876			34,425
Other non-performing assets:
Foreclosed assets held for sale	19,576			25,565
Other non-performing assets	540			553
Total other non-performing assets	20,116			26,118
Total non-performing assets	$	92,992		$	60,543

Performing TDRs	$	6,519		$	6,369
Allowance for loan losses to non-performing loans	91		%	164		%
Non-performing loans to total loans	0.76		%	0.41		%
Non-performing assets (including performing TDRs) to total assets ⁽²⁾	0.56		%	0.40		%
Non-performing assets to total assets ⁽²⁾	0.52		%	0.37		%

_______________________________________


(1)	Includes nonaccrual TDRs of approximately $1.8 million at September 30, 2019 and $2.8 million at December 31, 2018.


(2)	Excludes all loans acquired, 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, 2019 and 2018.

At September 30, 2019, impaired loans, net of government guarantees and loans acquired, were $70.0 million compared to $39.8 million at December 31, 2018. 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.

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) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that will affect specific loans and categories of loans. 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.

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

Table 10: Allowance for Loan Losses



(In thousands)	2019		2018
Balance, beginning of year	$	56,599	$	41,668
Loans charged off:
Credit card	3,298		2,930
Other consumer	3,497		3,743
Real estate	1,552		5,568
Commercial	21,564		3,143
Total loans charged off	29,911		15,384
Recoveries of loans previously charged off:
Credit card	734		778
Other consumer	2,053		403
Real estate	350		624
Commercial	295		578
Total recoveries	3,432		2,383
Net loans charged off	26,479		13,001
Provision for loan losses ⁽¹⁾	35,873		26,691
Balance, September 30 ⁽³⁾	$	65,993	$	55,358

Loans charged off:
Credit card			1,121
Other consumer			2,894
Real estate			337
Commercial			3,480
Total loans charged off			7,832
Recoveries of loans previously charged off:
Credit card			227
Other consumer			154
Real estate			367
Commercial			167
Total recoveries			915
Net loans charged off			6,917
Provision for loan losses ⁽²⁾			8,158
Balance, end of year ⁽³⁾			$	56,599

_______________________________________

(1)

Provision for loan losses of $2,464,000 attributable to loans acquired, was excluded from this table for 2019 (total year-to-date provision for loan losses was $38,337,000) and $1,837,000 was excluded from this table for 2018 (total year-to-date 2018 provision for loan losses was $28,528,000). Charge offs of $2,862,000 on loans acquired were excluded from this table for 2019 and $910,000 for 2018. Additionally, recoveries of $900,000 on loans acquired were excluded from this table for 2019.


(2)	Provision for loan losses of $3,299,000 attributable to loans acquired, was excluded from this table for 2018 (total 2018 provision for loan losses was $38,148,000).

(3)

Allowance for loan losses at September 30, 2019 includes $597,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at December 31, 2018 and September 30, 2018 includes $95,000 and $1,345,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at September 30, 2019 was $66,590,000 and total allowance for loan losses at December 31, 2018 and September 30, 2018 was $56,694,000 and $56,703,000, respectively.

Provision for Loan Losses

The amount of provision added to the allowance during the three and nine months ended September 30, 2019 and 2018, and for the year ended December 31, 2018, 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.

Allowance for Loan Losses Allocation

As of September 30, 2019, the allowance for loan losses reflects an increase of approximately $9.4 million from December 31, 2018, while total loans, excluding loans acquired, increased by $1.2 billion 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. 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.

Table 11: Allocation of Allowance for Loan Losses



	September 30, 2019				December 31, 2018
(Dollars in thousands)	Allowance Amount		% of loans ⁽¹⁾		Allowance Amount		% of loans ⁽¹⁾
Credit cards	$	4,003	2.0	%	$	3,923	2.4	%
Other consumer	2,100		2.2	%	2,380		2.4	%
Real estate	36,470		70.4	%	29,743		70.8	%
Commercial	23,225		21.9	%	20,514		23.0	%
Other	195		3.5	%	39		1.4	%
Total ⁽²⁾	$	65,993	100.0	%	$	56,599	100.0	%

_______________________________________


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


(2)	Allowance for loan losses at September 30, 2019 and December 31, 2018 includes $597,000 and $95,000, respectively, allowance for loans acquired (not shown in the table above). The total allowance for loan losses at September 30, 2019 and December 31, 2018 was $66,590,000 and $56,694,000, respectively.

DEPOSITS

Deposits are our primary source of funding for earning assets and are primarily developed through our network of 212 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, 2019, core deposits comprised 79.6% 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, with oversight by the Asset Liability Committee and the Bank’s Treasury Management, 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. 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. We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.

Our total deposits as of September 30, 2019, were $13.47 billion, an increase of $1.07 billion from December 31, 2018. The increase was primarily due to the Reliance Bank merger, however, we also achieved organic core deposit growth for the first nine months of 2019. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $10.4 billion at September 30, 2019, compared to $9.5 billion at December 31, 2018, a $879.3 million increase. Total time deposits increased $190.0 million to $3.1 billion at September 30, 2019, from $2.9 billion at December 31, 2018. We had $1.1 billion and $1.4 billion of brokered deposits at September 30, 2019, and December 31, 2018, respectively.

OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

Our total debt was $1.45 billion and $1.70 billion at September 30, 2019 and December 31, 2018, respectively. The outstanding balance for September 30, 2019 includes $1.1 billion in FHLB short-term advances, $13.4 million in FHLB long-term advances, $330.0 million in subordinated notes and $24.2 million of trust preferred securities and other subordinated debt. FHLB short-term advances mostly consist of FHLB Owns the Option (“FOTO”) advances that are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. The Company’s FOTO advances outstanding at the end of the third quarter have ten to fifteen year maturity dates with lockout periods that have expired and, as a result, are considered and monitored by the Company as short-term advances. The possibility of the FHLB exercising the options is analyzed by the Company along with the market expected rate outcome.

In March 2018, we issued $330 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes (“the Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.6 million in debt issuance costs related to the offering. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 125 basis points, payable quarterly in arrears. The notes will be subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries.

During 2017, we entered into a Revolving Credit Agreement with U.S. Bank National Association and executed an unsecured Revolving Credit Agreement (the “Credit Agreement”) pursuant to which we may borrow, prepay and reborrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed in an acquisition. In October 2018, we entered into a First Amendment to the Credit Agreement with U.S. Bank National Association, which primarily extended the expiration date to October 2019 and reduced the $75.0 million to $50.0 million. In December 2018, we entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants are evaluated on a consolidated basis. All amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company were due and payable on October 4, 2019. The balance due under the Credit Agreement at September 30, 2019 and October 4, 2019 was $0. The Company did not renew the Credit Agreement upon the expiration date.

During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the $75.0 million outstanding balance on the Credit Agreement, $43.3 million in notes payable, $94.9 million in trust preferred securities and $19.1 million in subordinated debt.

CAPITAL

Overview

At September 30, 2019, total capital was $2.55 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At September 30, 2019, our common equity to assets ratio was 14.34% compared to 13.58% at year-end 2018.

Capital 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 January 18, 2018, the Board of Directors of the Company approved a two-for-one stock split of the Company’s outstanding Class A common stock, $0.01 par value (“Common Stock”), in the form of a 100% stock dividend for shareholders of record as of the close of business on January 30, 2018. The new shares were distributed by the Company’s transfer agent, Computershare, and the Company’s common stock began trading on a split-adjusted basis on the Nasdaq Global Select Market on February 9,

2018. All previously reported share and per share data included in filings subsequent to February 8, 2018 are restated to reflect the retroactive effect of this two-for-one stock split.

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

On April 12, 2019, as part of the acquisition of Reliance, the Company issued 40,000 shares of Simmons Series A Preferred Stock and 2,000.02 shares Simmons Series B Preferred Stock in exchange for the outstanding shares of Reliance’s Series A Preferred Stock and Series B Preferred Stock. On May 13, 2019, the Company redeemed all of the preferred stock, including accrued and unpaid dividends.

Stock Repurchase

Through third quarter 2019, we had a stock repurchase program in place which authorized the repurchase of up to 1,700,000 (split adjusted) of Common Stock. As previously discussed in Note 22, Subsequent Events, of the accompanying Condensed Notes to Consolidated Financial Statements, on October 22, 2019, we announced a new stock repurchase program which replaces the previous program and under which we may repurchase up to $60,000,000 of our Common Stock currently issued and outstanding. We may repurchase shares of our common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the new stock repurchase program will be determined by management at its discretion based on a variety of factors. We anticipate funding for this new stock repurchase program to come from available sources of liquidity, including cash on hand and future cash flow. We had no stock repurchases pursuant to the repurchase program during the first nine months of 2019 or 2018.

Cash Dividends

We declared cash dividends on our common stock of $0.48 per share for the first nine months of 2019 compared to $0.45 per share for the first nine months of 2018, an increase of $0.03, or 7%. On October 22, 2019, the Board of Directors declared a regular $0.16 per share quarterly cash dividend payable January 6, 2020, to shareholders of record December 16, 2019. 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 and the funding of debt obligations. 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 bank subsidiary 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. The Company continually assesses its capital and liquidity needs and the best way to meet them, including, without limitation, through capital raising via, among other things, equity or debt offerings.

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, 2019, 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 Banks 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 institution’s categories.

Our risk-based capital ratios at September 30, 2019 and December 31, 2018 are presented in Table 12 below:

Table 12: Risk-Based Capital



(Dollars in thousands)	September 30, 2019			December 31, 2018
Tier 1 capital:
Stockholders’ equity	$	2,547,071		$	2,246,434
Goodwill and other intangible assets	(1,013,309		)	(912,428		)
Unrealized (gain) loss on available-for-sale securities, net of income taxes	(23,709		)	27,374
Total Tier 1 capital	1,510,053			1,361,380
Tier 2 capital:
Trust preferred securities and subordinated debt	354,223			353,950
Qualifying allowance for loan losses	74,455			63,608
Total Tier 2 capital	428,678			417,558
Total risk-based capital	$	1,938,731		$	1,778,938

Risk weighted assets	$	14,725,571		$	13,326,832

Assets for leverage ratio	$	16,681,527		$	15,512,042

Ratios at end of period:
Common equity Tier 1 ratio (CET1)	10.25		%	10.22		%
Tier 1 leverage ratio	9.05		%	8.78		%
Tier 1 risk-based capital ratio	10.25		%	10.22		%
Total risk-based capital ratio	13.17		%	13.35		%
Minimum guidelines:
Common equity Tier 1 ratio	4.50		%	4.50		%
Tier 1 leverage ratio	4.00		%	4.00		%
Tier 1 risk-based capital ratio	6.00		%	6.00		%
Total risk-based capital ratio	8.00		%	8.00		%

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 introduced substantial revisions to the risk-based capital requirements applicable to bank holding companies and depository institutions.

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 expanded the risk-weighting categories from 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.

The final rules included 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 raised 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 its subsidiary bank on January 1, 2015, with full compliance with all of the final rule’s requirements on January 1, 2019.

Prior to December 31, 2017, Tier 1 capital included common equity Tier 1 capital and certain additional Tier 1 items as provided under the Basel III Rules. The Tier 1 capital for the Company consisted of common equity Tier 1 capital and trust preferred securities. The Basel III Rules include certain provisions that require trust preferred securities to be phased out of qualifying Tier 1 capital when assets surpass $15 billion. As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt of $354.2 million is included as Tier 2 and total capital as of September 30, 2019.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See the Recently Issued Accounting Standards section in Note 1, Preparation of Interim Financial Statements, 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.

CAUTIONARY NOTE REGARDING 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 the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “believe,” “budget,” “expect,” “foresee,” “anticipate,” “intend,” “indicate,” “target,” “estimate,” “plan,” “project,” “continue,” “contemplate,” “positions,” “prospects,” “predict,” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could,” “might” or “may,” or by variations of such words or by similar expressions. 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, the adequacy of the allowance for loan losses, the effect of certain new accounting standards on the Company’s financial statements (including, without limitation, the CECL methodology and its anticipated effect on the provision and allowance for credit losses), 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 future litigation, acquisition strategy, 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: changes in the Company’s operating or expansion and acquisition strategy (including difficulties integrating The Landrum Company into the Company’s business), the effects of future economic conditions, including unemployment levels and slowdowns in economic growth, governmental monetary and fiscal policies, as well as legislative and regulatory changes; real estate values; 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; changes in the securities markets generally or the price of the Company’s common stock specifically; developments in information technology affecting the financial industry; changes in the assumptions, forecasts, models, and methodology used to calculate the expected impact of CECL on the Company’s financial statements; 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, fair value for loans and other real estate owned; and other cautionary statements

set forth elsewhere in this report. Please also refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s annual report on Form 10-K for the year ended December 31, 2018, and related disclosures in other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. Many of these factors are beyond our ability to predict or control, and actual results could differ materially from those in the forward-looking statements due to these factors and others. 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. Any forward-looking statement speaks only as of the date hereof, and 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.

RECONCILIATION OF NON-GAAP MEASURES

The tables below present computations of core earnings (net income excluding non-core items {merger related costs, early retirement program costs and the one-time costs of branch right sizing}) and diluted core earnings per share (non-GAAP) as well as a reconciliation of tangible book value per share (non-GAAP), tangible common equity to tangible equity (non-GAAP) and the core net interest margin (non-GAAP). Non-core items are included in financial results presented in accordance with generally accepted accounting principles (US GAAP).

We believe the exclusion of these non-core items in expressing earnings and certain other financial measures, including “core earnings,” provides a meaningful basis 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. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business because management does not consider these non-core 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

We believe the presentation of “core earnings” on a diluted per share basis, “diluted core earnings per share” (non-GAAP) and core net interest margin (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. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business, because management does not consider these non-core 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

We have $1.0 billion and $937.0 million total goodwill and other intangible assets for the periods ended September 30, 2019 and December 31, 2018, respectively. Because of our high level of intangible assets, management believes a useful calculation is return on tangible equity (non-GAAP).

We believe 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 is applied by management and the Board of Directors.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to identify and approve each item that qualifies as non-core 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 non-core items does not represent the amount that effectively accrues directly to stockholders (i.e., non-core items are

included in earnings and stockholders’ equity). Additionally, similarly titled non-GAAP financial measures used by other companies may not be computed in the same or similar fashion.

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

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



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Net income available to common stockholders	$	81,826		$	55,193		$	185,119		$	160,067
Non-core items:
Merger related costs	2,556			804			11,548			3,980
Early retirement program	177			—			3,464			—
Branch right sizing	160			970			3,092			1,049
Tax effect ⁽¹⁾	(756		)	(463		)	(4,731		)	(1,314		)
Net non-core items	2,137			1,311			13,373			3,715
Core earnings (non-GAAP)	$	83,963		$	56,504		$	198,492		$	163,782

Diluted earnings per share⁽²⁾	$	0.84		$	0.59		$	1.94		$	1.72
Non-core items:
Merger related costs	0.04			0.01			0.12			0.04
Early retirement program	—			—			0.04			—
Branch right sizing	—			0.01			0.03			0.01
Tax effect ⁽¹⁾	(0.01		)	—			(0.05		)	(0.01		)
Net non-core items	0.03			0.02			0.14			0.04
Diluted core earnings per share (non-GAAP)	$	0.87		$	0.61		$	2.08		$	1.76

_______________________________________


(1)	Effective tax rate of 26.135%.


(2)	See Note 16, Earnings Per Share, for number of shares used to determine EPS.

See Table 14 below for the reconciliation of tangible book value per share.

Table 14: Reconciliation of Tangible Book Value per Share (non-GAAP)



(In thousands, except per share data)	September 30, 2019			December 31, 2018
Total common stockholders’ equity	$	2,547,071		$	2,246,434
Intangible assets:
Goodwill	(926,648		)	(845,687		)
Other intangible assets	(101,149		)	(91,334		)
Total intangibles	(1,027,797		)	(937,021		)
Tangible common stockholders’ equity	$	1,519,274		$	1,309,413
Shares of common stock outstanding	96,613,855			92,347,643

Book value per common share	$	26.36		$	24.33

Tangible book value per common share (non-GAAP)	$	15.73		$	14.18

See Table 15 below for the calculation of tangible common equity and the reconciliation of tangible common equity to tangible assets.

Table 15: Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP)



(In thousands, except per share data)	September 30, 2019			December 31, 2018
Total common stockholders’ equity	$	2,547,071		$	2,246,434
Intangible assets:
Goodwill	(926,648		)	(845,687		)
Other intangible assets	(101,149		)	(91,334		)
Total intangibles	(1,027,797		)	(937,021		)
Tangible common stockholders’ equity	$	1,519,274		$	1,309,413

Total assets	$	17,758,511		$	16,543,337
Intangible assets:
Goodwill	(926,648		)	(845,687		)
Other intangible assets	(101,149		)	(91,334		)
Total intangibles	(1,027,797		)	(937,021		)
Tangible assets	$	16,730,714		$	15,606,316

Ratio of common equity to assets	14.34		%	13.58		%
Ratio of tangible common equity to tangible assets (non-GAAP)	9.08		%	8.39		%

See Table 16 below for the calculation of core net interest margin for the periods presented.

Table 16: Reconciliation of Core Net Interest Margin (non-GAAP)



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Net interest income	$	150,164		$	142,968		$	437,546		$	414,771
FTE adjustment	1,843			1,393			5,150			3,831
Fully tax equivalent net interest income	152,007			144,361			442,696			418,602
Total accretable yield	(9,322		)	(10,006		)	(26,144		)	(31,413		)
Core net interest income	$	142,685		$	134,355		$	416,552		$	387,189

Average earning assets – quarter-to-date	$	15,831,432		$	14,373,253		$	15,326,432		$	13,837,639

Net interest margin	3.81		%	3.98		%	3.86		%	4.04		%
Core net interest margin (non-GAAP)	3.58		%	3.71		%	3.63		%	3.74		%


Item 3.	Quantitative and Qualitative Disclosure About Market Risk

The Company has leveraged its investment in its 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 repurchases and debt service requirements. At September 30, 2019, undivided profits of Simmons Bank were approximately $629.6 million, of which approximately $128.8 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, the Company’s 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 subsidiary bank’s primary investing activities include loan originations and purchases of investment securities, offset by loan payoffs and investment cash flows and 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 monitors these same indicators and makes adjustments as needed.

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 seven 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 are available on a daily basis and are used to meet the normal fluctuations of a dynamic balance sheet. The Bank has approximately $380 million in Federal funds lines of credit from upstream correspondent banks that can be accessed, when needed. In order to ensure availability of these upstream funds we test these borrowing lines at least annually. 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.

Second, the bank subsidiary has lines of credit 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 $3.1 billion of these lines of credit are currently available, if needed, for liquidity.

A third source of liquidity is that we have the ability to access large wholesale deposits from both the public and private sector to fund short-term liquidity needs.

A fourth source of liquidity is the retail deposits available through our network of financial centers throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. Although this method can be a somewhat more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs.

Fifth, 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 98.2% 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.

Sixth, we have a network of downstream correspondent banks from which we can access debt to meet liquidity needs.

Finally, we have the ability to access funds through the Federal Reserve Bank Discount Window.

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.

As of September 30, 2019, the model simulations projected that 100 and 200 basis point increases in interest rates would result in a positive variance in net interest income of 2.24% and 4.64%, respectively, relative to the base case over the next 12 months, while decreases in interest rates of 100 basis points and 200 basis points would result in a negative variance in net interest income of (2.37)% and (3.40)%, respectively, relative to the base case over the next 12 months. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each period-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, 2019:

Table 14: Net Interest Income Sensitivity



Interest Rate Scenario	% Change from Base
Up 200 basis points	4.64%
Up 100 basis points	2.24%
Down 100 basis points	(2.37)%
Down 200 basis points	(3.40)%


Item 4.	Controls and Procedures

Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has 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 Securities Exchange Act of 1934, as amended (“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 as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

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, 2019, which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Part II:	Other Information


Item 1.	Legal Proceedings

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.


Item 1A.	Risk Factors

There have been no material changes to the risk factors discussed in Part 1, Item 1A of our Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). 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 2018 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.

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

The information concerning our purchases of Common Stock for the periods indicated is as follows:



	Total number of shares purchased⁽¹⁾	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽²⁾	Maximum number of shares that may yet be purchased under the plans or programs
July 1, 2019 - July 31, 2019	1,394	$	23.22	—	308,272
August 1, 2019 - August 31, 2019	—	—		—	308,272
September 1, 2019 - September 30, 2019	2,001	25.11		—	308,272
Total	3,395	$	24.33	—	308,272


(1)	Total number of shares purchased consists of 3,395 shares of restricted stock repurchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under any publicly announced plan.

(2)

On July 23, 2012, the Company approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares of Common Stock. The Company had no repurchases of its Common Stock during the three months ended September 30, 2019. On October 22, 2019, the Company announced a new stock repurchase program, replacing the previous stock repurchase program, under which the Company may repurchase up to $60,000,000 of Common Stock currently issued and outstanding. The new stock repurchase program will terminate on October 31, 2021 (unless terminated sooner).

Item 6. Exhibits


Exhibit No.	Description



2.1	Agreement 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)).
2.2	Agreement 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)).
2.3	Agreement 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)).
2.4	Agreement and Plan of Merger, dated as of April 28, 2015, by and between Simmons First National Corporation and Ozark Trust & Investment Corporation (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Current Report on Form 8-K for April 29, 2015 (File No. 000-06253)).
2.5	Stock Purchase Agreement by and among Citizens National Bank, Citizens National Bancorp, Inc. and Simmons First National Corporation, dated as of May 18, 2016 (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K for May 18, 2016 (File No. 000-06253)).
2.6	Agreement and Plan of Merger, dated as of November 17, 2016, by and between Simmons First National Corporation and Hardeman County Investment Company, Inc. (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K for November 17, 2016 (File No. 000-06253)).
2.7	Agreement and Plan of Merger, dated as of December 14, 2016, by and between Simmons First National Corporation and Southwest Bancorp, Inc., as amended on July 19, 2017 (incorporated by reference to Exhibit 2.11 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2017 (File No. 000-06253)).



2.8	Agreement and Plan of Merger, dated as of January 23, 2017, by and between Simmons First National Corporation and First Texas, BHC, Inc., as amended on July 19, 2017 (incorporated by reference to Exhibit 2.12 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2017 (File No. 000-06253)).
2.9	Agreement and Plan of Merger, dated as of November 13, 2018, by and between Simmons First National Corporation and Reliance Bancshares, Inc., as amended on February 11, 2019 (incorporated by reference to Annex A to the Proxy Statement/Prospectus filed pursuant to Rule 424(b)(3) by Simmons First National Corporation for March 4, 2019 (File No. 333-229378)).
2.10	Agreement and Plan of Merger, dated as of July 30, 2019, by and between Simmons First National Corporation and The Landrum Company (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K for July 30, 2019 (File No. 000-06253)).
3.1	Amended and Restated Articles of Incorporation of Simmons First National Corporation, as amended on October 29, 2019 (incorporated by reference to Exhibit 3.1 to Simmons First National Corporation’s Current Report on Form 8-K for November 1, 2019 (File No. 000-06253)).
3.2	As Amended By-Laws of Simmons First National Corporation (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 (File No. 333-233559) filed by Simmons First National Corporation on August 30, 2019 (File No. 000-06253)).
4.1	Instruments defining the rights of security holders, including indentures. Simmons First National Corporation hereby agrees to furnish copies of instruments defining the rights of holders of long-term debt of the Corporation and its consolidated subsidiaries to the U.S. Securities and Exchange Commission upon request. No issuance of debt exceeds ten percent of the total assets of the Corporation and its subsidiaries on a consolidated basis.
15.1	Awareness Letter of BKD, LLP.*
31.1	Rule 13a-15(e) and 15d-15(e) Certification – George A. Makris, Jr., Chairman and Chief Executive Officer.*
31.2	Rule 13a-15(e) and 15d-15(e) Certification – Robert A. Fehlman, Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer.*
31.3	Rule 13a-15(e) and 15d-15(e) Certification – David W. Garner, Executive Vice President, Controller and Chief Accounting Officer.*
32.1	Certification 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.*
32.2	Certification 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, Chief Operating Officer and Treasurer.*
32.3	Certification 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.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. **
101.SCH	Inline XBRL Taxonomy Extension Schema.**
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase.**
101.DEF	InlineXBRL Taxonomy Extension Definition Linkbase.**
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase.**
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase.**
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).**

_____________________________________________________________________________________________

* 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.

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 7, 2019	/s/ George A. Makris, Jr.
		George A. Makris, Jr.
		Chairman and Chief Executive Officer



Date:	November 7, 2019	/s/ Robert A. Fehlman
		Robert A. Fehlman
		Senior Executive Vice President,
		Chief Financial Officer, Chief Operating Officer
		and Treasurer


Date:	November 7, 2019	/s/ David W. Garner
		David W. Garner
		Executive Vice President, Controller
		and Chief Accounting Officer