Annual Statements Open main menu

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




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended
March 31, 2019
 Commission File Number 000-06253
sfnclogoa02.jpg
(Exact name of registrant as specified in its charter)
 
Arkansas
71-0407808
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
501 Main Street, Pine Bluff, Arkansas
71601
(Address of principal executive offices)
(Zip Code)
 
(870) 541-1000
(Registrant’s telephone number, including area code)
 
Not Applicable
Former name, former address and former fiscal year, if changed since last report
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes   ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
x Yes   ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, 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. (Check one):
 
Large accelerated filer x
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   x No
 
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


The number of shares outstanding of the Registrant’s Common Stock as of May 3, 2019, was 95,876,505.





Simmons First National Corporation
Quarterly Report on Form 10-Q
March 31, 2019

Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
Legal Proceedings
*
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
*
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
 
 
 
 
___________________
*    No reportable information under this item.






Part I:
Financial Information
Item 1.
Financial Statements (Unaudited)
Simmons First National Corporation
Consolidated Balance Sheets
March 31, 2019 and December 31, 2018
 
March 31,
 
December 31,
(In thousands, except share data)
2019
 
2018
 
(Unaudited)
 
 

ASSETS
 

 
 

Cash and non-interest bearing balances due from banks
$
151,112

 
$
171,792

Interest bearing balances due from banks and federal funds sold
340,049

 
661,666

Cash and cash equivalents
491,161

 
833,458

Interest bearing balances due from banks - time
4,684

 
4,934

Investment securities:
 
 
 
Held-to-maturity
61,435

 
289,194

Available-for-sale
2,240,111

 
2,151,752

Total investments
2,301,546

 
2,440,946

Mortgage loans held for sale
18,480

 
26,799

Loans:
 
 
 
Legacy loans
8,684,550

 
8,430,388

Allowance for loan losses
(59,243
)
 
(56,599
)
Loans acquired, net of discount and allowance
3,056,187

 
3,292,783

Net loans
11,681,494

 
11,666,572

Premises and equipment
333,740

 
295,060

Foreclosed assets and other real estate owned
18,952

 
25,565

Interest receivable
51,796

 
49,938

Bank owned life insurance
192,736

 
193,170

Goodwill
845,687

 
845,687

Other intangible assets
88,694

 
91,334

Other assets
62,669

 
69,874

Total assets
$
16,091,639

 
$
16,543,337

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing transaction accounts
$
2,674,034

 
$
2,672,405

Interest bearing transaction accounts and savings deposits
6,666,823

 
6,830,191

Time deposits
2,648,674

 
2,896,156

Total deposits
11,989,531


12,398,752

Federal funds purchased and securities sold under agreements to repurchase
120,213

 
95,792

Other borrowings
1,169,989

 
1,345,450

Subordinated debentures
354,041

 
353,950

Accrued interest and other liabilities
155,544

 
102,959

Total liabilities
13,789,318


14,296,903

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, Class A, $0.01 par value; 175,000,000 shares authorized at March 31, 2019 and December 31, 2018; 92,568,361 and 92,347,643 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
926

 
923

Surplus
1,599,566

 
1,597,944

Undivided profits
707,829

 
674,941

Accumulated other comprehensive loss
(6,000
)
 
(27,374
)
Total stockholders’ equity
2,302,321

 
2,246,434

Total liabilities and stockholders’ equity
$
16,091,639

 
$
16,543,337


See Condensed Notes to Consolidated Financial Statements.
3





Simmons First National Corporation
Consolidated Statements of Income
Three Months Ended March 31, 2019 and 2018
 
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
 
 
 
2019
 
2018
 
 
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
 
 
Loans
 
 
 
 
$
159,440

 
$
143,350

Interest bearing balances due from banks and federal funds sold
 
 
 
 
2,154

 
1,009

Investment securities
 
 
 
 
17,312

 
12,622

Mortgage loans held for sale
 
 
 
 
210

 
158

TOTAL INTEREST INCOME
 
 
 
 
179,116

 
157,139

 
 
 
 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
 
 
 
 
30,750

 
15,597

Federal funds purchased and securities sold under agreements to repurchase
 
 
 
 
136

 
110

Other borrowings
 
 
 
 
6,793

 
5,139

Subordinated notes and debentures
 
 
 
 
4,411

 
1,327

TOTAL INTEREST EXPENSE
 
 
 
 
42,090

 
22,173

 
 
 
 
 
 
 
 
NET INTEREST INCOME
 
 
 
 
137,026

 
134,966

Provision for loan losses
 
 
 
 
9,285

 
9,150

 
 
 
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
 
 
 
127,741

 
125,816

 
 
 
 
 
 
 
 
NON-INTEREST INCOME
 
 
 
 
 
 
 
Trust income
 
 
 
 
5,708

 
5,249

Service charges on deposit accounts
 
 
 
 
10,068

 
10,345

Other service charges and fees
 
 
 
 
1,289

 
2,750

Mortgage lending income
 
 
 
 
2,823

 
3,472

SBA lending income
 
 
 
 
497

 
973

Investment banking income
 
 
 
 
618

 
834

Debit and credit card fees
 
 
 
 
6,098

 
8,796

Bank owned life insurance income
 
 
 
 
795

 
1,103

Gain on sale of securities, net
 
 
 
 
2,740

 
6

Other income
 
 
 
 
3,125

 
4,007

TOTAL NON-INTEREST INCOME
 
 
 
 
33,761

 
37,535

 
 
 
 
 
 
 
 
NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
 
 
 
 
56,367

 
56,357

Occupancy expense, net
 
 
 
 
7,475

 
6,960

Furniture and equipment expense
 
 
 
 
3,358

 
4,403

Other real estate and foreclosure expense
 
 
 
 
637

 
1,020

Deposit insurance
 
 
 
 
2,040

 
2,128

Merger related costs
 
 
 
 
1,470

 
1,711

Other operating expenses
 
 
 
 
30,062

 
25,494

TOTAL NON-INTEREST EXPENSE
 
 
 
 
101,409

 
98,073

 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
60,093

 
65,278

Provision for income taxes
 
 
 
 
12,398

 
13,966

 
 
 
 
 
 
 
 
NET INCOME
 
 
 
 
$
47,695

 
$
51,312

BASIC EARNINGS PER SHARE
 
 
 
 
$
0.52

 
$
0.56

DILUTED EARNINGS PER SHARE
 
 
 
 
$
0.51

 
$
0.55




See Condensed Notes to Consolidated Financial Statements.
4





Simmons First National Corporation
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2019 and 2018
 
 
 
Three Months Ended March 31,
(In thousands)
 
 
 
 
2019
 
2018
 
 
 
(Unaudited)
NET INCOME
 
 
 
 
$
47,695

 
$
51,312

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period on available-for-sale securities
 
 
 
 
29,130

 
(22,735
)
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 included in net income
 
 
 
 
2,740

 
6

Other comprehensive gain (loss), before tax effect
 
 
 
 
28,937

 
(22,741
)
Less: Tax effect of other comprehensive income (loss)
 
 
 
 
7,563

 
(5,943
)
 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
21,374

 
(16,798
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
$
69,069

 
$
34,514



See Condensed Notes to Consolidated Financial Statements.
5





Simmons First National Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2019 and 2018
(In thousands)
March 31, 2019
 
March 31, 2018
 
(Unaudited)
OPERATING ACTIVITIES
 

 
 

Net income
$
47,695

 
$
51,312

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
7,451

 
6,677

Provision for loan losses
9,285

 
9,150

Gain on sale of investments
(2,740
)
 
(6
)
Net accretion of investment securities and assets
(9,559
)
 
(14,368
)
Net amortization (accretion) on borrowings
91

 
(211
)
Stock-based compensation expense
3,084

 
2,585

(Gain) loss on sale of foreclosed assets held for sale
(32
)
 
41

Gain on sale of mortgage loans held for sale
(3,342
)
 
(2,610
)
Deferred income taxes
2,081

 
3,921

Income from bank owned life insurance
(876
)
 
(1,103
)
Originations of mortgage loans held for sale
(98,255
)
 
(113,012
)
Proceeds from sale of mortgage loans held for sale
109,916

 
121,952

Changes in assets and liabilities:
 
 
 
Interest receivable
(1,858
)
 
1,582

Lease right-of-use assets
2,294

 

Other assets
3,730

 
(5,648
)
Accrued interest and other liabilities
30,805

 
33,983

Income taxes payable
(10,977
)
 
(13,955
)
Net cash provided by operating activities
88,793


80,290

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net originations of loans
(18,116
)
 
(140,804
)
Decrease in due from banks - time
250

 
245

Purchases of premises and equipment, net
(13,027
)
 
(6,052
)
Proceeds from sale of foreclosed assets held for sale
7,214

 
4,359

Proceeds from sale of available-for-sale securities
209,968

 
7,726

Proceeds from maturities of available-for-sale securities
55,804

 
58,548

Purchases of available-for-sale securities
(110,767
)
 
(320,798
)
Proceeds from maturities of held-to-maturity securities
11,408

 
15,512

Proceeds from bank owned life insurance death benefits
1,310

 
616

Disposition of assets and liabilities held for sale
1,393

 
(75,586
)
Net cash provided by (used in) investing activities
145,437

 
(456,234
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net change in deposits
(409,221
)
 
564,040

Proceeds from issuance of subordinated notes

 
326,711

Dividends paid on common stock
(14,807
)
 
(14,081
)
Net change in other borrowed funds
(175,461
)
 
(239,038
)
Net change in federal funds purchased and securities sold under agreements to repurchase
24,421

 
(1,535
)
Net shares issued under stock compensation plans
(2,771
)
 
443

Shares issued under employee stock purchase plan
1,312

 
1,026

Net cash (used in) provided by financing activities
(576,527
)

637,566

 
 
 
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(342,297
)
 
261,622

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
833,458

 
598,042

 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
491,161


$
859,664


See Condensed Notes to Consolidated Financial Statements.
6





Simmons First National Corporation
Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2019 and 2018
(In thousands, except share data)
 
Common
Stock
 
Surplus
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Undivided
Profits
 
Total
Balance at, December 31, 2017
 
$
920

 
$
1,586,034

 
$
(17,264
)
 
$
514,874

 
$
2,084,564

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 

 

 
(16,798
)
 
51,312

 
34,514

Stock issued for employee stock purchase plan – 39,782 shares
 

 
1,026

 

 

 
1,026

Stock-based compensation plans, net – 173,489
 
2

 
3,026

 

 

 
3,028

Dividends on common stock – $0.15 per share
 

 

 

 
(14,081
)
 
(14,081
)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2018 (Unaudited)
 
922


1,590,086


(34,062
)

552,105


2,109,051

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 

 

 
6,688

 
164,401

 
171,089

Stock-based compensation plans, net – 105,254
 
1

 
7,858

 

 

 
7,859

Dividends on common stock – $0.45 per share
 

 

 

 
(41,565
)
 
(41,565
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
923


1,597,944


(27,374
)

674,941


2,246,434

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 

 

 
21,374

 
47,695

 
69,069

Stock issued for employee stock purchase plan – 60,413 shares
 
1

 
1,311

 

 

 
1,312

Stock-based compensation plans, net – 160,305
 
2

 
311

 

 

 
313

Dividends on common stock – $0.16 per share
 

 

 

 
(14,807
)
 
(14,807
)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019 (Unaudited)
 
$
926


$
1,599,566


$
(6,000
)

$
707,829


$
2,302,321





See Condensed Notes to Consolidated Financial Statements.
7





SIMMONS FIRST NATIONAL CORPORATION
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS
 
Organizational Structure
 
Simmons First National Corporation (the “Company”) is a publicly traded financial holding company that trades on the NASDAQ Market (“NASDAQ”) under the ticker symbol “SFNC” 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 Investment Group, Inc. (a registered broker-dealer), Simmons First Insurance Services, Inc. (an insurance agency), and Simmons First Insurance Services of TN, LLC (an insurance agency).
 
Description of Business
 
The Company is headquartered in Pine Bluff, Arkansas and conducts banking operations in communities throughout Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company, through its subsidiaries, offers consumer, real estate and commercial loans, checking, savings and time deposits from 191 financial centers conveniently located throughout its market areas. Additionally, the Company offers specialized products and services such as credit cards, trust and fiduciary services, investments, agricultural finance lending, equipment lending, insurance and small business administration (“SBA”) lending.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosures for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 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 FASB issued 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

8





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 March 31, 2019, no applicable software implementation costs have been incurred.

Derivatives and Hedging: Targeted Improvements - In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), that changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in order to better align a company’s risk management activities and financial reporting for hedging relationships. In summary, this amendment 1) expands the types of transactions eligible for hedge accounting; 2) eliminates the separate measurement and presentation of hedge ineffectiveness; 3) simplifies the requirements around the assessment of hedge effectiveness; 4) provides companies more time to finalize hedge documentation; and 5) enhances presentation and disclosure requirements. The effective date is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. All transition requirements and elections should be applied to existing hedging relationships on the date of adoption and the effects should be reflected as of the beginning of the fiscal year of adoption. 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.

Leases - In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance results in a more consistent representation of the rights and obligations arising from leases by requiring lessees to recognize the lease asset and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 statement of financial position 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 statement of financial position but instead will recognize lease payments as an expense over the lease term as appropriate. See Note 6 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

9





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.

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 will early adopt ASU 2017-04 during the second quarter 2019 to coincide with the Company’s formal impairment analysis and it is not expected to have a material effect on the Company’s results of operations, financial position or disclosures.

Credit Losses on Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The effective date for these amendments is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a cross functional team that 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 issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13 that provides an option to phase in 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 Company has not yet determined the magnitude of any such adjustment or the overall impact on its results of operations, financial position or disclosures. However, the Company is continuing its efforts in developing processes and procedures to ensure it is fully compliant at the required adoption date. Among other things, the Company continues to gather data and develop forecast models for asset quality, loan balances, and portfolio net charge-offs and is working with the selected model vendor to produce parallel calculations through the year leading up to implementation. Model inputs began in the fourth quarter 2018 with additional inputs and scenarios to be modeled throughout 2019 with focus on calculating a potential range of financial impact.
 
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: SUBSEQUENT ACQUISITION
 
On April 12, 2019, the Company completed its merger with Reliance Bancshares, Inc. (“Reliance”) pursuant to the terms of the Agreement and Plan of Merger (“Reliance Agreement”), dated November 13, 2018, as amended February 11, 2019. The Company was the surviving corporation in the merger. The merger was described in the Company’s Registration Statement on Form S-4 filed with the SEC on January 25, 2019, and amended on February 12, 2019. As a result of the merger, the Company expanded its presence in the St. Louis banking market and now has approximately $17.6 billion in assets and approximately $12.9 billion and $13.1 billion in loans and deposits, respectively.

In the merger, each outstanding share of Reliance common stock and common stock equivalents 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 is issuing 3,999,623 shares of its common stock and paid $62.7 million in cash to effect the merger. The merger was approved by stockholders of Reliance on April 8, 2019.

10





Due to the timing of the merger and the amount of assets and liabilities assumed, the Company is continuing to determine their preliminary fair values and the purchase price allocation.  The Company expects to finalize the analysis of the acquired assets and liabilities over the next few months and within one year of the merger. The Company will record the merger using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of acquisition. The results of the merger will be included in the Company’s consolidated operating results beginning on the acquisition date.

NOTE 3: INVESTMENT SECURITIES
 
The amortized cost and fair value of investment securities that are classified as held-to-maturity (“HTM”) and available-for-sale (“AFS”) are as follows:
 
 
March 31, 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
$
12,996

 
$

 
$
(9
)
 
$
12,987

 
$
16,990

 
$

 
$
(49
)
 
$
16,941

Mortgage-backed securities
12,847

 
10

 
(240
)
 
12,617

 
13,346

 
5

 
(412
)
 
12,939

State and political subdivisions
33,597

 
751

 
(27
)
 
34,321

 
256,863

 
3,029

 
(954
)
 
258,938

Other securities
1,995

 
36

 

 
2,031

 
1,995

 
17

 

 
2,012

Total HTM
$
61,435


$
797


$
(276
)

$
61,956


$
289,194


$
3,051


$
(1,415
)

$
290,830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
163,730

 
$
596

 
$
(2,749
)
 
$
161,577

 
$
157,523

 
$
518

 
$
(3,740
)
 
$
154,301

Mortgage-backed securities
1,362,950

 
2,569

 
(19,842
)
 
1,345,677

 
1,552,487

 
3,097

 
(32,684
)
 
1,522,900

State and political subdivisions
571,716

 
10,307

 
(1,233
)
 
580,790

 
320,142

 
171

 
(5,470
)
 
314,843

Other securities
151,707

 
437

 
(77
)
 
152,067

 
157,471

 
2,251

 
(14
)
 
159,708

Total AFS
$
2,250,103


$
13,909


$
(23,901
)

$
2,240,111


$
2,187,623


$
6,037


$
(41,908
)

$
2,151,752

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

Certain investment securities are valued at less than their historical cost. Total fair value of these investments at March 31, 2019 and December 31, 2018, was $1.4 billion and $1.7 billion, which is approximately 60.1% and 70.3%, respectively, of the Company’s combined AFS and HTM investment portfolios.


11





The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 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
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
$

 
$

 
$
12,987

 
$
(9
)
 
$
12,987

 
$
(9
)
Mortgage-backed securities
487

 
(1
)
 
9,994

 
(239
)
 
10,481

 
(240
)
State and political subdivisions
80

 
(1
)
 
4,881

 
(26
)
 
4,961

 
(27
)
Total HTM
$
567


$
(2
)

$
27,862


$
(274
)

$
28,429


$
(276
)
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
5,583

 
$
(30
)
 
$
124,129

 
$
(2,719
)
 
$
129,712

 
$
(2,749
)
Mortgage-backed securities
40,444

 
(248
)
 
1,086,169

 
(19,594
)
 
1,126,613

 
(19,842
)
State and political subdivisions
1,016

 
(4
)
 
92,894

 
(1,229
)
 
93,910

 
(1,233
)
Other securities
5,029

 
(76
)
 
100

 
(1
)
 
5,129

 
(77
)
Total AFS
$
52,072


$
(358
)

$
1,303,292


$
(23,543
)

$
1,355,364


$
(23,901
)
 
These 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 March 31, 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 March 31, 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.


12





Income earned on securities for the three months ended March 31, 2019 and 2018, is as follows:
(In thousands)
 
 
 
 
2019
 
2018
Taxable:
 
 
 
 
 

 
 

Held-to-maturity
 
 
 
 
$
438

 
$
567

Available-for-sale
 
 
 
 
12,551

 
9,032

 
 
 
 
 
 
 
 
Non-taxable:
 
 
 
 
 
 
 
Held-to-maturity
 
 
 
 
1,162

 
1,936

Available-for-sale
 
 
 
 
3,161

 
1,087

Total
 
 
 
 
$
17,312

 
$
12,622


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
$
18,407

 
$
18,397

 
$
7,375

 
$
7,372

After one through five years
20,419

 
20,624

 
74,428

 
74,208

After five through ten years
5,564

 
5,691

 
123,088

 
124,101

After ten years
4,198

 
4,627

 
535,761

 
541,815

Securities not due on a single maturity date
12,847

 
12,617

 
1,362,950

 
1,345,677

Other securities (no maturity)

 

 
146,501

 
146,938

Total
$
61,435


$
61,956


$
2,250,103


$
2,240,111

 
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $1.06 billion at March 31, 2019 and $1.02 billion at December 31, 2018.
 
There were approximately $2.7 million of gross realized gains and no gross realized losses from the sale of securities during the three months ended March 31, 2019. During the quarter, the Company made adjustments to the bond portfolio based upon projected cash flow changes due to the present low rate environment. There were approximately $6,000 of gross realized gains and no gross realized losses from the sale of securities during the three months ended March 31, 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.


 

13





NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
 
At March 31, 2019, the Company’s loan portfolio was $11.74 billion, compared to $11.72 billion at December 31, 2018. The various categories of loans are summarized as follows:
 
(In thousands)
March 31, 2019
 
December 31, 2018
Consumer:
 

 
 

Credit cards
$
181,549

 
$
204,173

Other consumer
213,659

 
201,297

Total consumer
395,208


405,470

Real Estate:
 
 
 
Construction
1,376,162

 
1,300,723

Single family residential
1,431,407

 
1,440,443

Other commercial
3,355,109

 
3,225,287

Total real estate
6,162,678


5,966,453

Commercial:
 
 
 
Commercial
1,801,422

 
1,774,909

Agricultural
147,216

 
164,514

Total commercial
1,948,638


1,939,423

Other
178,026

 
119,042

Loans
8,684,550

 
8,430,388

Loans acquired, net of discount and allowance (1)
3,056,187

 
3,292,783

Total loans
$
11,740,737


$
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

14





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)
March 31, 2019
 
December 31, 2018
Consumer:
 

 
 

Credit cards
$
338

 
$
296

Other consumer
1,555

 
2,159

Total consumer
1,893


2,455

Real estate:
 
 
 
Construction
2,570

 
1,269

Single family residential
15,324

 
11,939

Other commercial
8,612

 
7,205

Total real estate
26,506


20,413

Commercial:
 
 
 
Commercial
31,409

 
10,049

Agricultural
1,117

 
1,284

Total commercial
32,526


11,333

Total
$
60,925


$
34,201


15





An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:
 
(In thousands)
Gross
30-89 Days
Past Due
 
90 Days
or More
Past Due
 
Total
Past Due
 
Current
 
Total
Loans
 
90 Days
Past Due &
Accruing
March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Credit cards
$
733

 
$
561

 
$
1,294

 
$
180,255

 
$
181,549

 
$
222

Other consumer
3,018

 
489

 
3,507

 
210,152

 
213,659

 
52

Total consumer
3,751


1,050


4,801


390,407


395,208


274

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
961

 
909

 
1,870

 
1,374,292

 
1,376,162

 

Single family residential
10,226

 
5,491

 
15,717

 
1,415,690

 
1,431,407

 
7

Other commercial
4,384

 
4,652

 
9,036

 
3,346,073

 
3,355,109

 

Total real estate
15,571


11,052


26,623


6,136,055


6,162,678


7

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial
6,845

 
8,611

 
15,456

 
1,785,966

 
1,801,422

 

Agricultural
202

 
954

 
1,156

 
146,060

 
147,216

 

Total commercial
7,047


9,565


16,612


1,932,026


1,948,638



Other

 

 

 
178,026

 
178,026

 

Total
$
26,369


$
21,667


$
48,036


$
8,636,514


$
8,684,550


$
281

 
 
 
 
 
 
 
 
 
 
 
 
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.

16





Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:
 
(In thousands)
Unpaid
Contractual
Principal
Balance
 
Recorded Investment
With No
Allowance
 
Recorded
Investment
With Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Average
Investment in
Impaired
Loans
 
Interest
Income
Recognized
March 31, 2019
 

 
 

 
 

 
 

 
 

 
Three Months Ended
March 31, 2019
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit cards
$
338

 
$
338

 
$

 
$
338

 
$

 
$
317

 
$
30

Other consumer
1,699

 
1,555

 

 
1,555

 

 
1,857

 
13

Total consumer
2,037


1,893




1,893



 
2,174

 
43

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
2,648

 
2,090

 
480

 
2,570

 
237

 
1,920

 
14

Single family residential
16,379

 
11,891

 
3,432

 
15,323

 
38

 
13,703

 
98

Other commercial
14,279

 
3,882

 
3,201

 
7,083

 
137

 
8,992

 
64

Total real estate
33,306


17,863


7,113


24,976


412

 
24,615

 
176

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
38,420

 
6,268

 
23,327

 
29,595

 
108

 
20,739

 
148

Agricultural
2,215

 
583

 
532

 
1,115

 
1

 
1,147

 
8

Total commercial
40,635


6,851


23,859


30,710


109

 
21,886

 
156

Total
$
75,978


$
26,607


$
30,972


$
57,579


$
521

 
$
48,675

 
$
375

 
December 31, 2018
 
 

 
 

 
 

 
 

 
Three Months Ended
March 31, 2018
Consumer:
 

 
 

 
 

 
 

 
 

 
 
 
 
Credit cards
$
296

 
$
296

 
$

 
$
296

 
$

 
$
234

 
$
15

Other consumer
2,311

 
2,159

 

 
2,159

 

 
4,658

 
34

Total consumer
2,607

 
2,455

 

 
2,455

 

 
4,892

 
49

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,344

 
784

 
485

 
1,269

 
211

 
2,082

 
16

Single family residential
12,906

 
11,468

 
616

 
12,084

 
36

 
13,523

 
100

Other commercial
8,434

 
5,442

 
5,458

 
10,900

 

 
16,287

 
120

Total real estate
22,684

 
17,694

 
6,559

 
24,253

 
247

 
31,892

 
236

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
10,361

 
7,254

 
4,628

 
11,882

 
437

 
7,226

 
53

Agricultural
2,419

 
1,180

 

 
1,180

 

 
1,586

 
12

Total commercial
12,780

 
8,434

 
4,628

 
13,062

 
437

 
8,812

 
65

Total
$
38,071

 
$
28,583

 
$
11,187

 
$
39,770

 
$
684

 
$
45,596

 
$
350


At March 31, 2019 and December 31, 2018, impaired loans, net of government guarantees and excluding loans acquired, totaled $57.6 million and $39.8 million, respectively. Allocations of the allowance for loan losses relative to impaired loans were $521,000 and $684,000 at March 31, 2019 and December 31, 2018, respectively. Approximately $375,000 of interest income was recognized on average impaired loans of $48.7 million for the three months ended March 31, 2019. Interest income recognized on impaired loans on a cash basis during the three months ended March 31, 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.
 

17





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

The following table presents a summary of troubled debt restructurings, excluding loans acquired, segregated by class of loans.
 
 
Accruing TDR Loans
 
Nonaccrual TDR Loans
 
Total TDR Loans
(Dollars in thousands)
Number
 
Balance
 
Number
 
Balance
 
Number
 
Balance
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction

 
$

 
3

 
$
480

 
3

 
$
480

Single-family residential
6

 
227

 
9

 
593

 
15

 
820

Other commercial
2

 
3,250

 
2

 
1,003

 
4

 
4,253

Total real estate
8


3,477


14


2,076


22


5,553

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial
4

 
2,820

 
5

 
427

 
9

 
3,247

Total commercial
4


2,820


5


427


9


3,247

Total
12


$
6,297


19


$
2,503


31


$
8,800

 
 
 
 
 
 
 
 
 
 
 
 
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


There were no loans restructured as TDRs during the three months ended March 31, 2019. The following table presents loans that were restructured as TDRs during the three months ended March 31, 2018, excluding loans acquired, segregated by class of loans.

 
 
 
 
 
 
 
Modification Type
 
 
(Dollars in thousands)
Number of
Loans
 
Balance Prior
to TDR
 
Balance at March 31,
 
Change in
Maturity
Date
 
Change in
Rate
 
Financial Impact
on Date of
Restructure
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Other consumer
1

 
$
91

 
$
91

 
$
91

 
$

 
$

Total consumer
1

 
91

 
91

 
91

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
1

 
61

 
62

 
62

 

 

Total real estate
1

 
61

 
62

 
62

 

 

Total
2

 
$
152

 
$
153

 
$
153

 
$

 
$

 

18





During the three months ended March 31, 2018, the Company modified 2 loans with a recorded investment of $152,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of up to 12 months. A specific reserve was not considered necessary for these loans based upon the fair value of the collateral. Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.
 
There was one commercial loan considered a TDR for which a payment default occurred during the three months ended March 31, 2019. A charge-off of approximately $138,000 was recorded for this loan. There was one commercial real estate loan for which a payment default occurred during the three months ended March 31, 2018. A charge-off of $66,300 was recorded for this loan and $294,300 was transferred to OREO. 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 March 31, 2018, for which OREO was received in full or partial satisfaction of the loans. There were no TDRs with pre-modification loan balance for which OREO was received in full or partial satisfaction of the loans during the three month period ended March 31, 2019. At March 31, 2019 and December 31, 2018, the Company had $3,498,000 and $3,899,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At March 31, 2019 and December 31, 2018, the Company had $4,716,000 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, 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.

19





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 $3.7 million and $4.1 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of March 31, 2019 and December 31, 2018, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $77.2 million and $50.4 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at March 31, 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 $177.4 million and $119.0 million, as of March 31, 2019 and December 31, 2018, respectively.
 

20





The following table presents a summary of loans by credit risk rating as of March 31, 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
March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Credit cards
$
180,988

 
$

 
$
561

 
$

 
$

 
$
181,549

Other consumer
211,642

 

 
2,017

 

 

 
213,659

Total consumer
392,630




2,578






395,208

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
1,372,113

 
443

 
3,606

 

 

 
1,376,162

Single family residential
1,407,554

 
1,784

 
21,839

 
230

 

 
1,431,407

Other commercial
3,313,139

 
21,629

 
20,341

 

 

 
3,355,109

Total real estate
6,092,806


23,856


45,786


230




6,162,678

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,745,162

 
9,671

 
46,589

 

 

 
1,801,422

Agricultural
145,828

 
67

 
1,321

 

 

 
147,216

Total commercial
1,890,990


9,738


47,910






1,948,638

Other
178,026

 

 

 

 

 
178,026

Loans acquired
2,930,179

 
45,157

 
80,515

 
336

 

 
3,056,187

Total
$
11,484,631


$
78,751


$
176,789


$
566


$


$
11,740,737

(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

 

21





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 months ended March 31, 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 March 31, 2019
 
 
 
 
 
 
 
 
 
Balance, beginning of period (2)
$
20,514

 
$
29,743

 
$
3,923

 
$
2,419

 
$
56,599

Provision for loan losses (1)
1,874

 
2,843

 
898

 
1,206

 
6,821

Charge-offs
(1,968
)
 
(374
)
 
(1,142
)
 
(1,533
)
 
(5,017
)
Recoveries
158

 
142

 
240

 
300

 
840

Net charge-offs
(1,810
)
 
(232
)
 
(902
)
 
(1,233
)
 
(4,177
)
Balance, March 31, 2019 (2)
$
20,578

 
$
32,354

 
$
3,919

 
$
2,392

 
$
59,243

 
 
 
 
 
 
 
 
 
 
Period-end amount allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
109

 
$
412

 
$

 
$

 
$
521

Loans collectively evaluated for impairment
20,469

 
31,942

 
3,919

 
2,392

 
58,722

Balance, March 31, 2019 (2)
$
20,578


$
32,354


$
3,919


$
2,392


$
59,243



22





Activity in the allowance for loan losses for the three months ended March 31, 2018 was as follows:
(In thousands)
Commercial
 
Real
Estate
 
Credit
Card
 
Other
Consumer
and Other
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Balance, beginning of period (3)
$
7,007

 
$
27,281

 
$
3,784

 
$
3,596

 
$
41,668

Provision for loan losses (1)
4,286

 
3,286

 
751

 
759

 
9,082

Charge-offs
(1,761
)
 
(455
)
 
(999
)
 
(1,056
)
 
(4,271
)
Recoveries
69

 
302

 
263

 
94

 
728

Net charge-offs
(1,692
)
 
(153
)
 
(736
)
 
(962
)
 
(3,543
)
Balance, March 31, 2018 (2)
$
9,601

 
$
30,414

 
$
3,799

 
$
3,393

 
$
47,207

 
 
 
 
 
 
 
 
 
 
Period-end amount allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
18

 
$
426

 
$

 
$

 
$
444

Loans collectively evaluated for impairment
9,583

 
29,988

 
3,799

 
3,393

 
46,763

Balance, March 31, 2018 (2)
$
9,601


$
30,414


$
3,799


$
3,393


$
47,207

 
 
 
 
 
 
 
 
 
 
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 (2)
$
20,514


$
29,743


$
3,923


$
2,419


$
56,599

______________________
(1)    Provision for loan losses of $2,464,000 attributable to loans acquired was excluded from this table for the three months ended March 31, 2019 (total provision for loan losses for the three months ended March 31, 2019 was $9,285,000). There were $1,247,000 in charge-offs for loans acquired during the three months ended March 31, 2019, resulting in an ending balance in the allowance related to loans acquired of $1,312,000. Provision for loan losses of $68,000 attributable to loans acquired was excluded from this table for the three months ended March 31, 2018 (total provision for loan losses for the three months ended March 31, 2018 was $9,150,000). There were $79,000 in charge-offs for loans acquired during the three months ended March 31, 2018, resulting in an ending balance in the allowance related to loans acquired of $407,000.
(2)    Allowance for loan losses at March 31, 2019 includes $1,312,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at December 31, 2018 and March 31, 2018 includes $95,000 and $407,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at March 31, 2019 was $60,555,000 and total allowance for loan losses at December 31, 2018 and March 31, 2018 was $56,694,000 and $47,614,000, respectively.
(3)    Allowance for loan losses at December 31, 2017 includes $418,000 allowance for loans acquired (not shown in the table above). The total allowance for loan losses at December 31, 2017 was $42,086,000.

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
March 31, 2019
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
30,710

 
$
24,976

 
$
338

 
$
1,555

 
$
57,579

Loans collectively evaluated for impairment
1,917,928

 
6,137,702

 
181,211

 
390,130

 
8,626,971

Balance, end of period
$
1,948,638


$
6,162,678


$
181,549


$
391,685


$
8,684,550

 
 
 
 
 
 
 
 
 
 
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


23





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.
 
The following table reflects the carrying value of all loans acquired as of March 31, 2019 and December 31, 2018
 
Loans Acquired
(In thousands)
March 31, 2019
 
December 31, 2018
Consumer:
 

 
 

Other consumer
$
11,979

 
$
15,658

Real estate:
 
 
 
Construction
404,512

 
429,605

Single family residential
533,917

 
566,188

Other commercial
1,730,472

 
1,848,679

Total real estate
2,668,901

 
2,844,472

Commercial:
 
 
 
Commercial
374,033

 
430,914

Agricultural
1,274

 
1,739

Total commercial
375,307

 
432,653

Total loans acquired (1)
$
3,056,187

 
$
3,292,783

________________________
(1)    Loans acquired are reported net of a $1,312,000 and $95,000 allowance at March 31, 2019 and December 31, 2018, respectively.


24





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)
March 31, 2019
 
December 31, 2018
 
 
 
 
Consumer:
 

 
 

Other consumer
$
149

 
$
140

Real estate:
 
 
 
Construction
130

 
114

Single family residential
6,342

 
6,603

Other commercial
8,973

 
1,167

Total real estate
15,445


7,884

Commercial:
 
 
 
Commercial
3,117

 
13,578

Agricultural
20

 
38

Total commercial
3,137


13,616

Total
$
18,731


$
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
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Other consumer
$
94

 
$
77

 
$
171

 
$
11,808

 
$
11,979

 
$

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
5

 
8,122

 
8,127

 
396,385

 
404,512

 

Single family residential
5,058

 
2,583

 
7,641

 
526,276

 
533,917

 
24

Other commercial
305

 
8,267

 
8,572

 
1,721,900

 
1,730,472

 

Total real estate
5,368


18,972


24,340


2,644,561


2,668,901

 
24

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial
7,265

 
6,673

 
13,938

 
360,095

 
374,033

 

Agricultural

 

 

 
1,274

 
1,274

 

Total commercial
7,265


6,673


13,938


361,369


375,307

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
12,727


$
25,722


$
38,449


$
3,017,738


$
3,056,187

 
$
24


25





(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
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Other consumer
$
11,715

 
$

 
$
264

 
$

 
$

 
$
11,979

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
369,267

 
27,475

 
7,770

 

 

 
404,512

Single family residential
520,159

 
2,049

 
11,373

 
336

 

 
533,917

Other commercial
1,675,051

 
11,894

 
43,527

 

 

 
1,730,472

Total real estate
2,564,477


41,418


62,670


336




2,668,901

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial
352,779

 
3,739

 
17,515

 

 

 
374,033

Agricultural
1,208

 

 
66

 

 

 
1,274

Total commercial
353,987


3,739


17,581






375,307

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,930,179


$
45,157


$
80,515


$
336


$


$
3,056,187


26





(In thousands)
Risk Rate
1-4
 
Risk Rate
5
 
Risk Rate
6
 
Risk Rate
7
 
Risk Rate
8
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
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. These adjustments will be recognized over the remaining lives of the purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three months ended March 31, 2019 and 2018.

 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
(In thousands)
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
Beginning balance
$
1,460

 
$
4,050

 
$
620

 
$
17,116

Additions

 

 

 

Accretable yield adjustments
17

 

 
1,134

 

Accretion
(9
)
 
9

 
(385
)
 
385

Payments and other reductions, net

 
(408
)
 

 
104

Balance, ending
$
1,468

 
$
3,651

 
$
1,369

 
$
17,605


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 $1,312,000 at March 31, 2019 and $95,000 at December 31, 2018. The provision on loans acquired for the three months ended March 31, 2019 and 2018 was $2,464,000 and $68,000, respectively.

27





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 Federal Home Loan Bank 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 March 31, 2019, right-of-use lease assets included in premises and equipment are $30.5 million and lease liabilities included in other liabilities are $30.4 million. During the three months ended March 31, 2019, the Company recognized lease expense of $2.6 million and the weighted average discount rate was 3.46%. At March 31, 2019, the weighted average remaining lease term was 9.29 years.

See Note 1, in the Recently Adopted Accounting Standards section, 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 $845.7 million at both March 31, 2019 and December 31, 2018. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2019 or the year ended December 31, 2018.
 
Core deposit premiums are amortized over periods ranging from 10 to 15 years and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Additionally, intangible assets are being amortized over various periods ranging from 10 to 15 years.
 
The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at March 31, 2019 and December 31, 2018, were as follows: 
 
(In thousands)
March 31, 2019
 
December 31, 2018
Goodwill
$
845,687

 
$
845,687

Core deposit premiums:
 
 
 
Gross carrying amount
105,984

 
105,984

Accumulated amortization
(28,552
)
 
(26,177
)
Core deposit premiums, net
77,432


79,807

Books of business intangible:
 
 
 
Gross carrying amount
15,234

 
15,234

Accumulated amortization
(3,972
)
 
(3,707
)
Books of business intangible, net
11,262


11,527

Other intangible assets, net
88,694

 
91,334

Total goodwill and other intangible assets
$
934,381


$
937,021

 

28





The Company’s estimated remaining amortization expense on intangibles as of March 31, 2019 is as follows:
 
(In thousands)
Year
 
Amortization
Expense
 
Remainder of 2019
 
$
7,924

 
2020
 
10,552

 
2021
 
10,490

 
2022
 
10,438

 
2023
 
10,156

 
Thereafter
 
39,134

 
Total
 
$
88,694


NOTE 8: TIME DEPOSITS
 
Time deposits include approximately $1.507 billion and $1.443 billion of certificates of deposit of $100,000 or more at March 31, 2019, and December 31, 2018, respectively. Of this total approximately $770.1 million and $753.2 million of certificates of deposit were over $250,000 at March 31, 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
March 31,
(In thousands)
 
 
 
 
2019
 
2018
Income taxes currently payable
 
 
 
 
$
10,317

 
$
10,045

Deferred income taxes
 
 
 
 
2,081

 
3,921

Provision for income taxes
 
 
 
 
$
12,398

 
$
13,966

 
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)
March 31, 2019
 
December 31, 2018
Deferred tax assets:
 

 
 

Loans acquired
$
11,052

 
$
12,536

Allowance for loan losses
14,885

 
13,947

Valuation of foreclosed assets
1,474

 
1,474

Tax NOLs from acquisition
6,969

 
7,242

Deferred compensation payable
2,793

 
2,707

Accrued equity and other compensation
6,304

 
8,182

Acquired securities
397

 
397

Unrealized loss on available-for-sale securities
2,718

 
9,196

Other
7,130

 
7,042

Gross deferred tax assets
53,722


62,723



29





(In thousands)
March 31, 2019
 
December 31, 2018
Deferred tax liabilities:
 
 
 
Goodwill and other intangible amortization
$
(30,273
)
 
$
(30,471
)
Accumulated depreciation
(13,361
)
 
(13,361
)
Other
(5,115
)
 
(5,360
)
Gross deferred tax liabilities
(48,749
)
 
(49,192
)
 
 
 
 
Net deferred tax asset, included in other assets
$
4,973

 
$
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
March 31,
(In thousands)
 
 
 
 
2019
 
2018
Computed at the statutory rate (21%)
 
 
 
 
$
12,620

 
$
13,708

Increase (decrease) in taxes resulting from:
 
 
 
 
 
 
 
State income taxes, net of federal tax benefit
 
 
 
 
1,345

 
1,822

Discrete items related to ASU 2016-09
 
 
 
 
(26
)
 
(273
)
Tax exempt interest income
 
 
 
 
(961
)
 
(677
)
Tax exempt earnings on BOLI
 
 
 
 
(179
)
 
(186
)
Federal tax credits
 
 
 
 
(729
)
 

Other differences, net
 
 
 
 
328

 
(428
)
Actual tax provision
 
 
 
 
$
12,398

 
$
13,966


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 closed a stock acquisition in a prior year that invoked the Section 382 annual limitation. Approximately $33.8 million of federal net operating losses subject to the IRC Sec 382 annual limitation are expected to be utilized by the Company. The net operating loss carryforwards expire between 2028 and 2035.

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.


30





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 $117.0 million and $95.5 million at March 31, 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 March 31, 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
March 31, 2019
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
116,963

 
$

 
$

 
$

 
$
116,963

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

 
$

 
$

 
$

 
$
95,542


NOTE 11: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES
 
Debt at March 31, 2019 and December 31, 2018 consisted of the following components: 
(In thousands)
March 31, 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
$
1,169,989

 
$
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
1,169,989


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
(3,281
)
 
(3,372
)
Total subordinated notes and debentures
354,041


353,950

Total other borrowings and subordinated debt
$
1,524,030


$
1,699,400

 

31





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. 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 Revolving Credit Agreement (the “Credit Agreement”), 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 the Credit Agreement with U.S. Bank National Association 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. In October 2019, all amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company are due and payable. The balance due under the Credit Agreement at March 31, 2019 was zero.

At March 31, 2019, the Company had $1.2 billion of Federal Home Loan Bank (“FHLB”) advances outstanding with original or expected maturities of one year or less, of which $775.0 million 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 first quarter have ten to fifteen year maturity dates with lockout periods that vary but do not exceed one year. These FOTO advances are considered and monitored by the Company as short-term advances due to the likelihood of FHLB exercising the options within a year of the settlement dates based upon the rising rate environment and the short lockout periods.

The Company had total FHLB advances of $1.2 billion at March 31, 2019, with approximately $2.2 billion of additional advances available from the FHLB. The FHLB advances are secured by mortgage loans and investment securities totaling approximately $4.7 billion at March 31, 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 March 31, 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 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.


32





The Company’s long-term debt includes subordinated debt, notes payable and long-term FHLB advances with an original maturity of greater than one year. Aggregate annual maturities of long-term debt at March 31, 2019, are as follows:
 
(In thousands)
Year
 
Annual
Maturities
 
2019
 
$
1,775

 
2020
 
2,099

 
2021
 
1,801

 
2022
 
948

 
2023
 
925

 
Thereafter
 
361,482

 
Total
 
$
369,030

 
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: COMMON STOCK
 
On January 18, 2018, the board of directors of the Company approved a two-for-one stock split of the Corporation’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 (“Record Date”). 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 Class A common stock, or approximately 2% of the shares outstanding. Under the current plan, the Company can repurchase an additional 308,272 shares. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes.

The Company had no repurchases of its common stock during the three month period ended March 31, 2019.
 


33





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 March 31, 2019, the Company’s subsidiary bank had approximately $57.7 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 March 31, 2019, the Company and its subsidiary bank met all capital adequacy requirements under the Basel III Capital Rules. The Company’s CET1 ratio was 10.46% at March 31, 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 three months ended March 31, 2019:
 
 
Stock Options
Outstanding
 
Non-vested
Stock Awards
Outstanding
 
Non-vested
Stock Units
Outstanding
 
Number
of Shares
(000)
 
Weighted
Average
Exercise
Price
 
Number
of Shares
(000)
 
Weighted
Average
Grant-Date
Fair Value
 
Number
of Shares
(000)
 
Weighted
Average
Grant-Date
Fair Value
Balance, January 1, 2019
695

 
$
22.42

 
72

 
$
21.45

 
817

 
$
27.65

Granted

 

 

 

 
399

 
26.57

Stock options exercised
(1
)
 
10.65

 

 

 

 

Stock awards/units vested (earned)

 

 
(21
)
 
18.65

 
(266
)
 
26.55

Forfeited/expired

 

 
(1
)
 
18.92

 
(57
)
 
28.45

 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
694

 
$
22.43

 
50

 
$
22.68

 
893

 
$
27.49

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable, March 31, 2019
694

 
$
22.43

 
 
 
 
 
 
 
 
 

34





The following table summarizes information about stock options under the plans outstanding at March 31, 2019:
 
 
 
 
 
Options Outstanding
 
Options Exercisable
Range of
Exercise Prices
 
Number
of Shares
(000)
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
Number
of Shares
(000)
 
Weighted
Average
Exercise
Price
$
9.46

 
 
$
9.46

 
1
 
2.80
 
$9.46
 
1
 
$9.46
10.65

 
 
10.65

 
3
 
3.83
 
10.65
 
3
 
10.65
10.76

 
 
10.76

 
2
 
0.80
 
10.76
 
2
 
10.76
20.29

 
 
20.29

 
71
 
5.75
 
20.29
 
71
 
20.29
20.36

 
 
20.36

 
3
 
5.63
 
20.36
 
3
 
20.36
22.20

 
 
22.20

 
74
 
5.98
 
22.20
 
74
 
22.20
22.75

 
 
22.75

 
436
 
6.36
 
22.75
 
436
 
22.75
23.51

 
 
23.51

 
97
 
6.81
 
23.51
 
97
 
23.51
24.07

 
 
24.07

 
7
 
6.46
 
24.07
 
7
 
24.07
$
9.46

 
 
$
24.07

 
694
 
6.28
 
$22.43
 
694
 
$22.43

The table below summarizes the Company’s restricted performance stock unit activity for the three months ended March 31, 2019:

(In thousands)
 
Performance Stock Units
Non-vested, January 1, 2019
 
177

Granted
 
83

Vested (earned)
 
(54
)
Forfeited
 
(17
)
Non-vested, March 31, 2019
 
189


Stock-based compensation expense was $3,084,000 and $2,621,000 during the three months ended March 31, 2019 and 2018, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was zero of unrecognized stock-based compensation expense related to stock options at March 31, 2019. Unrecognized stock-based compensation expense related to non-vested stock awards and stock units was $20,533,000 at March 31, 2019. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.0 years.
 
The intrinsic value of stock options outstanding and stock options exercisable at March 31, 2019 was $1,425,000 and $1,423,000, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $24.48 as of March 31, 2019, and the exercise price multiplied by the number of options outstanding. The total intrinsic value of stock options exercised during the three months ended March 31, 2019 and March 31, 2018, was $6,000 and $646,000, 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 three months ended March 31, 2019 and 2018.
 


35





NOTE 16: EARNINGS PER SHARE (“EPS”)
 
Basic EPS is computed based on the weighted average number of shares outstanding during each period. Diluted EPS is computed using 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
March 31,
(In thousands, except per share data)
 
 
 
 
2019
 
2018
Net income
 
 
 
 
$
47,695

 
$
51,312

 
 
 
 
 
 
 
 
Average common shares outstanding
 
 
 
 
92,520

 
92,182

Average potential dilutive common shares
 
 
 
 
351

 
457

Average diluted common shares
 
 
 
 
92,871


92,639

 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
$
0.52

 
$
0.56

Diluted earnings per share
 
 
 
 
$
0.51

 
$
0.55


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 months ended March 31, 2019 and 2018.
 
NOTE 17: ADDITIONAL CASH FLOW INFORMATION
 
The following is a summary of the Company’s additional cash flow information:
 
 
Three Months Ended
March 31,
(In thousands)
2019
 
2018
Interest paid
$
38,047

 
$
22,863

Income taxes (refunded) paid
(54
)
 
(7,375
)
Transfers of loans to foreclosed assets held for sale
569

 
1,316

Transfers of premises to foreclosed assets and other real estate owned

 
106

Right-of use lease assets obtained in exchange for lessee operating lease liabilities
32,757

 

 


36





NOTE 18: OTHER OPERATING EXPENSES
 
Other operating expenses consist of the following:
 
 
 
 
Three Months Ended
March 31,
(In thousands)
 
 
 
 
2019
 
2018
Professional services
 
 
 
 
$
4,323

 
$
4,330

Postage
 
 
 
 
1,726

 
1,399

Telephone
 
 
 
 
1,619

 
1,486

Credit card expense
 
 
 
 
3,860

 
3,228

Marketing
 
 
 
 
3,057

 
1,660

Software and technology
 
 
 
 
4,496

 
2,648

Operating supplies
 
 
 
 
618

 
749

Amortization of intangibles
 
 
 
 
2,641

 
2,837

Branch right sizing expense
 
 
 
 
45

 
61

Other expense
 
 
 
 
7,677

 
7,096

Total other operating expenses
 
 
 
 
$
30,062


$
25,494

 
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 other 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, 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 March 31, 2019, the Company had outstanding commitments to extend credit aggregating approximately $573,779,000 and $3,384,471,000 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 $36,929,000 and $39,101,000 at March 31, 2019, and December 31, 2018, respectively, with terms ranging from 9 months to 15 years. At March 31, 2019 and December 31, 2018, the Company had no deferred revenue under standby letter of credit agreements.



37





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.


38





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 March 31, 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)
March 31, 2019
 

 
 

 
 

 
 

Available-for-sale securities
 

 
 

 
 

 
 

U.S. Government agencies
$
161,577

 
$

 
$
161,577

 
$

Mortgage-backed securities
1,345,677

 

 
1,345,677

 

State and political subdivisions
580,790

 

 
580,790

 

Other securities
152,067

 

 
152,067

 

Derivative asset
6,306

 

 
6,306

 

Derivative liability
(5,861
)
 

 
(5,861
)
 

 
 
 
 
 
 
 
 
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

39





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 March 31, 2019 and December 31, 2018, the fair value of foreclosed assets and other real estate owned less estimated costs to sell was $19.0 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 March 31, 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 March 31, 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)
March 31, 2019
 

 
 

 
 

 
 

Impaired loans (1) (2) (collateral dependent)
$
2,101

 
$

 
$

 
$
2,101

Foreclosed assets and other real estate owned (1)
302

 

 

 
302

 
 
 
 
 
 
 
 
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 zero and $2,738,000 were related to the impaired collateral dependent loans for which fair value re-measurements took place during the periods ended March 31, 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).
 

40





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.


41





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
March 31, 2019
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
491,161

 
$
491,161

 
$

 
$

 
$
491,161

Interest bearing balances due from banks - time
4,684

 

 
4,684

 

 
4,684

Held-to-maturity securities
61,435

 

 
61,956

 

 
61,956

Mortgage loans held for sale
18,480

 

 

 
18,480

 
18,480

Interest receivable
51,796

 

 
51,796

 

 
51,796

Legacy loans, net
8,625,307

 

 

 
8,539,036

 
8,539,036

Loans acquired, net
3,056,187

 

 

 
3,025,619

 
3,025,619

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
Non-interest bearing transaction accounts
2,674,034

 

 
2,674,034

 

 
2,674,034

Interest bearing transaction accounts and savings deposits
6,666,823

 

 
6,666,823

 

 
6,666,823

Time deposits
2,648,674

 

 

 
2,632,615

 
2,632,615

Federal funds purchased and securities sold under agreements to repurchase
120,213

 

 
120,213

 

 
120,213

Other borrowings
1,169,989

 

 
1,168,914

 

 
1,168,914

Subordinated notes and debentures
354,041

 

 
359,090

 

 
359,090

Interest payable
13,941

 

 
13,941

 

 
13,941

 
 
 
 
 
 
 
 
 
 
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.


42





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 March 31, 2019, and the related condensed consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2019 and 2018, and stockholders’ equity and cash flows for the three-month periods ended March 31, 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
May 8, 2019


43





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
 
Net income for the three months ended March 31, 2019 was $47.7 million and diluted earnings per share were $0.51, a decrease of $3.6 million and $0.04, compared to the same period in 2018.
 
Net income for the first three months in both 2019 and 2018 included non-core items related to our acquisitions and branch right sizing initiatives. Excluding all non-core items, core earnings for the three months ended March 31, 2019 were $49.1 million, or $0.53 diluted core earnings per share compared to $52.6 million, or $0.57 diluted core earnings per share for the same period in 2018. See “Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.
 
We had solid operating results during the first quarter 2019. Revenue was affected by three significant items compared to the first quarter 2018. Accretion income was down $4.6 million; debit card interchange income, primarily as a result of the Durbin rate cap, was down $2.8 million; and the gain on sale of securities was up $2.7 million, resulting in a net decrease of $4.7 million from the previous year.
 
In April, we completed the acquisition of Reliance Bancshares, Inc. (“Reliance”) and performed the associated systems conversion. We are excited about our merger with Reliance and the opportunities we now have in the St. Louis market due to our increased presence. See Note 2, Pending Acquisition, in the accompanying 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 will evaluate the primary information technology systems and functions that support our operations and improve or replace 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.
 
Stockholders’ equity as of March 31, 2019 was $2.3 billion, book value per share was $24.87 and tangible book value per share was $14.78. Our ratio of stockholders’ equity to total assets was 14.3% and the ratio of tangible stockholders’ equity to tangible assets was 9.0% at March 31, 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 $11.741 billion at March 31, 2019, compared to $11.723 billion at December 31, 2018 and $10.987 billion at March 31, 2018. Total loans increased approximately $17.6 million during the quarter. We experienced seasonal decreases in the credit card and agricultural portfolios.

We continue to have good asset quality. At March 31, 2019, the allowance for loan losses for legacy loans was $59.2 million. The allowance for loan losses for loans acquired was $1.3 million and the acquired loan discount credit mark was $42.4 million. The allowances for loan losses and credit marks provide a total of $103.0 million of coverage, which equates to a total coverage ratio of 0.9% of gross loans. The ratio of credit mark and related allowance to loans acquired was 1.4%.
 
Simmons First National Corporation is an Arkansas-based financial holding company that, as of March 31, 2019, has approximately $16.1 billion in consolidated assets and conducts financial operations throughout Arkansas, Colorado, 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

44





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.
 
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

45





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. Because of the cap, Simmons Bank received approximately $5.9 million less in debit card fees on a pre-tax basis in 2018. The interchange rate cap resulted in a $2.8 million reduction in debit card fees for the first quarter of 2019 when compared to the first quarter 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.
 

46





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 60% of our loans and 80% of our time deposits will reprice in the next year.

Net Interest Income

For the three month period ended March 31, 2019, net interest income on a fully taxable equivalent basis was $138.6 million, an increase of $2.5 million, or 1.9%, over the same period in 2018. The increase in net interest income was the result of a $22.4 million increase in interest income partially offset by a $19.9 million increase in interest expense.

The increase in interest income primarily resulted from a $16.1 million increase in interest income on loans and an increase of $5.1 million in interest income on investment securities. Increases in loan volume of $12.1 million due to increased average loan balances during the first three months of 2019 as well as $4.1 million due to an increase in yield of 15 basis points contributed to the increase in interest income on loans during 2019.

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 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 March 31, 2019 and 2018, interest income included $6.7 million and $11.3 million, respectively, for the yield accretion recognized on loans acquired.

The $19.9 million increase in interest expense is due to the higher cost of deposits, growth in types of deposit accounts, higher cost of deposits due to the rising-rate environment and the additional subordinated and other debt. Interest expense increased $2.7 million due to deposit growth, $12.5 million due to the increase in yield of 57 basis points on deposit accounts and $4.7 million due to increases in subordinated debt and increased FHLB borrowings.

Net Interest Margin
 
Our net interest margin decreased 32 basis points to 3.85% for the three month period ended March 31, 2019, when compared to 4.17% for the same period in 2018. Normalized for all accretion, our core net interest margin at March 31, 2019 and 2018 was 3.67% and 3.82%, respectively.


47





Since the first quarter of 2018, loan yield has increased 15 basis points and core loan yield has increased 34 basis points while cost of interest bearing deposits has risen 57 basis points and the cost of borrowed funds has increased 103 basis points. The decrease in both the net interest margin and the core net interest margin for the three month period ended March 31, 2019 is a direct result of the rising rate environment.

Net Interest Income Tables
 
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2019 and 2018, respectively, as well as changes in fully taxable equivalent net interest margin for the three months ended March 31, 2019, versus March 31, 2018.
 
Table 1: Analysis of Net Interest Margin
(FTE = Fully Taxable Equivalent)


 
 
 
Three Months Ended
March 31,
(In thousands)
 
 
 
 
2019
 
2018
Interest income
 
 
 
 
$
179,116

 
$
157,139

FTE adjustment
 
 
 
 
1,601

 
1,130

Interest income – FTE
 
 
 
 
180,717


158,269

Interest expense
 
 
 
 
42,090

 
22,173

Net interest income – FTE
 
 
 
 
$
138,627


$
136,096

 
 
 
 
 
 
 
 
Yield on earning assets – FTE
 
 
 
 
5.02
%
 
4.84
%
Cost of interest bearing liabilities
 
 
 
 
1.52
%
 
0.89
%
Net interest spread – FTE
 
 
 
 
3.50
%
 
3.95
%
Net interest margin – FTE
 
 
 
 
3.85
%
 
4.17
%

Table 2:  Changes in Fully Taxable Equivalent Net Interest Margin
 
 
 
 
Three Months Ended
March 31,
(In thousands)
 
 
2019 vs. 2018
Increase due to change in earning assets
 
 
$
15,209

Increase due to change in earning asset yields
 
 
7,239

Decrease due to change in interest bearing liabilities
 
 
(4,535
)
Decrease due to change in interest rates paid on interest bearing liabilities
 
 
(15,382
)
Increase in net interest income
 
 
$
2,531

 
Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three months ended March 31, 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.
 

48





Table 3:  Average Balance Sheets and Net Interest Income Analysis
 
 
Three Months Ended March 31,
 
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
$
394,462

 
$
2,154

 
2.21
 
$
338,505

 
$
1,009

 
1.21
Investment securities - taxable
1,880,694

 
12,989

 
2.80
 
1,618,270

 
9,599

 
2.41
Investment securities - non-taxable
590,941

 
5,834

 
4.00
 
460,675

 
4,083

 
3.59
Mortgage loans held for sale
17,733

 
210

 
4.80
 
14,775

 
158

 
4.34
Loans
11,710,075

 
159,530

 
5.53
 
10,819,324

 
143,420

 
5.38
Total interest earning assets
14,593,905

 
180,717

 
5.02
 
13,251,549

 
158,269

 
4.84
Non-earning assets
1,708,292

 
 
 
 
 
1,836,661

 
 
 
 
Total assets
$
16,302,197

 
 
 
 
 
$
15,088,210

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 
 
 

 
 

 
 
Interest bearing liabilities:
 

 
 

 
 
 
 

 
 

 
 
Interest bearing transaction and savings deposits
$
6,749,032

 
$
18,430

 
1.11
 
$
6,579,295

 
$
10,755

 
0.66
Time deposits
2,781,592

 
12,320

 
1.80
 
2,003,668

 
4,842

 
0.98
Total interest bearing deposits
9,530,624

 
30,750

 
1.31
 
8,582,963

 
15,597

 
0.74
Federal funds purchased and securities sold under agreements to repurchase
109,302

 
136

 
0.50
 
120,443

 
110

 
0.37
Other borrowings
1,224,255

 
6,793

 
2.25
 
1,282,527

 
5,139

 
1.63
Subordinated debt and debentures
353,996

 
4,411

 
5.05
 
162,813

 
1,327

 
3.31
Total interest bearing liabilities
11,218,177

 
42,090

 
1.52
 
10,148,746

 
22,173

 
0.89
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
2,707,715

 
 
 
 
 
2,632,182

 
 
 
 
Other liabilities
127,407

 
 
 
 
 
204,230

 
 
 
 
Total liabilities
14,053,299

 
 
 
 
 
12,985,158

 
 
 
 
Stockholders’ equity
2,248,898

 
 
 
 
 
2,103,052

 
 
 
 
Total liabilities and stockholders’ equity
$
16,302,197

 
 
 
 
 
$
15,088,210

 
 
 
 
Net interest spread
 
 
 
 
3.50
 
 
 
 
 
3.95
Net interest margin
 
 
$
138,627

 
3.85
 
 
 
$
136,096

 
4.17


49





Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three month period ended March 31, 2019, as compared to the same period of the prior year. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
 
Table 4:  Volume/Rate Analysis 

 
Three Months Ended
March 31,
 
2019 vs. 2018
(In thousands, on a fully taxable equivalent basis)
Volume
 
Yield/
Rate
 
Total
Increase (decrease) in:
 

 
 

 
 

Interest income:
 

 
 

 
 

Interest bearing balances due from banks and federal funds sold
$
190

 
$
955

 
$
1,145

Investment securities - taxable
1,684

 
1,706

 
3,390

Investment securities - non-taxable
1,248

 
503

 
1,751

Mortgage loans held for sale
34

 
18

 
52

Loans
12,053

 
4,057

 
16,110

Total
15,209


7,239


22,448

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
Interest bearing transaction and savings accounts
284

 
7,391

 
7,675

Time deposits
2,378

 
5,100

 
7,478

Federal funds purchased and securities sold under agreements to repurchase
(11
)
 
37

 
26

Other borrowings
(242
)
 
1,896

 
1,654

Subordinated notes and debentures
2,126

 
958

 
3,084

Total
4,535


15,382


19,917

Increase (decrease) in net interest income
$
10,674


$
(8,143
)

$
2,531


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 March 31, 2019, was $9.3 million, compared to $9.2 million for the three month period ended March 31, 2018, an increase of $135,000. See Allowance for Loan Losses section for additional information.
 
The provision increase was necessary to maintain an appropriate allowance for loan losses for the company’s growing legacy portfolio. Significant loan growth in our markets, both from new loans and from loans acquired migrating to legacy, required an allowance to be established for those loans through a provision.
 
Additionally, the provision on loans acquired for the three months ended March 31, 2019 was $2,464,000 and was primarily the result of identifying certain loans specific to an acquired portfolio in our Dallas market which were poorly structured or were poorly managed post-funding. We have carefully reviewed these loans for potential losses and believe we have adequately identified any risk associated with the loans. The provision on loans acquired for the three month period ended March 31, 2018 was $68,000 and was the result of a decrease in expected cash flows from our required ongoing evaluation of credit marks on certain purchased credit impaired loans.


50





NON-INTEREST INCOME
 
Total non-interest income was $33.8 million for the three month period ended March 31, 2019, a decrease of approximately $3.8 million, or 10.1%, compared to $37.5 million for the same period in 2018.

During the first quarter 2019, we had decreases in total service charges and fees, mortgage and SBA lending income, and debit and credit card fees that were partially offset by additional trust income and gains on the sale of securities. Total service charges and fees decreased $1.7 million, or 13.3%, mortgage and SBA lending income decreased $1.1 million, or 25.3%, and debit and credit card fees decreased $2.7 million, or 30.7%. Service charges and fees decreased due to less NSF revenue and ATM interchange income. Mortgage and SBA lending income decreased due to less mortgage lending transactions as a result of the rising rate environment and remaining selective in our decisions regarding loan sales as premium rates continue to be lower, respectively. The interchange rate cap as established by the Durbin amendment became effective for us July 1, 2018, resulting in a $2.8 million reduction in debit card fees when compared to the first quarter of last year. The additional gains on the sale of securities was a result of selling approximately $197 million of securities during the first quarter, which resulted in a gain of $2.7 million, as part of a bond portfolio analysis of expected cash flow changes.
 
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.
 
Table 5 shows non-interest income for the three month periods ended March 31, 2019 and 2018, respectively, as well as changes in 2019 from 2018.
 
Table 5:  Non-Interest Income
 
 
 
 
 
 
Three Months Ended
March 31,
 
2019
Change from
(In thousands)
 
 
 
 
 
 
2019
 
2018
 
2018
Trust income
 
 
 
 
 
 
 
 
$
5,708

 
$
5,249

 
$
459

 
8.7
 %
Service charges on deposit accounts
 
 
 
 
 
 
 
 
10,068

 
10,345

 
(277
)
 
(2.7
)
Other service charges and fees
 
 
 
 
 
 
 
 
1,289

 
2,750

 
(1,461
)
 
(53.1
)
Mortgage lending income
 
 
 
 
 
 
 
 
2,823

 
3,472

 
(649
)
 
(18.7
)
SBA lending income
 
 
 
 
 
 
 
 
497

 
973

 
(476
)
 
(48.9
)
Investment banking income
 
 
 
 
 
 
 
 
618

 
834

 
(216
)
 
(25.9
)
Debit and credit card fees
 
 
 
 
 
 
 
 
6,098

 
8,796

 
(2,698
)
 
(30.7
)
Bank owned life insurance income
 
 
 
 
 
 
 
 
795

 
1,103

 
(308
)
 
(27.9
)
Gain on sale of securities, net
 
 
 
 
 
 
 
 
2,740

 
6

 
2,734

 
*
Gain on sale of premises held for sale, net
 
 
 
 
 
 
 
 

 
4

 
(4
)
 
(100.0
)
Other income
 
 
 
 
 
 
 
 
3,125

 
4,003

 
(878
)
 
(21.9
)
Total non-interest income
 
 
 
 
 
 
 
 
$
33,761


$
37,535


$
(3,774
)
 
(10.1
)%
_____________________________
*    Not meaningful
 
Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended March 31, 2019, was $23.2 million, a decrease of $4.0 million from the three month period ended March 31, 2018. The majority of the decrease is in total service charges and debit and credit card fees, previously discussed.


51





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 March 31, 2019 was $101.4 million, an increase of $3.3 million, or 3.4%, from the same period in 2018. Normalizing for the non-core costs, such as the early retirement program costs, merger related costs and branch right sizing expenses, non-interest expense for the three months ended March 31, 2019 increased $3.2 million, or 3.4%, from the same period in 2018.

As previously mentioned, our NGB technology initiative is well underway and the incremental software and technology expenditures of $1.8 million during the first quarter 2019 were primarily related to this initiative. Marketing costs increased over prior year due to incorporating a comprehensive community banking marketing philosophy over our expanded footprint.
 
Table 6 below shows non-interest expense for the three month periods ended March 31, 2019 and 2018, respectively, as well as changes in 2019 from 2018.
 
Table 6:  Non-Interest Expense
 
 
 
 
 
 
Three Months Ended
March 31,
 
2019
Change from
(In thousands)
 
 
 
 
 
 
2019
 
2018
 
2018
Salaries and employee benefits
 
 
 
 
 
 
 
 
$
56,012

 
$
56,357

 
$
(345
)
 
(0.6
)%
Early retirement program
 
 
 
 
 
 
 
 
355

 

 
355

 
*
Occupancy expense, net
 
 
 
 
 
 
 
 
7,475

 
6,960

 
515

 
7.4

Furniture and equipment expense
 
 
 
 
 
 
 
 
3,358

 
4,403

 
(1,045
)
 
(23.7
)
Other real estate and foreclosure expense
 
 
 
 
 
 
 
 
637

 
1,020

 
(383
)
 
(37.6
)
Deposit insurance
 
 
 
 
 
 
 
 
2,040

 
2,128

 
(88
)
 
(4.1
)
Merger related costs
 
 
 
 
 
 
 
 
1,470

 
1,711

 
(241
)
 
(14.1
)
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional services
 
 
 
 
 
 
 
 
4,323

 
4,330

 
(7
)
 
(0.2
)
Postage
 
 
 
 
 
 
 
 
1,726

 
1,399

 
327

 
23.3

Telephone
 
 
 
 
 
 
 
 
1,619

 
1,486

 
133

 
8.9

Credit card expenses
 
 
 
 
 
 
 
 
3,860

 
3,228

 
632

 
19.6

Marketing
 
 
 
 
 
 
 
 
3,057

 
1,660

 
1,397

 
84.2

Software and technology
 
 
 
 
 
 
 
 
4,496

 
2,648

 
1,848

 
69.8

Operating supplies
 
 
 
 
 
 
 
 
618

 
749

 
(131
)
 
(17.5
)
Amortization of intangibles
 
 
 
 
 
 
 
 
2,641

 
2,837

 
(196
)
 
(6.9
)
Branch right sizing expense
 
 
 
 
 
 
 
 
45

 
61

 
(16
)
 
(26.2
)
Other expense
 
 
 
 
 
 
 
 
7,677

 
7,096

 
581

 
8.2

Total non-interest expense
 
 
 
 
 
 
 
 
$
101,409


$
98,073


$
3,336

 
3.4
 %
_____________________________
*    Not meaningful
 

52





LOAN PORTFOLIO
 
Our legacy loan portfolio, excluding loans acquired, averaged $8.536 billion and $5.934 billion during the first three months of 2019 and 2018, respectively. As of March 31, 2019, total loans, excluding loans acquired, were $8.68 billion, an increase of $254.2 million 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 March 31, 2019 included $81.2 million in balances that migrated from loans acquired during the period. These migrated loan balances are included in the legacy loan balances as of March 31, 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)
March 31, 2019
 
December 31, 2018
Consumer:
 

 
 

Credit cards
$
181,549

 
$
204,173

Other consumer
213,659

 
201,297

Total consumer
395,208


405,470

Real estate:
 
 
 
Construction
1,376,162

 
1,300,723

Single family residential
1,431,407

 
1,440,443

Other commercial
3,355,109

 
3,225,287

Total real estate
6,162,678


5,966,453

Commercial:
 
 
 
Commercial
1,801,422

 
1,774,909

Agricultural
147,216

 
164,514

Total commercial
1,948,638


1,939,423

Other
178,026

 
119,042

Total loans, excluding loans acquired, before allowance for loan losses
$
8,684,550


$
8,430,388


Consumer loans consist of credit card loans and other consumer loans.  Consumer loans were $395.2 million at March 31, 2019, or 4.6% 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 March 31, 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 $6.163 billion at March 31, 2019, or 71.0% of total loans, compared to $5.966 billion, or 70.8%, of total loans at December 31, 2018, an increase of $196.2 million, or 3.3%. Our construction and development (“C&D”) loans increased by $75.4 million, or 5.8%, single family residential loans decreased by $9.0 million, or 0.6%, and commercial real estate (“CRE”) loans increased by

53





$129.8 million, or 4.0%. The construction portfolio is continuing to fund loans that were closed in prior quarters, however, the overall commitments have trended down in the first quarter of 2019.

Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were $1.949 billion at March 31, 2019, or 22.4% of total loans, compared to $1.939 billion, or 23.0% of total loans at December 31, 2018, an increase of $9.2 million, or 0.5%. Non-agricultural commercial loans increased to $1.801 billion, a $26.5 million increase, or 1.5%, from December 31, 2018. Agricultural loans decreased to $147.2 million, a $17.3 million decrease, or (10.5)%, 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.

Table 8 reflects the carrying value of all loans acquired as of March 31, 2019 and December 31, 2018.
 
Table 8:  Loans Acquired 
 
(In thousands)
March 31, 2019
 
December 31, 2018
Consumer:
 

 
 

Other consumer
$
11,979

 
$
15,658

Real estate:
 
 
 
Construction
404,512

 
429,605

Single family residential
533,917

 
566,188

Other commercial
1,730,472

 
1,848,679

Total real estate
2,668,901


2,844,472

Commercial:
 
 
 
Commercial
374,033

 
430,914

Agricultural
1,274

 
1,739

Total commercial
375,307


432,653

Total loans acquired (1)
$
3,056,187

 
$
3,292,783

_______________________________________
(1)    Loans acquired are reported net of a $1.3 million and $95,000 allowance at March 31, 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 three months of 2019. During the three months ended March 31, 2019, we recorded approximately $2.5 million in a provision for these loans and charge-offs of $1,247,000, resulting in an allowance for loan losses on loans acquired at March 31, 2019 of $1.3 million. 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 have carefully reviewed these loans for potential losses and believe we have adequately identified any risk associated with the loans. 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.

54





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 $20.1 million from December 31, 2018 to March 31, 2019. Nonaccrual loans increased by $26.7 million during the period, primarily commercial loans, partially offset by a decrease in foreclosed assets held for sale of $6.6 million. The nonaccrual loan increase was primarily due to one loan in the Southwest Market. Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.54% at March 31, 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 $8.8 million at March 31, 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 three 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 March 31, 2019. Non-performing loans equaled 0.70% of total loans. Non-performing assets were 0.50% of total assets, a 13 basis point increase from December 31, 2018. The allowance for loan losses was 97% of non-performing loans. Our annualized net charge-offs to total loans for the first three months of 2019 was 0.20%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.16%. Annualized net credit card charge-offs to total credit card loans were 1.92%, compared to 1.64% during the full year 2018, and 165 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.


55





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)
March 31, 2019
 
December 31, 2018
Nonaccrual loans (1)
$
60,925

 
$
34,201

Loans past due 90 days or more (principal or interest payments)
281

 
224

Total non-performing loans
61,206


34,425

Other non-performing assets:
 
 
 
Foreclosed assets held for sale
18,952

 
25,565

Other non-performing assets
505

 
553

Total other non-performing assets
19,457


26,118

Total non-performing assets
$
80,663


$
60,543

 
 
 
 
Performing TDRs
$
6,297

 
$
6,369

Allowance for loan losses to non-performing loans
97
%
 
164
%
Non-performing loans to total loans
0.70
%
 
0.41
%
Non-performing assets (including performing TDRs) to total assets (2)
0.54
%
 
0.40
%
Non-performing assets to total assets (2)
0.50
%
 
0.37
%
_______________________________________
(1)
Includes nonaccrual TDRs of approximately $2.5 million at March 31, 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 month periods ended March 31, 2019 and 2018.
 
At March 31, 2019, impaired loans, net of government guarantees and loans acquired, were $57.6 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.



56





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.


57





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
1,142

 
999

Other consumer
1,533

 
1,056

Real estate
374

 
455

Commercial
1,968

 
1,761

Total loans charged off
5,017


4,271

Recoveries of loans previously charged off:
 
 
 
Credit card
240

 
263

Other consumer
300

 
94

Real estate
142

 
302

Commercial
158

 
69

Total recoveries
840


728

Net loans charged off
4,177

 
3,543

Provision for loan losses (1)
6,821

 
9,082

Balance, March 31 (3)
$
59,243


$
47,207

 
 
 
 
Loans charged off:
 
 
 
Credit card
 
 
3,052

Other consumer
 
 
5,581

Real estate
 
 
5,450

Commercial
 
 
4,862

Total loans charged off
 
 
18,945

Recoveries of loans previously charged off:
 
 
 
Credit card
 
 
742

Other consumer
 
 
463

Real estate
 
 
689

Commercial
 
 
676

Total recoveries
 
 
2,570

Net loans charged off
 
 
16,375

Provision for loan losses (2)
 
 
25,767

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 $9,285,000) and $68,000 was excluded from this table for 2018 (total year-to-date 2018 provision for loan losses was $9,150,000). Charge offs of $1,247,000 on loans acquired were excluded from this table for 2019 and $79,000 for 2018.
(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 March 31, 2019 includes $1,312,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at December 31, 2018 and March 31, 2018 includes $95,000 and $407,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at March 31, 2019 was $60,555,000 and total allowance for loan losses at December 31, 2018 and March 31, 2018 was $56,694,000 and $47,614,000, respectively.


58





Provision for Loan Losses
 
The amount of provision added to the allowance during the three months ended March 31, 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 March 31, 2019, the allowance for loan losses reflects an increase of approximately $2.6 million from December 31, 2018, while total loans, excluding loans acquired, increased by $254.2 million over the same three 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
 
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Allowance
Amount
 
% of
loans (1)
 
Allowance
Amount
 
% of
loans (1)
Credit cards
$
3,919

 
2.1
%
 
$
3,923

 
2.4
%
Other consumer
2,344

 
2.5
%
 
2,380

 
2.4
%
Real estate
32,354

 
71.0
%
 
29,743

 
70.8
%
Commercial
20,578

 
22.4
%
 
20,514

 
23.0
%
Other
48

 
2.0
%
 
39

 
1.4
%
Total (2)
$
59,243


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 March 31, 2019 and December 31, 2018 includes $1,312,000 and $95,000, respectively, allowance for loans acquired (not shown in the table above). The total allowance for loan losses at March 31, 2019 and December 31, 2018 was $60,555,000 and $56,694,000, respectively.

DEPOSITS
 
Deposits are our primary source of funding for earning assets and are primarily developed through our network of 191 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 March 31, 2019, core deposits comprised 78.6% 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 do expect costs of funding with deposits to increase with the continued rise in interest rates and increased competition for deposits across all our markets.
 

59





Our total deposits as of March 31, 2019, were $12.0 billion, a decrease of $409.2 million from December 31, 2018. We are managing our balance sheet and our net interest margin by continuing to eliminate several high-cost deposits related to public funds and brokered deposits. We are very pleased with our growth in core deposits during the quarter of $148.0 million as we continue to emphasize relationship banking. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $9.3 billion at March 31, 2019, compared to $9.5 billion at December 31, 2018, a $161.7 million decrease. Total time deposits decreased $247.5 million to $2.6 billion at March 31, 2019, from $2.9 billion at December 31, 2018. We had $1.1 billion and $1.4 billion of brokered deposits at March 31, 2019, and December 31, 2018, respectively.

OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES
 
Our total debt was $1.5 billion and $1.7 billion at March 31, 2019 and December 31, 2018, respectively. The decrease from year end was due to the Company using a portion of excess cash to repay FHLB advances. The outstanding balance for March 31, 2019 includes $1.2 billion in FHLB short-term advances, $15.0 million in FHLB long-term advances, $330.0 million in subordinated notes and $24.0 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 first quarter have ten to fifteen year maturity dates with lockout periods that vary but do not exceed one year. These FOTO advances are considered and monitored by the Company as short-term advances due to the likelihood of FHLB exercising the options within a year of the settlement dates based upon the rising rate environment and the short lockout periods.
 
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 Simmons First National Corporation 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. In October 2019, all amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company are due and payable. The balance due under the Credit Agreement at March 31, 2019 was zero.

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 March 31, 2019, total capital was $2.302 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At March 31, 2019, our common equity to assets ratio was 14.31% 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 Corporation’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 (“Record Date”). The new shares were distributed by the Company’s transfer agent, Computershare,

60





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.
 
Stock Repurchase
 
On July 23, 2012, we announced the adoption by our Board of Directors of a stock repurchase program which authorized the repurchase of up to 1,700,000 (split adjusted) of Class A common stock, or approximately 2% of the shares outstanding. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that we intend to repurchase. We may discontinue purchases at any time that management determines additional purchases are not warranted. We intend to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes. We had no stock repurchases during the first three months of 2019 or 2018.

Cash Dividends
 
We declared cash dividends on our common stock of $0.16 per share for the first three months of 2019 compared to $0.15 per share for the first three months of 2018, an increase of $0.01, or 7%. 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.
 
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 March 31, 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

61





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 March 31, 2019 and December 31, 2018 are presented in Table 12 below:
 
Table 12:  Risk-Based Capital

(Dollars in thousands)
March 31, 2019
 
December 31, 2018
Tier 1 capital:
 

 
 

Stockholders’ equity
$
2,302,321

 
$
2,246,434

Goodwill and other intangible assets
(910,122
)
 
(912,428
)
Unrealized loss on available-for-sale securities, net of income taxes
6,000

 
27,374

Total Tier 1 capital
1,398,199


1,361,380

Tier 2 capital:
 
 
 
Trust preferred securities and subordinated debt
354,041

 
353,950

Qualifying allowance for loan losses
67,771

 
63,608

Total Tier 2 capital
421,812


417,558

Total risk-based capital
$
1,820,011


$
1,778,938

 
 
 
 
Risk weighted assets
$
13,364,636

 
$
13,326,832

 
 
 
 
Assets for leverage ratio
$
15,423,961

 
$
15,512,042

 
 
 
 
Ratios at end of period:
 
 
 
Common equity Tier 1 ratio (CET1)
10.46
%
 
10.22
%
Tier 1 leverage ratio
9.07
%
 
8.78
%
Tier 1 risk-based capital ratio
10.46
%
 
10.22
%
Total risk-based capital ratio
13.62
%
 
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.
 

62





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 $354.0 million is included as Tier 2 and total capital as of March 31, 2019.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
See the section titled Recently Issued Accounting Standards 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “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, allowance for loan losses, the effect of certain new accounting standards on the Company’s financial statements, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy, 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, the effects of future economic conditions, governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; the failure of assumptions underlying the establishment of reserves for possible loan losses, fair value for loans and other real estate owned; and those factors set forth under Item 1A. Risk-Factors of this report and other cautionary statements set forth elsewhere in this report.  Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance.
 
We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof. However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. 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.


63





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 (GAAP).
 
We believe the exclusion of these non-core items in expressing earnings and certain other financial measures, including “core earnings,” provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. 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 $934.4 million and $937.0 million total goodwill and other intangible assets for the periods ended March 31, 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).
 

64





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
March 31,
(Dollars in thousands)
 
 
 
 
2019
 
2018
Net income
 
 
 
 
$
47,695

 
$
51,312

Non-core items:
 
 
 
 
 
 
 
Merger related costs
 
 
 
 
1,470

 
1,711

Early retirement program
 
 
 
 
355

 

Branch right sizing
 
 
 
 
45

 
57

Tax effect (1)
 
 
 
 
(489
)
 
(462
)
Net non-core items
 
 
 
 
1,381

 
1,306

Core earnings (non-GAAP)
 
 
 
 
$
49,076


$
52,618

 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
$
0.51

 
$
0.55

Non-core items:
 
 
 
 
 
 
 
Merger related costs
 
 
 
 
0.02

 
0.02

Early retirement program
 
 
 
 
0.01
 

Branch right sizing
 
 
 
 

 

Tax effect (1)
 
 
 
 
(0.01
)
 

Net non-core items
 
 
 
 
0.02

 
0.02

Diluted core earnings per share (non-GAAP)
 
 
 
 
$
0.53


$
0.57

_______________________________________
(1)
Effective tax rate of 26.135%.

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)
March 31, 2019
 
December 31, 2018
Total common stockholders’ equity
$
2,302,321

 
$
2,246,434

Intangible assets:
 
 
 
Goodwill
(845,687
)
 
(845,687
)
Other intangible assets
(88,694
)
 
(91,334
)
Total intangibles
(934,381
)

(937,021
)
Tangible common stockholders’ equity
$
1,367,940


$
1,309,413

Shares of common stock outstanding
92,568,361

 
92,347,643

 
 
 
 
Book value per common share
$
24.87

 
$
24.33

 
 
 
 
Tangible book value per common share (non-GAAP)
$
14.78

 
$
14.18



65





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)
March 31, 2019
 
December 31, 2018
Total common stockholders’ equity
$
2,302,321

 
$
2,246,434

Intangible assets:
 
 
 
Goodwill
(845,687
)
 
(845,687
)
Other intangible assets
(88,694
)
 
(91,334
)
Total intangibles
(934,381
)

(937,021
)
Tangible common stockholders’ equity
$
1,367,940


$
1,309,413

 
 
 
 
Total assets
$
16,091,639

 
$
16,543,337

Intangible assets:
 
 
 
Goodwill
(845,687
)
 
(845,687
)
Other intangible assets
(88,694
)
 
(91,334
)
Total intangibles
(934,381
)

(937,021
)
Tangible assets
$
15,157,258


$
15,606,316

 
 
 
 
Ratio of common equity to assets
14.31
%
 
13.58
%
Ratio of tangible common equity to tangible assets (non-GAAP)
9.02
%
 
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
March 31,
(Dollars in thousands)
 
 
 
 
2019
 
2018
Net interest income
 
 
 
 
$
137,026

 
$
134,966

FTE adjustment
 
 
 
 
1,601

 
1,130

Fully tax equivalent net interest income
 
 
 
 
138,627


136,096

Total accretable yield
 
 
 
 
(6,660
)
 
(11,294
)
Core net interest income
 
 
 
 
$
131,967


$
124,802

 
 
 
 
 
 
 
 
Average earning assets – quarter-to-date
 
 
 
 
$
14,593,905

 
$
13,251,549

 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.85
%
 
4.17
%
Core net interest margin (non-GAAP)
 
 
 
 
3.67
%
 
3.82
%


66





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 March 31, 2019, undivided profits of Simmons Bank were approximately $428.6 million, of which approximately $57.7 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 sources of liquidity available to the Company are a $50.0 million revolving line of credit with U.S. Bank National Association for purposes of financing distributions, financing certain acquisitions and working capital purposes and 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 $2.2 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, 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 97.3% 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.
 

67





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 March 31, 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 2.13% and 4.02%, 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 (2.03)% and (4.81)%, 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 March 31, 2019:  
 
Table 14: Net Interest Income Sensitivity
 
Interest Rate Scenario
% Change from Base
Up 200 basis points
4.02%
Up 100 basis points
2.13%
Down 100 basis points
(2.03)%
Down 200 basis points
(4.81)%


68





Item 4.
Controls and Procedures
 
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures were effective for the period.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2019, which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II:
Other Information

Item 1A.
Risk Factors

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of our Form 10-K for the year ended December 31, 2018. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Form 10-K, which could materially and adversely affect the Company’s business, ongoing financial condition and results of operations. The risks described are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also adversely affect our business, ongoing financial condition or results of operations.
 
Item 6.
Exhibits

Exhibit No.
Description
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)).

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)).

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)).

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)).

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)).

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)).

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)).

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)).


69





Agreement and Plan of Merger, dated as of November 13, 2018, by and between Simmons First National Corporation and Reliance Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to Simmons First National Corporation’s Current Report on Form 8-K for November 13, 2018 (File No. 000-06253)).

Amended and Restated Articles of Incorporation of Simmons First National Corporation, as amended on February 12, 2019 (incorporated by reference to Exhibit 3.1 to Simmons First National Corporation’s Current Report on Form 8-K/A on April 11, 2019 (File No. 000-06253)).

Amended By-Laws of Simmons First National Corporation (incorporated by reference to Exhibit 3.2 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2017 (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.

Amended and Restated Simmons First National Corporation Code of Ethics (incorporated by reference to Exhibit 14.1 to Simmons First National Corporation’s Current Report on Form 8-K on July 19, 2018 (File No. 000-06253)).

Awareness Letter of BKD, LLP.*

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

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

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

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.*

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 and Treasurer.*

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.**

101.SCH
XBRL Taxonomy Extension Schema.**

101.CAL
XBRL Taxonomy Extension Calculation Linkbase.**

101.DEF
XBRL Taxonomy Extension Definition Linkbase.**

101.LAB
XBRL Taxonomy Extension Labels Linkbase.**

101.PRE
XBRL Taxonomy Extension Presentation Linkbase.**

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


70





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:
May 8, 2019
/s/ George A. Makris, Jr.
 
 
George A. Makris, Jr.
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
 
 
 
Date:
May 8, 2019
/s/ Robert A. Fehlman
 
 
Robert A. Fehlman
 
 
Senior Executive Vice President,
 
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
 
 
 
Date:
May 8, 2019
/s/ David W. Garner
 
 
David W. Garner
 
 
Executive Vice President, Controller
 
 
and Chief Accounting Officer


71