CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS
Organizational Structure
Simmons First National Corporation (the “Company”) is a financial holding company and the parent company of Simmons Bank, an Arkansas state-chartered bank that began as a community bank in 1903. Simmons Bank is the parent company of Simmons First Insurance Services, Inc. (an insurance agency) and Simmons First Insurance Services of TN, LLC (an insurance agency).
Description of Business
The Company is headquartered in Pine Bluff, Arkansas and, through its subsidiaries, conducts banking operations in communities throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company, through its subsidiaries, offers consumer, real estate and commercial loans, as well as checking, savings and time deposits from
212
financial centers conveniently located throughout its market areas. Additionally, the Company offers, among other things, 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 Accounting Standards Update (“ASU”) No. 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
(“ASU 2018-15”), that amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance states that only qualifying costs incurred during the application development stage can be capitalized. The effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with the applicable guidance. At the time of adoption, entities will be required to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. The
Company early adopted ASU 2018-15 in the first quarter 2019 and elected to apply the guidance prospectively to all software implementation costs incurred after the date of adoption. As of
June 30, 2019
,
$646,000
of applicable software implementation costs have been incurred but not yet capitalized.
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.
Goodwill Impairment
– In January 2017, the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), that eliminates Step 2 from the goodwill impairment test which required entities to compare the implied fair value of goodwill to its carrying amount. Under the amendments, the goodwill impairment will be measured as the excess of the reporting unit’s carrying amount over its fair value. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The effective date is for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual impairment tests beginning in 2017. The Company early adopted ASU 2017-04 during the second quarter 2019 to coincide with the Company’s formal impairment analysis. See Note 7 for additional information.
Leases
- In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance results in a more consistent representation of the rights and obligations arising from leases by requiring lessees to recognize the lease asset and lease liabilities that arise from leases in the 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 measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its fair value disclosures.
Credit Losses on Financial Instruments
– In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current US GAAP with a methodology 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 has developed internal econometric models to assist with loss driver analysis, completed testing on various pool segments to determine the model methodologies that align with the historical data captures, and continues to develop quantifiable documentation around qualitative adjustments. The Company continues to work with the model vendor to create alternative calculation models for validation purposes and to develop parallel calculations through the third and fourth quarters of 2019, with focus on calculating a potential range of 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: ACQUISITION
Reliance Bancshares, Inc.
On April 12, 2019, the Company completed its merger with Reliance Bancshares, Inc. (“Reliance”), headquartered in the St. Louis, Missouri, metropolitan area, pursuant to the terms of the Agreement and Plan of Merger (“Reliance Agreement”), dated November 13, 2018, as amended February 11, 2019. In the merger, each outstanding share of Reliance common stock, as well as each Reliance common stock equivalent was canceled and converted into the right to receive shares of the Company’s common stock and/or cash in accordance with the terms of the Reliance Agreement. In addition, each share of Reliance’s Series A Preferred Stock and Series B Preferred Stock was converted into the right to receive
one
share of Simmons’ comparable Series A Preferred Stock or Series B Preferred Stock, respectively, and each share of Reliance’s Series C Preferred Stock was converted into the right to receive
one
share of Simmons’ comparable Series C Preferred Stock (unless the holder of such Series C Preferred Stock elected to receive
alternate consideration in accordance with the Reliance Agreement). The Company issued
3,999,623
shares of its common stock and paid
$62.7 million
in cash to effect the merger. The Company also issued
$42.0 million
of preferred stock in exchange for all outstanding shares of Reliance preferred stock. On May 13, 2019, the Company redeemed all of the preferred stock issued in connection with the merger, and paid all accrued and unpaid dividends up to the date of redemption.
Prior to the merger, Reliance conducted banking business from
22
branches located in Missouri and Illinois. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately
$1.5 billion
in assets, including approximately
$1.1 billion
in loans (inclusive of loan discounts), and approximately
$1.2 billion
in deposits. Contemporaneously with the completion of the Reliance merger, Reliance Bank was merged into Simmons Bank, with Simmons Bank as the surviving institution.
Goodwill of
$80.8 million
was recorded as a result of the transaction. The merger strengthened the Company’s market share and brought forth additional opportunities in the Company’s St. Louis metropolitan area footprint, which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.
A summary, at fair value, of the assets acquired and liabilities assumed in the Reliance transaction, as of the acquisition date, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Acquired from Reliance
|
|
Fair Value Adjustments
|
|
Fair Value
|
|
Assets Acquired
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
25,693
|
|
|
$
|
—
|
|
|
$
|
25,693
|
|
|
Due from banks - time
|
502
|
|
|
—
|
|
|
502
|
|
|
Investment securities
|
287,983
|
|
|
(1,763
|
)
|
|
286,220
|
|
|
Loans acquired
|
1,138,527
|
|
|
(41,657
|
)
|
|
1,096,870
|
|
|
Allowance for loan losses
|
(10,808
|
)
|
|
10,808
|
|
|
—
|
|
|
Foreclosed assets
|
11,092
|
|
|
(3,992
|
)
|
|
7,100
|
|
|
Premises and equipment
|
32,452
|
|
|
(3,001
|
)
|
|
29,451
|
|
|
Bank owned life insurance
|
39,348
|
|
|
—
|
|
|
39,348
|
|
|
Core deposit intangible
|
—
|
|
|
18,350
|
|
|
18,350
|
|
|
Other assets
|
24,175
|
|
|
5,001
|
|
|
29,176
|
|
|
Total assets acquired
|
$
|
1,548,964
|
|
|
$
|
(16,254
|
)
|
|
$
|
1,532,710
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Non-interest bearing transaction accounts
|
$
|
108,845
|
|
|
$
|
(33
|
)
|
|
$
|
108,812
|
|
|
Interest bearing transaction accounts and savings deposits
|
639,798
|
|
|
—
|
|
|
639,798
|
|
|
Time deposits
|
478,415
|
|
|
(1,758
|
)
|
|
476,657
|
|
|
Total deposits
|
1,227,058
|
|
|
(1,791
|
)
|
|
1,225,267
|
|
|
Securities sold under agreement to repurchase
|
14,146
|
|
|
—
|
|
|
14,146
|
|
|
Other borrowings
|
162,900
|
|
|
(5,500
|
)
|
|
157,400
|
|
|
Accrued interest and other liabilities
|
8,185
|
|
|
936
|
|
|
9,121
|
|
|
Total liabilities assumed
|
1,412,289
|
|
|
(6,355
|
)
|
|
1,405,934
|
|
|
Equity
|
136,675
|
|
|
(94,675
|
)
|
|
42,000
|
|
|
Total equity assumed
|
136,675
|
|
|
(94,675
|
)
|
|
42,000
|
|
|
Total liabilities and equity assumed
|
$
|
1,548,964
|
|
|
$
|
(101,030
|
)
|
|
$
|
1,447,934
|
|
|
Net assets acquired
|
|
|
|
|
84,776
|
|
|
Purchase price
|
|
|
|
|
165,539
|
|
|
Goodwill
|
|
|
|
|
$
|
80,763
|
|
The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the merger. Management will continue to review the estimated fair values and evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction over the next few months, within one year of the merger. Therefore, adjustments to the estimated amounts and carrying values may occur.
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisitions above.
Cash and due from banks and time deposits due from banks
– The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Investment securities
– Investment securities were acquired with an adjustment to fair value based upon quoted market prices if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.
Loans acquired
– Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.
Foreclosed assets
– These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.
Premises and equipment
– Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.
Bank owned life insurance
– Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value.
Goodwill
– The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill. Goodwill established prior to the acquisitions, if applicable, was written off.
Core deposit intangible
– This intangible asset represents the value of the relationships that the acquired banks had with their deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.
Other assets
– The fair value adjustment results from certain assets whose value was estimated to be less than book value, such as certain prepaid assets, receivables and other miscellaneous assets. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.
Deposits
– The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material.
Securities sold under agreement to repurchase
– The carrying amount of securities sold under agreement to repurchase is a reasonable estimate of fair value based on the short-term nature of these liabilities.
FHLB and other borrowings
– The fair value of Federal Home Loan Bank and other borrowings is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.
Accrued interest and other liabilities
– The adjustment establishes a liability for unfunded commitments equal to the fair value of that liability at the date of acquisition.
The Landrum Company (Pending Acquisition)
On July 30, 2019, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with The Landrum Company (“Landrum”), headquartered in Columbia, Missouri pursuant to which, upon the terms and subject to the conditions of the Agreement, Landrum will merge with and into the Company, with the Company continuing as the surviving corporation. According to the terms of the Agreement, upon the consummation of the merger, (i) holders of Landrum’s common stock will receive, in the aggregate,
17,350,000
shares of the Company’s common stock and (ii) each share of Landrum’s series E preferred stock will be converted into the right to receive one share of the Company’s comparable series D preferred stock.
Landrum conducts banking business from
39
branches located in Missouri, Oklahoma and Texas. As of June 30, 2019, Landrum had approximately
$3.3 billion
in assets,
$2.1 billion
in loans and
$3.0 billion
in deposits. Completion of the transaction is expected during the fourth quarter of 2019 and is subject to certain closing conditions, including approval by the shareholders of Landrum, as well as customary regulatory approvals. Upon closing, Landrum will merge into the Company.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(In thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross Unrealized
(Losses)
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross Unrealized
(Losses)
|
|
Estimated
Fair
Value
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
999
|
|
|
$
|
16,990
|
|
|
$
|
—
|
|
|
$
|
(49
|
)
|
|
$
|
16,941
|
|
|
Mortgage-backed securities
|
12,225
|
|
|
103
|
|
|
(59
|
)
|
|
12,269
|
|
|
13,346
|
|
|
5
|
|
|
(412
|
)
|
|
12,939
|
|
|
State and political subdivisions
|
32,236
|
|
|
1,090
|
|
|
(12
|
)
|
|
33,314
|
|
|
256,863
|
|
|
3,029
|
|
|
(954
|
)
|
|
258,938
|
|
|
Other securities
|
1,995
|
|
|
63
|
|
|
—
|
|
|
2,058
|
|
|
1,995
|
|
|
17
|
|
|
—
|
|
|
2,012
|
|
|
Total HTM
|
$
|
47,455
|
|
|
$
|
1,256
|
|
|
$
|
(71
|
)
|
|
$
|
48,640
|
|
|
$
|
289,194
|
|
|
$
|
3,051
|
|
|
$
|
(1,415
|
)
|
|
$
|
290,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
197,382
|
|
|
$
|
1,654
|
|
|
$
|
(1,380
|
)
|
|
$
|
197,656
|
|
|
$
|
157,523
|
|
|
$
|
518
|
|
|
$
|
(3,740
|
)
|
|
$
|
154,301
|
|
|
Mortgage-backed securities
|
1,346,839
|
|
|
5,971
|
|
|
(7,050
|
)
|
|
1,345,760
|
|
|
1,552,487
|
|
|
3,097
|
|
|
(32,684
|
)
|
|
1,522,900
|
|
|
State and political subdivisions
|
617,987
|
|
|
18,841
|
|
|
(270
|
)
|
|
636,558
|
|
|
320,142
|
|
|
171
|
|
|
(5,470
|
)
|
|
314,843
|
|
|
Other securities
|
161,961
|
|
|
545
|
|
|
(93
|
)
|
|
162,413
|
|
|
157,471
|
|
|
2,251
|
|
|
(14
|
)
|
|
159,708
|
|
|
Total AFS
|
$
|
2,324,169
|
|
|
$
|
27,011
|
|
|
$
|
(8,793
|
)
|
|
$
|
2,342,387
|
|
|
$
|
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
June 30, 2019
and
December 31, 2018
, was
$1.0 billion
and
$1.7 billion
, which is approximately
39.8%
and
70.3%
, respectively, of the Company’s combined AFS and HTM investment portfolios.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
(In thousands)
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
5,845
|
|
|
(59
|
)
|
|
5,845
|
|
|
(59
|
)
|
|
State and political subdivisions
|
—
|
|
|
—
|
|
|
2,294
|
|
|
(12
|
)
|
|
2,294
|
|
|
(12
|
)
|
|
Total HTM
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,139
|
|
|
$
|
(71
|
)
|
|
$
|
8,139
|
|
|
$
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114,443
|
|
|
$
|
(1,380
|
)
|
|
$
|
114,443
|
|
|
$
|
(1,380
|
)
|
|
Mortgage-backed securities
|
20,839
|
|
|
(102
|
)
|
|
749,380
|
|
|
(6,948
|
)
|
|
770,219
|
|
|
(7,050
|
)
|
|
State and political subdivisions
|
23,205
|
|
|
(15
|
)
|
|
29,156
|
|
|
(255
|
)
|
|
52,361
|
|
|
(270
|
)
|
|
Other securities
|
4,994
|
|
|
(93
|
)
|
|
100
|
|
|
—
|
|
|
5,094
|
|
|
(93
|
)
|
|
Total AFS
|
$
|
49,038
|
|
|
$
|
(210
|
)
|
|
$
|
893,079
|
|
|
$
|
(8,583
|
)
|
|
$
|
942,117
|
|
|
$
|
(8,793
|
)
|
The declines reflected in the preceding table primarily resulted from the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. Management does not have the intent to sell these securities and management believes it is more likely than not the Company will not have to sell these securities before recovery of their amortized cost basis less any current period credit losses.
Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as HTM until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of
June 30, 2019
, management also had the ability and intent to hold the securities classified as AFS for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of
June 30, 2019
, management believes the impairments detailed in the table above are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
Income earned on securities for the
three and six
months ended
June 30, 2019
and
2018
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Taxable:
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
$
|
289
|
|
|
$
|
546
|
|
|
$
|
727
|
|
|
$
|
1,113
|
|
|
Available-for-sale
|
11,705
|
|
|
10,218
|
|
|
24,256
|
|
|
19,250
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable:
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
89
|
|
|
1,897
|
|
|
1,251
|
|
|
3,833
|
|
|
Available-for-sale
|
4,511
|
|
|
1,635
|
|
|
7,672
|
|
|
2,722
|
|
|
Total
|
$
|
16,594
|
|
|
$
|
14,296
|
|
|
$
|
33,906
|
|
|
$
|
26,918
|
|
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
|
$
|
6,118
|
|
|
$
|
6,122
|
|
|
$
|
11,673
|
|
|
$
|
11,681
|
|
|
After one through five years
|
19,353
|
|
|
19,716
|
|
|
74,767
|
|
|
75,019
|
|
|
After five through ten years
|
5,563
|
|
|
5,785
|
|
|
151,019
|
|
|
153,373
|
|
|
After ten years
|
4,196
|
|
|
4,748
|
|
|
589,198
|
|
|
605,410
|
|
|
Securities not due on a single maturity date
|
12,225
|
|
|
12,269
|
|
|
1,346,839
|
|
|
1,345,760
|
|
|
Other securities (no maturity)
|
—
|
|
|
—
|
|
|
150,673
|
|
|
151,144
|
|
|
Total
|
$
|
47,455
|
|
|
$
|
48,640
|
|
|
$
|
2,324,169
|
|
|
$
|
2,342,387
|
|
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to
$1.18 billion
at
June 30, 2019
and
$1.02 billion
at
December 31, 2018
.
There were approximately
$2.8 million
of gross realized gains and
no
gross realized losses from the sale of securities during the three months ended
June 30, 2019
, and approximately
$5.6 million
of gross realized gains and
no
gross realized losses from the sale of securities during the
six
months ended
June 30, 2019
. During the first 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
$7,000
of gross realized gains and
$14,000
of gross realized losses from the sale of securities during the three months ended
June 30, 2018
, and approximately
$13,000
of gross realized gains and
$14,000
of gross realized losses from the sale of securities during the
six
months ended
June 30, 2018
.
The state and political subdivision debt obligations are predominately non-rated bonds representing small issuances, primarily in Arkansas, Missouri, Oklahoma, Tennessee and Texas issues, which are evaluated on an ongoing basis.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
At
June 30, 2019
, the Company’s loan portfolio was
$13.13 billion
, compared to
$11.72 billion
at
December 31, 2018
. The various categories of loans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Consumer:
|
|
|
|
|
|
|
Credit cards
|
$
|
187,919
|
|
|
$
|
204,173
|
|
|
Other consumer
|
207,445
|
|
|
201,297
|
|
|
Total consumer
|
395,364
|
|
|
405,470
|
|
|
Real Estate:
|
|
|
|
|
Construction
|
1,540,352
|
|
|
1,300,723
|
|
|
Single family residential
|
1,444,525
|
|
|
1,440,443
|
|
|
Other commercial
|
3,531,273
|
|
|
3,225,287
|
|
|
Total real estate
|
6,516,150
|
|
|
5,966,453
|
|
|
Commercial:
|
|
|
|
|
Commercial
|
1,871,695
|
|
|
1,774,909
|
|
|
Agricultural
|
191,922
|
|
|
164,514
|
|
|
Total commercial
|
2,063,617
|
|
|
1,939,423
|
|
|
Other
|
287,366
|
|
|
119,042
|
|
|
Loans
|
9,262,497
|
|
|
8,430,388
|
|
|
Loans acquired, net of discount and allowance
(1)
|
3,864,516
|
|
|
3,292,783
|
|
|
Total loans
|
$
|
13,127,013
|
|
|
$
|
11,723,171
|
|
_____________________________
(1) See Note 5, Loans Acquired, for segregation of loans acquired by loan class.
Loan Origination/Risk Management
– The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; providing an adequate allowance for loans losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. Furthermore, a factor that influenced the Company’s judgment regarding the allowance for loan losses consists of a nine-year historical loss average segregated by each primary loan sector. On an annual basis, historical loss rates are calculated for each sector.
Consumer
– The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment. Other consumer loans include direct and indirect installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
Real estate
– The real estate loan portfolio consists of construction loans, single family residential loans and commercial loans. Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate. Commercial real estate cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the
overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length. The Company monitors these loans closely.
Commercial
– The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with
one
or
three
year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on commercial loans for closely-held or limited liability entities.
Nonaccrual and Past Due Loans
– Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Nonaccrual loans, excluding loans acquired, segregated by class of loans, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Consumer:
|
|
|
|
|
|
|
Credit cards
|
$
|
327
|
|
|
$
|
296
|
|
|
Other consumer
|
1,571
|
|
|
2,159
|
|
|
Total consumer
|
1,898
|
|
|
2,455
|
|
|
Real estate:
|
|
|
|
|
Construction
|
2,140
|
|
|
1,269
|
|
|
Single family residential
|
15,648
|
|
|
11,939
|
|
|
Other commercial
|
9,847
|
|
|
7,205
|
|
|
Total real estate
|
27,635
|
|
|
20,413
|
|
|
Commercial:
|
|
|
|
|
Commercial
|
31,240
|
|
|
10,049
|
|
|
Agricultural
|
1,183
|
|
|
1,284
|
|
|
Total commercial
|
32,423
|
|
|
11,333
|
|
|
Total
|
$
|
61,956
|
|
|
$
|
34,201
|
|
An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
30-89 Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Loans
|
|
90 Days
Past Due &
Accruing
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
704
|
|
|
$
|
556
|
|
|
$
|
1,260
|
|
|
$
|
186,659
|
|
|
$
|
187,919
|
|
|
$
|
230
|
|
|
Other consumer
|
2,800
|
|
|
579
|
|
|
3,379
|
|
|
204,066
|
|
|
207,445
|
|
|
2
|
|
|
Total consumer
|
3,504
|
|
|
1,135
|
|
|
4,639
|
|
|
390,725
|
|
|
395,364
|
|
|
232
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
4,031
|
|
|
989
|
|
|
5,020
|
|
|
1,535,332
|
|
|
1,540,352
|
|
|
—
|
|
|
Single family residential
|
8,976
|
|
|
6,754
|
|
|
15,730
|
|
|
1,428,795
|
|
|
1,444,525
|
|
|
17
|
|
|
Other commercial
|
3,972
|
|
|
5,107
|
|
|
9,079
|
|
|
3,522,194
|
|
|
3,531,273
|
|
|
—
|
|
|
Total real estate
|
16,979
|
|
|
12,850
|
|
|
29,829
|
|
|
6,486,321
|
|
|
6,516,150
|
|
|
17
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
6,364
|
|
|
7,778
|
|
|
14,142
|
|
|
1,857,553
|
|
|
1,871,695
|
|
|
18
|
|
|
Agricultural
|
242
|
|
|
898
|
|
|
1,140
|
|
|
190,782
|
|
|
191,922
|
|
|
—
|
|
|
Total commercial
|
6,606
|
|
|
8,676
|
|
|
15,282
|
|
|
2,048,335
|
|
|
2,063,617
|
|
|
18
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
287,366
|
|
|
287,366
|
|
|
—
|
|
|
Total
|
$
|
27,089
|
|
|
$
|
22,661
|
|
|
$
|
49,750
|
|
|
$
|
9,212,747
|
|
|
$
|
9,262,497
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
1,033
|
|
|
$
|
506
|
|
|
$
|
1,539
|
|
|
$
|
202,634
|
|
|
$
|
204,173
|
|
|
$
|
209
|
|
|
Other consumer
|
4,264
|
|
|
896
|
|
|
5,160
|
|
|
196,137
|
|
|
201,297
|
|
|
4
|
|
|
Total consumer
|
5,297
|
|
|
1,402
|
|
|
6,699
|
|
|
398,771
|
|
|
405,470
|
|
|
213
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
533
|
|
|
308
|
|
|
841
|
|
|
1,299,882
|
|
|
1,300,723
|
|
|
—
|
|
|
Single family residential
|
7,769
|
|
|
4,127
|
|
|
11,896
|
|
|
1,428,547
|
|
|
1,440,443
|
|
|
—
|
|
|
Other commercial
|
3,379
|
|
|
2,773
|
|
|
6,152
|
|
|
3,219,135
|
|
|
3,225,287
|
|
|
—
|
|
|
Total real estate
|
11,681
|
|
|
7,208
|
|
|
18,889
|
|
|
5,947,564
|
|
|
5,966,453
|
|
|
—
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
4,472
|
|
|
5,105
|
|
|
9,577
|
|
|
1,765,332
|
|
|
1,774,909
|
|
|
11
|
|
|
Agricultural
|
467
|
|
|
1,055
|
|
|
1,522
|
|
|
162,992
|
|
|
164,514
|
|
|
—
|
|
|
Total commercial
|
4,939
|
|
|
6,160
|
|
|
11,099
|
|
|
1,928,324
|
|
|
1,939,423
|
|
|
11
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
119,042
|
|
|
119,042
|
|
|
—
|
|
|
Total
|
$
|
21,917
|
|
|
$
|
14,770
|
|
|
$
|
36,687
|
|
|
$
|
8,393,701
|
|
|
$
|
8,430,388
|
|
|
$
|
224
|
|
Impaired Loans
– A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loans, including scheduled principal and interest payments. This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management. Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if the loan is collateral dependent.
Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Impaired loans, or portions thereof, are charged-off when deemed uncollectible.
Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Unpaid
Contractual
Principal
Balance
|
|
Recorded Investment
With No
Allowance
|
|
Recorded
Investment
With Allowance
|
|
Total
Recorded
Investment
|
|
Related
Allowance
|
|
Average
Investment in
Impaired
Loans
|
|
Interest
Income
Recognized
|
|
Average
Investment in
Impaired
Loans
|
|
Interest
Income
Recognized
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
326
|
|
|
$
|
326
|
|
|
$
|
—
|
|
|
$
|
326
|
|
|
$
|
—
|
|
|
$
|
332
|
|
|
$
|
40
|
|
|
$
|
320
|
|
|
$
|
70
|
|
|
Other consumer
|
1,715
|
|
|
1,571
|
|
|
—
|
|
|
1,571
|
|
|
—
|
|
|
1,563
|
|
|
12
|
|
|
1,762
|
|
|
25
|
|
|
Total consumer
|
2,041
|
|
|
1,897
|
|
|
—
|
|
|
1,897
|
|
|
—
|
|
|
1,895
|
|
|
52
|
|
|
2,082
|
|
|
95
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
2,235
|
|
|
1,735
|
|
|
405
|
|
|
2,140
|
|
|
237
|
|
|
2,355
|
|
|
14
|
|
|
1,993
|
|
|
28
|
|
|
Single family residential
|
16,769
|
|
|
12,295
|
|
|
3,353
|
|
|
15,648
|
|
|
31
|
|
|
15,486
|
|
|
105
|
|
|
14,351
|
|
|
203
|
|
|
Other commercial
|
8,823
|
|
|
4,900
|
|
|
3,370
|
|
|
8,270
|
|
|
227
|
|
|
7,676
|
|
|
59
|
|
|
8,751
|
|
|
123
|
|
|
Total real estate
|
27,827
|
|
|
18,930
|
|
|
7,128
|
|
|
26,058
|
|
|
495
|
|
|
25,517
|
|
|
178
|
|
|
25,095
|
|
|
354
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
31,718
|
|
|
8,907
|
|
|
21,050
|
|
|
29,957
|
|
|
5,744
|
|
|
29,776
|
|
|
187
|
|
|
23,811
|
|
|
335
|
|
|
Agricultural
|
2,202
|
|
|
649
|
|
|
532
|
|
|
1,181
|
|
|
—
|
|
|
1,148
|
|
|
8
|
|
|
1,159
|
|
|
16
|
|
|
Total commercial
|
33,920
|
|
|
9,556
|
|
|
21,582
|
|
|
31,138
|
|
|
5,744
|
|
|
30,924
|
|
|
195
|
|
|
24,970
|
|
|
351
|
|
|
Total
|
$
|
63,788
|
|
|
$
|
30,383
|
|
|
$
|
28,710
|
|
|
$
|
59,093
|
|
|
$
|
6,239
|
|
|
$
|
58,336
|
|
|
$
|
425
|
|
|
$
|
52,147
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2018
|
|
Six Months Ended
June 30, 2018
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
296
|
|
|
$
|
296
|
|
|
$
|
—
|
|
|
$
|
296
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
$
|
10
|
|
|
$
|
236
|
|
|
$
|
25
|
|
|
Other consumer
|
2,311
|
|
|
2,159
|
|
|
—
|
|
|
2,159
|
|
|
—
|
|
|
4,205
|
|
|
33
|
|
|
4,373
|
|
|
67
|
|
|
Total consumer
|
2,607
|
|
|
2,455
|
|
|
—
|
|
|
2,455
|
|
|
—
|
|
|
4,409
|
|
|
43
|
|
|
4,609
|
|
|
92
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
1,344
|
|
|
784
|
|
|
485
|
|
|
1,269
|
|
|
211
|
|
|
1,887
|
|
|
13
|
|
|
1,899
|
|
|
29
|
|
|
Single family residential
|
12,906
|
|
|
11,468
|
|
|
616
|
|
|
12,084
|
|
|
36
|
|
|
14,423
|
|
|
118
|
|
|
14,154
|
|
|
218
|
|
|
Other commercial
|
8,434
|
|
|
5,442
|
|
|
5,458
|
|
|
10,900
|
|
|
—
|
|
|
13,528
|
|
|
104
|
|
|
14,588
|
|
|
224
|
|
|
Total real estate
|
22,684
|
|
|
17,694
|
|
|
6,559
|
|
|
24,253
|
|
|
247
|
|
|
29,838
|
|
|
235
|
|
|
30,641
|
|
|
471
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
10,361
|
|
|
7,254
|
|
|
4,628
|
|
|
11,882
|
|
|
437
|
|
|
7,204
|
|
|
61
|
|
|
7,428
|
|
|
114
|
|
|
Agricultural
|
2,419
|
|
|
1,180
|
|
|
—
|
|
|
1,180
|
|
|
—
|
|
|
1,142
|
|
|
11
|
|
|
1,474
|
|
|
23
|
|
|
Total commercial
|
12,780
|
|
|
8,434
|
|
|
4,628
|
|
|
13,062
|
|
|
437
|
|
|
8,346
|
|
|
72
|
|
|
8,902
|
|
|
137
|
|
|
Total
|
$
|
38,071
|
|
|
$
|
28,583
|
|
|
$
|
11,187
|
|
|
$
|
39,770
|
|
|
$
|
684
|
|
|
$
|
42,593
|
|
|
$
|
350
|
|
|
$
|
44,152
|
|
|
$
|
700
|
|
At
June 30, 2019
and
December 31, 2018
, impaired loans, net of government guarantees and excluding loans acquired, totaled
$59.1 million
and
$39.8 million
, respectively. Allocations of the allowance for loan losses relative to impaired loans were
$6.2 million
and
$684,000
at
June 30, 2019
and
December 31, 2018
, respectively. Approximately
$425,000
and
$800,000
of interest income was recognized on average impaired loans of
$58.3 million
and
$52.1 million
for the
three and six
months ended
June 30, 2019
. Interest income recognized on impaired loans on a cash basis during the
three and six
months ended
June 30, 2019
and
2018
was not material.
Included in certain impaired loan categories are troubled debt restructurings (“TDRs”). When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.
Under ASC Topic 310-10-35 –
Subsequent Measurement
, a TDR is considered to be impaired, and an impairment analysis must be performed. The Company assesses the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determines if a specific allocation to the allowance for loan losses is needed.
Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.
The following table presents a summary of troubled debt restructurings, excluding loans acquired, segregated by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing TDR Loans
|
|
Nonaccrual TDR Loans
|
|
Total TDR Loans
|
|
(Dollars in thousands)
|
Number
|
|
Balance
|
|
Number
|
|
Balance
|
|
Number
|
|
Balance
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
—
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
405
|
|
|
3
|
|
|
$
|
405
|
|
|
Single-family residential
|
5
|
|
|
221
|
|
|
10
|
|
|
583
|
|
|
15
|
|
|
804
|
|
|
Other commercial
|
2
|
|
|
3,213
|
|
|
2
|
|
|
978
|
|
|
4
|
|
|
4,191
|
|
|
Total real estate
|
7
|
|
|
3,434
|
|
|
15
|
|
|
1,966
|
|
|
22
|
|
|
5,400
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
4
|
|
|
2,812
|
|
|
5
|
|
|
311
|
|
|
9
|
|
|
3,123
|
|
|
Total commercial
|
4
|
|
|
2,812
|
|
|
5
|
|
|
311
|
|
|
9
|
|
|
3,123
|
|
|
Total
|
11
|
|
|
$
|
6,246
|
|
|
20
|
|
|
$
|
2,277
|
|
|
31
|
|
|
$
|
8,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 month periods ended
June 30, 2019
and
2018
nor the
six
months ended
June 30, 2019
. The following table presents loans that were restructured as TDRs during the
six
months ended
June 30, 2018
, excluding loans acquired, segregated by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification Type
|
|
|
|
(Dollars in thousands)
|
Number of
Loans
|
|
Balance Prior
to TDR
|
|
Balance at June 30,
|
|
Change in
Maturity
Date
|
|
Change in
Rate
|
|
Financial Impact
on Date of
Restructure
|
|
Six Months Ended June 30, 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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the
six
months ended
June 30, 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
six
months ended
June 30, 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
six
months ended
June 30, 2018
. A charge-off of
$66,300
was recorded for this loan and
$294,300
was transferred to OREO. The Company defines a payment default as a payment received more than 90 days after its due date.
In addition to the TDRs that occurred during the periods provided in the preceding tables, the Company had TDRs with pre-modification loan balances, specifically in commercial real estate, of
$294,300
at
June 30, 2018
, for which OREO was received in full or partial satisfaction of the loans. There were
no
TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three or
six
month periods ended
June 30, 2019
. At
June 30, 2019
and
December 31, 2018
, the Company had
$3,924,000
and
$3,899,000
, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At
June 30, 2019
and
December 31, 2018
, the Company had
$4,960,000
and
$3,530,000
, respectively, of OREO secured by residential real estate properties.
Credit Quality Indicators
– As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the States of Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.
The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Loans are rated on a scale of 1 to 8. A description of the general characteristics of the 8 risk ratings is as follows:
|
|
|
|
•
|
Risk Rate 1 – Pass (Excellent)
– This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.
|
|
|
|
|
•
|
Risk Rate 2 – Pass (Good)
- Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).
|
|
|
|
|
•
|
Risk Rate 3 – Pass (Acceptable – Average)
- Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.
|
|
|
|
|
•
|
Risk Rate 4 – Pass (Monitor)
- Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.
|
|
|
|
|
•
|
Risk Rate 5 – Special Mention
- A loan in this category has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.
|
|
|
|
|
•
|
Risk Rate 6 – Substandard
- A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.
|
|
|
|
|
•
|
Risk Rate 7 – Doubtful
- A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity, or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.
|
|
|
|
|
•
|
Risk Rate 8 – Loss
- Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.
|
Loans acquired are evaluated using this internal grading system. Loans acquired are evaluated individually and include purchased credit impaired loans of
$3.9 million
and
$4.1 million
that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of
June 30, 2019
and
December 31, 2018
, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20,
$76.5 million
and
$50.4 million
were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at
June 30, 2019
and
December 31, 2018
, respectively.
Purchased credit impaired loans are loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their fair value was initially based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the undiscounted cash flows expected at acquisition and the fair value at acquisition is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment.
Classified loans for the Company include loans in Risk Ratings 6, 7 and 8. Loans may be classified, but not considered impaired, due to one of the following reasons: (1)The Company has established minimum dollar amount thresholds for loan impairment testing. Loans rated 6 – 8 that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans. (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered
to not be impaired and are not included in impaired loans. Total classified loans, excluding loans accounted for under ASC Topic 310-30, were
$172.8 million
and
$119.0 million
, as of
June 30, 2019
and
December 31, 2018
, respectively.
The following table presents a summary of loans by credit risk rating as of
June 30, 2019
and
December 31, 2018
, segregated by class of loans. Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Risk Rate
1-4
|
|
Risk Rate
5
|
|
Risk Rate
6
|
|
Risk Rate
7
|
|
Risk Rate
8
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
187,363
|
|
|
$
|
—
|
|
|
$
|
556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
187,919
|
|
|
Other consumer
|
205,416
|
|
|
—
|
|
|
2,029
|
|
|
—
|
|
|
—
|
|
|
207,445
|
|
|
Total consumer
|
392,779
|
|
|
—
|
|
|
2,585
|
|
|
—
|
|
|
—
|
|
|
395,364
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
1,536,632
|
|
|
477
|
|
|
3,243
|
|
|
—
|
|
|
—
|
|
|
1,540,352
|
|
|
Single family residential
|
1,420,143
|
|
|
2,674
|
|
|
21,481
|
|
|
227
|
|
|
—
|
|
|
1,444,525
|
|
|
Other commercial
|
3,487,955
|
|
|
21,143
|
|
|
22,175
|
|
|
—
|
|
|
—
|
|
|
3,531,273
|
|
|
Total real estate
|
6,444,730
|
|
|
24,294
|
|
|
46,899
|
|
|
227
|
|
|
—
|
|
|
6,516,150
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
1,821,027
|
|
|
9,349
|
|
|
41,319
|
|
|
—
|
|
|
—
|
|
|
1,871,695
|
|
|
Agricultural
|
190,445
|
|
|
74
|
|
|
1,403
|
|
|
—
|
|
|
—
|
|
|
191,922
|
|
|
Total commercial
|
2,011,472
|
|
|
9,423
|
|
|
42,722
|
|
|
—
|
|
|
—
|
|
|
2,063,617
|
|
|
Other
|
287,366
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
287,366
|
|
|
Loans acquired
|
3,727,652
|
|
|
56,531
|
|
|
80,009
|
|
|
324
|
|
|
—
|
|
|
3,864,516
|
|
|
Total
|
$
|
12,863,999
|
|
|
$
|
90,248
|
|
|
$
|
172,215
|
|
|
$
|
551
|
|
|
$
|
—
|
|
|
$
|
13,127,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Risk Rate
1-4
|
|
Risk Rate
5
|
|
Risk Rate
6
|
|
Risk Rate
7
|
|
Risk Rate
8
|
|
Total
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
203,667
|
|
|
$
|
—
|
|
|
$
|
506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
204,173
|
|
|
Other consumer
|
198,840
|
|
|
—
|
|
|
2,457
|
|
|
—
|
|
|
—
|
|
|
201,297
|
|
|
Total consumer
|
402,507
|
|
|
—
|
|
|
2,963
|
|
|
—
|
|
|
—
|
|
|
405,470
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
1,296,988
|
|
|
1,910
|
|
|
1,825
|
|
|
—
|
|
|
—
|
|
|
1,300,723
|
|
|
Single family residential
|
1,420,052
|
|
|
1,628
|
|
|
18,528
|
|
|
235
|
|
|
—
|
|
|
1,440,443
|
|
|
Other commercial
|
3,193,289
|
|
|
17,169
|
|
|
14,829
|
|
|
—
|
|
|
—
|
|
|
3,225,287
|
|
|
Total real estate
|
5,910,329
|
|
|
20,707
|
|
|
35,182
|
|
|
235
|
|
|
—
|
|
|
5,966,453
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
1,742,002
|
|
|
8,357
|
|
|
24,550
|
|
|
—
|
|
|
—
|
|
|
1,774,909
|
|
|
Agricultural
|
162,824
|
|
|
75
|
|
|
1,615
|
|
|
—
|
|
|
—
|
|
|
164,514
|
|
|
Total commercial
|
1,904,826
|
|
|
8,432
|
|
|
26,165
|
|
|
—
|
|
|
—
|
|
|
1,939,423
|
|
|
Other
|
119,042
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
119,042
|
|
|
Loans acquired
|
3,187,083
|
|
|
51,255
|
|
|
54,097
|
|
|
348
|
|
|
—
|
|
|
3,292,783
|
|
|
Total
|
$
|
11,523,787
|
|
|
$
|
80,394
|
|
|
$
|
118,407
|
|
|
$
|
583
|
|
|
$
|
—
|
|
|
$
|
11,723,171
|
|
Allowance for Loan Losses
Allowance for Loan Losses
– The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310-10,
Receivables
, and allowance allocations calculated in accordance with ASC Topic 450-20,
Loss Contingencies
. Accordingly, the methodology is based on the Company’s internal grading system, specific impairment analysis, qualitative and quantitative factors.
As mentioned above, allocations to the allowance for loan losses are categorized as either specific allocations or general allocations.
A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loan, including scheduled principal and interest payments. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for loan losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.
The general allocation is calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that will affect specific loans and categories of loans. The Company establishes general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans.
The following table details activity in the allowance for loan losses by portfolio segment for legacy loans for the
three and six
months ended
June 30, 2019
. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial
|
|
Real
Estate
|
|
Credit
Card
|
|
Other
Consumer
and Other
|
|
Total
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
(2)
|
$
|
20,578
|
|
|
$
|
32,354
|
|
|
$
|
3,919
|
|
|
$
|
2,392
|
|
|
$
|
59,243
|
|
|
Provision for loan losses
(1)
|
2,956
|
|
|
2,681
|
|
|
800
|
|
|
642
|
|
|
7,079
|
|
|
Charge-offs
|
(1,867
|
)
|
|
(271
|
)
|
|
(1,039
|
)
|
|
(905
|
)
|
|
(4,082
|
)
|
|
Recoveries
|
72
|
|
|
153
|
|
|
271
|
|
|
331
|
|
|
827
|
|
|
Net charge-offs
|
(1,795
|
)
|
|
(118
|
)
|
|
(768
|
)
|
|
(574
|
)
|
|
(3,255
|
)
|
|
Balance, June 30, 2019
(2)
|
$
|
21,739
|
|
|
$
|
34,917
|
|
|
$
|
3,951
|
|
|
$
|
2,460
|
|
|
$
|
63,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
(2)
|
$
|
20,514
|
|
|
$
|
29,743
|
|
|
$
|
3,923
|
|
|
$
|
2,419
|
|
|
$
|
56,599
|
|
|
Provision for loan losses
(1)
|
4,830
|
|
|
5,524
|
|
|
1,698
|
|
|
1,848
|
|
|
13,900
|
|
|
Charge-offs
|
(3,835
|
)
|
|
(645
|
)
|
|
(2,181
|
)
|
|
(2,438
|
)
|
|
(9,099
|
)
|
|
Recoveries
|
230
|
|
|
295
|
|
|
511
|
|
|
631
|
|
|
1,667
|
|
|
Net charge-offs
|
(3,605
|
)
|
|
(350
|
)
|
|
(1,670
|
)
|
|
(1,807
|
)
|
|
(7,432
|
)
|
|
Balance, June 30, 2019
(2)
|
$
|
21,739
|
|
|
$
|
34,917
|
|
|
$
|
3,951
|
|
|
$
|
2,460
|
|
|
$
|
63,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
5,744
|
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,239
|
|
|
Loans collectively evaluated for impairment
|
15,995
|
|
|
34,422
|
|
|
3,951
|
|
|
2,460
|
|
|
56,828
|
|
|
Balance, June 30, 2019
(2)
|
$
|
21,739
|
|
|
$
|
34,917
|
|
|
$
|
3,951
|
|
|
$
|
2,460
|
|
|
$
|
63,067
|
|
(1) Provision for loan losses of
zero
and
$2,464,000
attributable to loans acquired was excluded from this table for the three and
six
months ended
June 30, 2019
, respectively (total provision for loan losses for the
three and six
months ended
June 30, 2019
was
$7,079,000
and
$16,364,000
). There were
$1,100,000
and
$2,347,000
in charge-offs for loans acquired during the three and
six
months ended
June 30, 2019
, respectively, and recoveries of
$900,000
for loans acquired during the three and
six
month periods ended
June 30, 2019
, resulting in an ending balance in the allowance related to loans acquired of
$1,112,000
.
(2) Allowance for loan losses at
June 30, 2019
includes
$1,112,000
allowance for loans acquired (not shown in the table above). Allowance for loan losses at March 31, 2019 and
December 31, 2018
includes
$1,312,000
and
$95,000
, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at
June 30, 2019
was
$64,179,000
and total allowance for loan losses at March 31, 2019 and
December 31, 2018
was
$60,555,000
and
$56,694,000
, respectively.
Activity in the allowance for loan losses for the
three and six
months ended
June 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial
|
|
Real
Estate
|
|
Credit
Card
|
|
Other
Consumer
and Other
|
|
Total
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
(4)
|
$
|
9,601
|
|
|
$
|
30,414
|
|
|
$
|
3,799
|
|
|
$
|
3,393
|
|
|
$
|
47,207
|
|
|
Provision for loan losses
(3)
|
6,897
|
|
|
(1,461
|
)
|
|
749
|
|
|
1,079
|
|
|
7,264
|
|
|
Charge-offs
|
(790
|
)
|
|
(161
|
)
|
|
(1,012
|
)
|
|
(1,366
|
)
|
|
(3,329
|
)
|
|
Recoveries
|
59
|
|
|
112
|
|
|
286
|
|
|
133
|
|
|
590
|
|
|
Net charge-offs
|
(731
|
)
|
|
(49
|
)
|
|
(726
|
)
|
|
(1,233
|
)
|
|
(2,739
|
)
|
|
Balance, June 30, 2018
(4)
|
$
|
15,767
|
|
|
$
|
28,904
|
|
|
$
|
3,822
|
|
|
$
|
3,239
|
|
|
$
|
51,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
(4)
|
$
|
7,007
|
|
|
$
|
27,281
|
|
|
$
|
3,784
|
|
|
$
|
3,596
|
|
|
$
|
41,668
|
|
|
Provision for loan losses
(3)
|
11,183
|
|
|
1,825
|
|
|
1,500
|
|
|
1,838
|
|
|
16,346
|
|
|
Charge-offs
|
(2,551
|
)
|
|
(616
|
)
|
|
(2,011
|
)
|
|
(2,422
|
)
|
|
(7,600
|
)
|
|
Recoveries
|
128
|
|
|
414
|
|
|
549
|
|
|
227
|
|
|
1,318
|
|
|
Net charge-offs
|
(2,423
|
)
|
|
(202
|
)
|
|
(1,462
|
)
|
|
(2,195
|
)
|
|
(6,282
|
)
|
|
Balance, June 30, 2018
(4)
|
$
|
15,767
|
|
|
$
|
28,904
|
|
|
$
|
3,822
|
|
|
$
|
3,239
|
|
|
$
|
51,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
18
|
|
|
$
|
427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
445
|
|
|
Loans collectively evaluated for impairment
|
15,749
|
|
|
28,477
|
|
|
3,822
|
|
|
3,239
|
|
|
51,287
|
|
|
Balance, June 30, 2018
(4)
|
$
|
15,767
|
|
|
$
|
28,904
|
|
|
$
|
3,822
|
|
|
$
|
3,239
|
|
|
$
|
51,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
437
|
|
|
$
|
247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
684
|
|
|
Loans collectively evaluated for impairment
|
20,077
|
|
|
29,496
|
|
|
3,923
|
|
|
2,419
|
|
|
55,915
|
|
|
Balance, December 31, 2018
(5)
|
$
|
20,514
|
|
|
$
|
29,743
|
|
|
$
|
3,923
|
|
|
$
|
2,419
|
|
|
$
|
56,599
|
|
______________________
(3) Provision for loan losses of
$1,769,000
and
$1,837,000
attributable to loans acquired was excluded from this table for the
three and six
months ended
June 30, 2018
, respectively (total provision for loan losses for the
three and six
months ended
June 30, 2018
was
$9,033,000
and
$18,183,000
, respectively). There were
$132,000
and
$211,000
in charge-offs for loans acquired during the
three and six
months ended
June 30, 2018
, respectively, resulting in an ending balance in the allowance related to loans acquired of
$2,044,000
.
(4) Allowance for loan losses at
June 30, 2018
, March 31, 2018 and
December 31, 2017
includes
$2,044,000
,
$407,000
and
$418,000
, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at
June 30, 2018
, March 31, 2018 and
December 31, 2017
was
$53,776,000
,
$47,614,000
and
$42,086,000
, respectively.
(5) Allowance for loan losses at
December 31, 2018
includes
$95,000
allowance for loans acquired (not shown in the table above). The total allowance for loan losses at
December 31, 2018
was
$56,694,000
.
The Company’s recorded investment in loans, excluding loans acquired, related to each balance in the allowance for loan losses by portfolio segment on the basis of the Company’s impairment methodology was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial
|
|
Real
Estate
|
|
Credit
Card
|
|
Other
Consumer
and Other
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
31,138
|
|
|
$
|
26,058
|
|
|
$
|
326
|
|
|
$
|
1,571
|
|
|
$
|
59,093
|
|
|
Loans collectively evaluated for impairment
|
2,032,479
|
|
|
6,490,092
|
|
|
187,593
|
|
|
493,240
|
|
|
9,203,404
|
|
|
Balance, end of period
|
$
|
2,063,617
|
|
|
$
|
6,516,150
|
|
|
$
|
187,919
|
|
|
$
|
494,811
|
|
|
$
|
9,262,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
13,062
|
|
|
$
|
24,253
|
|
|
$
|
296
|
|
|
$
|
2,159
|
|
|
$
|
39,770
|
|
|
Loans collectively evaluated for impairment
|
1,926,361
|
|
|
5,942,200
|
|
|
203,877
|
|
|
318,180
|
|
|
8,390,618
|
|
|
Balance, end of period
|
$
|
1,939,423
|
|
|
$
|
5,966,453
|
|
|
$
|
204,173
|
|
|
$
|
320,339
|
|
|
$
|
8,430,388
|
|
NOTE 5: LOANS ACQUIRED
The Company accounts for its acquisitions under ASC Topic 805,
Business Combinations
, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the loans acquired is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820,
Fair Value Measurement
. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
The Company evaluates non-impaired loans acquired in accordance with the provisions of ASC Topic 310-20,
Nonrefundable Fees and Other Costs
. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. The Company evaluates purchased impaired loans in accordance with the provisions of ASC Topic 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality
. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.
For impaired loans accounted for under ASC Topic 310-30, the Company continues to estimate cash flows expected to be collected on purchased credit impaired loans. The Company evaluates, at each balance sheet date, whether the present value of the purchased credit impaired loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in the consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the remaining life of the purchased credit impaired loan.
During the second quarter 2019, the Company evaluated
$1.097 billion
of net loans (
$1.127 billion
gross loans less
$30.6 million
discount) purchased in conjunction with the acquisition of Reliance, described in Note 2, Acquisition, in accordance with the provisions of ASC Topic 310-20. The Company evaluated the remaining
$176,000
of net loans (
$385,000
gross loans less
$209,000
discount) purchased in conjunction with the acquisition of Reliance for impairment in accordance with the provisions of ASC Topic 310-30.
The following table reflects the carrying value of all loans acquired as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Acquired
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Consumer:
|
|
|
|
|
|
|
Other consumer
|
$
|
9,704
|
|
|
$
|
15,658
|
|
|
Real estate:
|
|
|
|
|
Construction
|
426,482
|
|
|
429,605
|
|
|
Single family residential
|
554,534
|
|
|
566,188
|
|
|
Other commercial
|
2,461,136
|
|
|
1,848,679
|
|
|
Total real estate
|
3,442,152
|
|
|
2,844,472
|
|
|
Commercial:
|
|
|
|
|
Commercial
|
411,577
|
|
|
430,914
|
|
|
Agricultural
|
1,083
|
|
|
1,739
|
|
|
Total commercial
|
412,660
|
|
|
432,653
|
|
|
Total loans acquired
(1)
|
$
|
3,864,516
|
|
|
$
|
3,292,783
|
|
________________________
(1) Loans acquired are reported net of a
$1,112,000
and
$95,000
allowance at
June 30, 2019
and
December 31, 2018
, respectively.
Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 4, Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
Other consumer
|
$
|
149
|
|
|
$
|
140
|
|
|
Real estate:
|
|
|
|
|
Construction
|
8,221
|
|
|
114
|
|
|
Single family residential
|
6,482
|
|
|
6,603
|
|
|
Other commercial
|
8,973
|
|
|
1,167
|
|
|
Total real estate
|
23,676
|
|
|
7,884
|
|
|
Commercial:
|
|
|
|
|
Commercial
|
7,858
|
|
|
13,578
|
|
|
Agricultural
|
20
|
|
|
38
|
|
|
Total commercial
|
7,878
|
|
|
13,616
|
|
|
Total
|
$
|
31,703
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
$
|
254
|
|
|
$
|
42
|
|
|
$
|
296
|
|
|
$
|
9,408
|
|
|
$
|
9,704
|
|
|
$
|
—
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
4
|
|
|
8,107
|
|
|
8,111
|
|
|
418,371
|
|
|
426,482
|
|
|
—
|
|
|
Single family residential
|
5,265
|
|
|
2,547
|
|
|
7,812
|
|
|
546,722
|
|
|
554,534
|
|
|
2
|
|
|
Other commercial
|
10,626
|
|
|
8,497
|
|
|
19,123
|
|
|
2,442,013
|
|
|
2,461,136
|
|
|
—
|
|
|
Total real estate
|
15,895
|
|
|
19,151
|
|
|
35,046
|
|
|
3,407,106
|
|
|
3,442,152
|
|
|
2
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
338
|
|
|
7,321
|
|
|
7,659
|
|
|
403,918
|
|
|
411,577
|
|
|
—
|
|
|
Agricultural
|
—
|
|
|
|
|
|
—
|
|
|
1,083
|
|
|
1,083
|
|
|
—
|
|
|
Total commercial
|
338
|
|
|
7,321
|
|
|
7,659
|
|
|
405,001
|
|
|
412,660
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
16,487
|
|
|
$
|
26,514
|
|
|
$
|
43,001
|
|
|
$
|
3,821,515
|
|
|
$
|
3,864,516
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
$
|
9,532
|
|
|
$
|
—
|
|
|
$
|
172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,704
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
400,925
|
|
|
17,928
|
|
|
7,629
|
|
|
—
|
|
|
—
|
|
|
426,482
|
|
|
Single family residential
|
539,716
|
|
|
1,833
|
|
|
12,661
|
|
|
324
|
|
|
—
|
|
|
554,534
|
|
|
Other commercial
|
2,382,022
|
|
|
35,233
|
|
|
43,881
|
|
|
—
|
|
|
—
|
|
|
2,461,136
|
|
|
Total real estate
|
3,322,663
|
|
|
54,994
|
|
|
64,171
|
|
|
324
|
|
|
—
|
|
|
3,442,152
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
394,439
|
|
|
1,537
|
|
|
15,601
|
|
|
—
|
|
|
—
|
|
|
411,577
|
|
|
Agricultural
|
1,018
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
1,083
|
|
|
Total commercial
|
395,457
|
|
|
1,537
|
|
|
15,666
|
|
|
—
|
|
|
—
|
|
|
412,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,727,652
|
|
|
$
|
56,531
|
|
|
$
|
80,009
|
|
|
$
|
324
|
|
|
$
|
—
|
|
|
$
|
3,864,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
$
|
15,380
|
|
|
$
|
—
|
|
|
$
|
278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,658
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
393,122
|
|
|
27,621
|
|
|
8,862
|
|
|
—
|
|
|
—
|
|
|
429,605
|
|
|
Single family residential
|
553,460
|
|
|
2,081
|
|
|
10,299
|
|
|
348
|
|
|
—
|
|
|
566,188
|
|
|
Other commercial
|
1,822,179
|
|
|
9,137
|
|
|
17,363
|
|
|
—
|
|
|
—
|
|
|
1,848,679
|
|
|
Total real estate
|
2,768,761
|
|
|
38,839
|
|
|
36,524
|
|
|
348
|
|
|
—
|
|
|
2,844,472
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
401,300
|
|
|
12,416
|
|
|
17,198
|
|
|
—
|
|
|
—
|
|
|
430,914
|
|
|
Agricultural
|
1,642
|
|
|
—
|
|
|
97
|
|
|
—
|
|
|
—
|
|
|
1,739
|
|
|
Total commercial
|
402,942
|
|
|
12,416
|
|
|
17,295
|
|
|
—
|
|
|
—
|
|
|
432,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,187,083
|
|
|
$
|
51,255
|
|
|
$
|
54,097
|
|
|
$
|
348
|
|
|
$
|
—
|
|
|
$
|
3,292,783
|
|
Loans acquired were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans are systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Company’s legacy loan portfolio, with most focus being placed on those loans which include the larger loan relationships and those loans which exhibit higher risk characteristics.
In addition to the accretable yield on loans acquired not considered to be impaired, the amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments may or may not be required. This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans.
Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the
three and six
months ended
June 30, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
(In thousands)
|
Accretable
Yield
|
|
Carrying
Amount of
Loans
|
|
Accretable
Yield
|
|
Carrying
Amount of
Loans
|
|
Beginning balance
|
$
|
1,468
|
|
|
$
|
3,651
|
|
|
$
|
1,460
|
|
|
$
|
4,050
|
|
|
Additions
|
—
|
|
|
175
|
|
|
—
|
|
|
175
|
|
|
Accretable yield adjustments
|
11
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
Accretion
|
(18
|
)
|
|
18
|
|
|
(27
|
)
|
|
27
|
|
|
Payments and other reductions, net
|
—
|
|
|
(357
|
)
|
|
—
|
|
|
(765
|
)
|
|
Balance, ending
|
$
|
1,461
|
|
|
$
|
3,487
|
|
|
$
|
1,461
|
|
|
$
|
3,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2018
|
|
Six Months Ended
June 30, 2018
|
|
(In thousands)
|
Accretable
Yield
|
|
Carrying
Amount of
Loans
|
|
Accretable
Yield
|
|
Carrying
Amount of
Loans
|
|
Beginning balance
|
$
|
1,369
|
|
|
$
|
17,605
|
|
|
$
|
620
|
|
|
$
|
17,116
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Accretable yield adjustments
|
44
|
|
|
—
|
|
|
1,178
|
|
|
—
|
|
|
Accretion
|
(31
|
)
|
|
31
|
|
|
(416
|
)
|
|
416
|
|
|
Payments and other reductions, net
|
—
|
|
|
(3,641
|
)
|
|
—
|
|
|
(3,537
|
)
|
|
Balance, ending
|
$
|
1,382
|
|
|
$
|
13,995
|
|
|
$
|
1,382
|
|
|
$
|
13,995
|
|
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
$1,112,000
at
June 30, 2019
and
$95,000
at
December 31, 2018
. The provision on loans acquired for the
three and six
months ended
June 30, 2019
was
zero
and
$2,464,000
, respectively. The provision on loans acquired for the
three and six
months ended
June 30, 2018
was
$1,769,000
and
$1,837,000
, respectively.
NOTE 6: RIGHT-OF-USE LEASE ASSETS AND LEASE LIABILITIES
As of the first quarter 2019, the Company accounts for its leases in accordance with ASC Topic 842,
Leases
, which requires recognition of most leases, including operating leases, with a term greater than 12 months, on the balance sheet. At lease commencement, the lease contract is reviewed to determine whether the contract is a finance lease or an operating lease; a lease liability is recognized on a discounted basis, related to the Company’s obligation to make lease payments; and a right-of-use asset is also recognized related to the Company’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for lease and non-lease components (such as taxes, insurance and common area maintenance costs) separately as such amounts are generally readily determinable under the lease contracts. Lease payments over the expected term are discounted using the Company’s 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
June 30, 2019
, right-of-use lease assets included in premises and equipment are
$35.2 million
and lease liabilities included in other liabilities are
$35.2 million
. During the
three and six
months ended
June 30, 2019
, the Company recognized lease expense of
$2.7 million
and
$5.3 million
, respectively, and the weighted average discount rate was
3.47%
. At
June 30, 2019
, the weighted average remaining lease term was
8.92 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
$926.5 million
at
June 30, 2019
and
$845.7 million
at
December 31, 2018
.
The Company recorded
$80.8 million
of goodwill during the second quarter 2019 as a result of its acquisition of Reliance. Goodwill impairment was neither indicated nor recorded during the
six
months ended
June 30, 2019
or the year ended
December 31, 2018
.
Core deposit premiums are amortized over periods ranging from
10 years
to
15 years
and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of
$18.4 million
were recorded during the second quarter 2019 as part of the Reliance acquisition. Additionally, intangible assets are being amortized over various periods ranging from
10 years
to
15 years
.
The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at
June 30, 2019
and
December 31, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Goodwill
|
$
|
926,450
|
|
|
$
|
845,687
|
|
|
Core deposit premiums:
|
|
|
|
|
Gross carrying amount
|
124,334
|
|
|
105,984
|
|
|
Accumulated amortization
|
(31,236
|
)
|
|
(26,177
|
)
|
|
Core deposit premiums, net
|
93,098
|
|
|
79,807
|
|
|
Books of business intangible:
|
|
|
|
|
Gross carrying amount
|
15,234
|
|
|
15,234
|
|
|
Accumulated amortization
|
(4,236
|
)
|
|
(3,707
|
)
|
|
Books of business intangible, net
|
10,998
|
|
|
11,527
|
|
|
Other intangible assets, net
|
104,096
|
|
|
91,334
|
|
|
Total goodwill and other intangible assets
|
$
|
1,030,546
|
|
|
$
|
937,021
|
|
The Company’s estimated remaining amortization expense on intangibles as of
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year
|
|
Amortization
Expense
|
|
|
Remainder of 2019
|
|
$
|
5,894
|
|
|
|
2020
|
|
11,776
|
|
|
|
2021
|
|
11,714
|
|
|
|
2022
|
|
11,662
|
|
|
|
2023
|
|
11,379
|
|
|
|
Thereafter
|
|
51,671
|
|
|
|
Total
|
|
$
|
104,096
|
|
NOTE 8: TIME DEPOSITS
Time deposits include approximately
$1.849 billion
and
$1.443 billion
of certificates of deposit of $100,000 or more at
June 30, 2019
, and
December 31, 2018
, respectively. Of this total approximately
$966.0 million
and
$753.2 million
of certificates of deposit were over $250,000 at
June 30, 2019
and
December 31, 2018
, respectively.
NOTE 9: INCOME TAXES
The provision for income taxes is comprised of the following components for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income taxes currently payable
|
$
|
12,757
|
|
|
$
|
15,652
|
|
|
$
|
23,074
|
|
|
$
|
25,697
|
|
|
Deferred income taxes
|
2,859
|
|
|
(1,869
|
)
|
|
4,940
|
|
|
2,052
|
|
|
Provision for income taxes
|
$
|
15,616
|
|
|
$
|
13,783
|
|
|
$
|
28,014
|
|
|
$
|
27,749
|
|
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)
|
June 30, 2019
|
|
December 31, 2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Loans acquired
|
$
|
17,480
|
|
|
$
|
12,536
|
|
|
Allowance for loan losses
|
15,744
|
|
|
13,947
|
|
|
Valuation of foreclosed assets
|
2,706
|
|
|
1,474
|
|
|
Tax NOLs from acquisition
|
19,159
|
|
|
7,242
|
|
|
Deferred compensation payable
|
2,492
|
|
|
2,707
|
|
|
Accrued equity and other compensation
|
7,494
|
|
|
8,182
|
|
|
Acquired securities
|
2,598
|
|
|
397
|
|
|
Unrealized loss on available-for-sale securities
|
—
|
|
|
9,196
|
|
|
Other
|
6,916
|
|
|
7,042
|
|
|
Gross deferred tax assets
|
74,589
|
|
|
62,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill and other intangible amortization
|
$
|
(34,590
|
)
|
|
$
|
(30,471
|
)
|
|
Accumulated depreciation
|
(12,871
|
)
|
|
(13,361
|
)
|
|
Unrealized gain on available-for-sale securities
|
(4,150
|
)
|
|
—
|
|
|
Other
|
(5,447
|
)
|
|
(5,360
|
)
|
|
Gross deferred tax liabilities
|
(57,058
|
)
|
|
(49,192
|
)
|
|
|
|
|
|
|
Net deferred tax asset, included in other assets
|
$
|
17,531
|
|
|
$
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Computed at the statutory rate
(21%)
|
$
|
14,955
|
|
|
$
|
14,143
|
|
|
$
|
27,575
|
|
|
$
|
27,851
|
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
1,420
|
|
|
1,265
|
|
|
2,765
|
|
|
3,087
|
|
|
Tax exempt interest income
|
(1,024
|
)
|
|
(782
|
)
|
|
(1,985
|
)
|
|
(1,459
|
)
|
|
Tax exempt earnings on BOLI
|
(215
|
)
|
|
(190
|
)
|
|
(394
|
)
|
|
(376
|
)
|
|
Federal tax credits
|
(729
|
)
|
|
—
|
|
|
(1,458
|
)
|
|
—
|
|
|
Other differences, net
|
1,209
|
|
|
(653
|
)
|
|
1,511
|
|
|
(1,354
|
)
|
|
Actual tax provision
|
$
|
15,616
|
|
|
$
|
13,783
|
|
|
$
|
28,014
|
|
|
$
|
27,749
|
|
The Company follows ASC Topic 740,
Income Taxes
, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in
2019
and in future years. The Company expects to fully realize its deferred tax assets in the future.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company has engaged in two tax-free reorganization transactions in which acquired net operating losses are limited pursuant to Section 382. In total, approximately
$91.3 million
of federal net operating losses subject to the IRC Sec 382 annual limitation are expected to be utilized by the Company, of which
$58.5 million
was added due to the Reliance acquisition during second quarter 2019. All of the acquired Reliance net operating losses will be fully utilized by 2029, with the remaining acquired net operating loss carryforwards fully utilized by 2036.
The Company files income tax returns in the U.S. federal jurisdiction. The Company’s U.S. federal income tax returns are open and subject to examinations from the
2015
tax year and forward. The Company’s various state income tax returns are generally open from the
2015
and later tax return years based on individual state statute of limitations.
NOTE 10: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company utilizes securities sold under agreements to repurchase to facilitate the needs of its customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents.
The gross amount of recognized liabilities for repurchase agreements was
$130.2 million
and
$95.5 million
at
June 30, 2019
and
December 31, 2018
, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
is presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
(In thousands)
|
Overnight and
Continuous
|
|
Up to 30 Days
|
|
30-90 Days
|
|
Greater than
90 Days
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
130,220
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
95,542
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95,542
|
|
NOTE 11: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES
Debt at
June 30, 2019
and
December 31, 2018
consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Other Borrowings
|
|
|
|
|
|
|
FHLB advances, net of discount, due 2019 to 2033, 1.38% to 7.37% secured by real estate loans
|
$
|
1,324,094
|
|
|
$
|
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
|
1,324,094
|
|
|
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
|
(3,190
|
)
|
|
(3,372
|
)
|
|
Total subordinated notes and debentures
|
354,132
|
|
|
353,950
|
|
|
Total other borrowings and subordinated debt
|
$
|
1,678,226
|
|
|
$
|
1,699,400
|
|
In March 2018, the Company issued
$330.0 million
in aggregate principal amount, of
5.00%
Fixed-to-Floating Rate Subordinated Notes (“the Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred
$3.6 million
in debt issuance costs related to the offering during March 2018. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of
5.00%
per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus
215
basis points, payable quarterly in arrears. The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its general creditors. The Notes are obligations of Simmons First National Corporation only and are not obligations of, and are not guaranteed by, any of its subsidiaries. During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Credit Agreement (described below), certain trust preferred securities, both discussed below, and unsecured debt from correspondent banks. The Notes qualify for Tier 2 capital treatment.
In 2017, the Company entered into a Revolving Credit Agreement with U.S. Bank National Association (the “Credit Agreement”) and executed an unsecured Revolving Credit Note pursuant to which the Company may borrow, prepay and re-borrow up to
$75.0 million
, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. The Credit Agreement contained customary representations, warranties, and covenants of the Company, including, among other things, covenants that impose various financial ratio requirements. In October 2018, the Company and U.S. Bank National Association entered into a First Amendment to the Credit Agreement, which extended the expiration date from October 5, 2018 to October 4, 2019, reduced the
$75.0 million
to
$50.0 million
, and increased the commitment fee on the unused portion from an annual rate of
0.25%
to
0.30%
. In December 2018, the Company entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants are evaluated on a consolidated basis. 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
June 30, 2019
was
zero
.
At
June 30, 2019
, the Company had
$1.3 billion
of Federal Home Loan Bank (“FHLB”) advances outstanding with original or expected maturities of
one year
or less, of which
$1.1 billion
are FHLB Owns the Option (“FOTO”) advances. FOTO advances are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. Typically, FOTO exercise dates follow a specified lockout period at the beginning of the term when FHLB cannot terminate the FOTO advance. If FHLB exercises its option to terminate the FOTO advance at one of the specified option exercise dates, there is no termination or prepayment fee, and replacement funding will be available at then-prevailing market rates, subject to FHLB’s credit and collateral requirements. The Company’s FOTO advances outstanding at the end of the
second
quarter have maturity dates of
ten years
to
fifteen years
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 short lockout periods. The possibility of the FHLB exercising the options is analyzed by the Company along with the market expected rate outcome.
The Company had total FHLB advances of
$1.3 billion
at
June 30, 2019
, with approximately
$2.9 billion
of additional advances available from the FHLB. The FHLB advances are secured by mortgage loans and investment securities totaling approximately
$5.4 billion
at
June 30, 2019
.
The trust preferred securities are tax-advantaged issues that qualified for Tier 1 capital treatment until December 31, 2017, when the Company reached
$15 billion
in assets. They still qualify for inclusion as Tier 2 capital at
June 30, 2019
. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payments on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.
The Company’s long-term debt includes subordinated debt, notes payable and long-term FHLB advances with an original maturity of greater than one year. Aggregate annual maturities of long-term debt at
June 30, 2019
, are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year
|
|
Annual
Maturities
|
|
|
2019
|
|
$
|
973
|
|
|
|
2020
|
|
2,099
|
|
|
|
2021
|
|
1,801
|
|
|
|
2022
|
|
948
|
|
|
|
2023
|
|
925
|
|
|
|
Thereafter
|
|
361,482
|
|
|
|
Total
|
|
$
|
368,228
|
|
NOTE 12: CONTINGENT LIABILITIES
The Company and/or its subsidiaries have various unrelated legal proceedings, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries.
NOTE 13: CAPITAL STOCK
On January 18, 2018, the board of directors of the Company approved a two-for-one stock split of the 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.
On April 12, 2019, as part of the acquisition of Reliance, the Company issued
40,000
shares of Simmons Series A Preferred Stock and
2,000
shares Simmons Series B Preferred Stock in exchange for the outstanding shares of Reliance’s Series A Preferred Stock and Series B Preferred Stock. On May 13, 2019, the Company redeemed all of the preferred stock, including accrued and unpaid dividends.
The Company had
no
repurchases of its common stock during the
three and six
month periods ended
June 30, 2019
.
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
June 30, 2019
, the Company’s subsidiary bank had approximately
$89.4 million
available for payment of dividends to the Company, without prior regulatory approval.
The risk-based capital guidelines of the Federal Reserve Board and the 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
June 30, 2019
, the Company and its subsidiary bank met all capital adequacy requirements under the Basel III Capital Rules. The Company’s CET1 ratio was
9.80%
at
June 30, 2019
.
NOTE 15: STOCK BASED COMPENSATION
The Company’s Board of Directors has adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or bonus shares granted to directors, officers and other key employees.
The table below summarizes the transactions under the Company’s active stock compensation plans for the
six
months ended
June 30, 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
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
483
|
|
|
26.25
|
|
|
Stock options exercised
|
(1
|
)
|
|
10.65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock awards/units vested (earned)
|
—
|
|
|
—
|
|
|
(29
|
)
|
|
19.34
|
|
|
(300
|
)
|
|
26.44
|
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
21.82
|
|
|
(83
|
)
|
|
28.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
694
|
|
|
$
|
22.43
|
|
|
41
|
|
|
$
|
22.90
|
|
|
917
|
|
|
$
|
27.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2019
|
694
|
|
|
$
|
22.43
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options under the plans outstanding at
June 30, 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
|
|
2.55
|
|
$9.46
|
|
1
|
|
$9.46
|
|
10.65
|
|
|
—
|
|
10.65
|
|
|
3
|
|
3.58
|
|
10.65
|
|
3
|
|
10.65
|
|
10.76
|
|
|
—
|
|
10.76
|
|
|
2
|
|
0.55
|
|
10.76
|
|
2
|
|
10.76
|
|
20.29
|
|
|
—
|
|
20.29
|
|
|
71
|
|
5.50
|
|
20.29
|
|
71
|
|
20.29
|
|
20.36
|
|
|
—
|
|
20.36
|
|
|
3
|
|
5.38
|
|
20.36
|
|
3
|
|
20.36
|
|
22.20
|
|
|
—
|
|
22.20
|
|
|
74
|
|
5.73
|
|
22.20
|
|
74
|
|
22.20
|
|
22.75
|
|
|
—
|
|
22.75
|
|
|
436
|
|
6.11
|
|
22.75
|
|
436
|
|
22.75
|
|
23.51
|
|
|
—
|
|
23.51
|
|
|
97
|
|
6.56
|
|
23.51
|
|
97
|
|
23.51
|
|
24.07
|
|
|
—
|
|
24.07
|
|
|
7
|
|
6.21
|
|
24.07
|
|
7
|
|
24.07
|
|
$
|
9.46
|
|
|
—
|
|
$
|
24.07
|
|
|
694
|
|
6.03
|
|
$22.43
|
|
694
|
|
$22.43
|
The table below summarizes the Company’s restricted performance stock unit activity for the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
(In thousands)
|
|
Performance Stock Units
|
|
Non-vested, January 1, 2019
|
|
177
|
|
|
Granted
|
|
117
|
|
|
Vested (earned)
|
|
(93
|
)
|
|
Forfeited
|
|
(3
|
)
|
|
Non-vested, June 30, 2019
|
|
198
|
|
Stock-based compensation expense was
$6,249,000
and
$6,504,000
during the
six
months ended
June 30, 2019
and
2018
, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was
no
unrecognized stock-based compensation expense related to stock options at
June 30, 2019
. Unrecognized stock-based compensation expense related to non-vested stock awards and stock units was
$18,759,000
at
June 30, 2019
. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was
1.9 years
.
The intrinsic value of stock options outstanding and stock options exercisable at
June 30, 2019
was
$608,000
and
$606,000
, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was
$23.26
as of
June 30, 2019
, and the exercise price multiplied by the number of options outstanding. The total intrinsic value of stock options exercised during the
six
months ended
June 30, 2019
and
June 30, 2018
, was
$5,000
and
$1,180,000
, 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
six
months ended
June 30, 2019
and
2018
.
NOTE 16: EARNINGS PER SHARE (“EPS”)
Basic EPS is computed by dividing reported net income available to common stockholders by weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing reported net income available to common stockholders by the weighted average common shares and all potential dilutive common shares outstanding during the period.
The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(In thousands, except per share data)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income available to common stockholders
|
$
|
55,598
|
|
|
$
|
53,562
|
|
|
$
|
103,293
|
|
|
$
|
104,874
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
96,098
|
|
|
92,264
|
|
|
94,318
|
|
|
92,223
|
|
|
Average potential dilutive common shares
|
270
|
|
|
469
|
|
|
270
|
|
|
469
|
|
|
Average diluted common shares
|
96,368
|
|
|
92,733
|
|
|
94,588
|
|
|
92,692
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
1.10
|
|
|
$
|
1.14
|
|
|
Diluted earnings per share
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
1.09
|
|
|
$
|
1.13
|
|
There were
6,610
stock options excluded from the three months ended
June 30, 2019
earnings per share calculation due to the average market price exceeding the related exercise price. There were
no
stock options excluded from the earnings per share calculations for the three months ended
June 30, 2018
and the
six
months ended
June 30, 2019
and
2018
due to the related exercise price exceeding the average market price for those periods.
NOTE 17: ADDITIONAL CASH FLOW INFORMATION
The following is a summary of the Company’s additional cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
Interest paid
|
$
|
87,841
|
|
|
$
|
47,675
|
|
|
Income taxes (refunded) paid
|
28,253
|
|
|
13,245
|
|
|
Transfers of loans to foreclosed assets held for sale
|
1,506
|
|
|
6,725
|
|
|
Transfers of premises to foreclosed assets and other real estate owned
|
444
|
|
|
855
|
|
|
Right-of use lease assets obtained in exchange for lessee operating lease liabilities (adoption of ASU 2016-02)
|
32,757
|
|
|
—
|
|
NOTE 18: OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Professional services
|
$
|
3,492
|
|
|
$
|
4,443
|
|
|
$
|
7,815
|
|
|
$
|
8,683
|
|
|
Postage
|
1,445
|
|
|
1,441
|
|
|
3,171
|
|
|
2,925
|
|
|
Telephone
|
1,480
|
|
|
2,064
|
|
|
3,099
|
|
|
2,969
|
|
|
Credit card expense
|
3,762
|
|
|
3,188
|
|
|
7,622
|
|
|
6,416
|
|
|
Marketing
|
2,436
|
|
|
1,765
|
|
|
5,493
|
|
|
3,407
|
|
|
Software and technology
|
5,580
|
|
|
3,335
|
|
|
10,076
|
|
|
5,983
|
|
|
Operating supplies
|
560
|
|
|
583
|
|
|
1,178
|
|
|
1,332
|
|
|
Amortization of intangibles
|
2,947
|
|
|
2,785
|
|
|
5,588
|
|
|
5,623
|
|
|
Branch right sizing expense
|
2,887
|
|
|
21
|
|
|
2,932
|
|
|
85
|
|
|
Other expense
|
8,278
|
|
|
6,560
|
|
|
15,955
|
|
|
14,256
|
|
|
Total other operating expenses
|
$
|
32,867
|
|
|
$
|
26,185
|
|
|
$
|
62,929
|
|
|
$
|
51,679
|
|
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, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas, along with credit card loans to customers throughout the United States. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At
June 30, 2019
, the Company had outstanding commitments to extend credit aggregating approximately
$602,752,000
and
$3,480,855,000
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
$51,628,000
and
$39,101,000
at
June 30, 2019
, and
December 31, 2018
, respectively, with terms ranging from
9 months
to
15 years
. At
June 30, 2019
and
December 31, 2018
, the Company had
no
deferred revenue under standby letter of credit agreements.
NOTE 21: FAIR VALUE MEASUREMENTS
ASC Topic 820,
Fair Value Measurements
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
|
|
|
|
•
|
Level 1 Inputs
– Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 Inputs
– Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
•
|
Level 3 Inputs
– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale securities
– Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. In order to ensure the fair values are consistent with ASC Topic 820, the Company periodically checks the fair values by comparing them to another pricing source, such as Bloomberg. The availability of pricing confirms Level 2 classification in the fair value hierarchy. The third-party pricing service is subject to an annual review of internal controls (SSAE 16), which is made available for the Company’s review. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company’s investment in U.S. Treasury securities, if any, is reported at fair value utilizing Level 1 inputs. The remainder of the Company’s available-for-sale securities are reported at fair value utilizing Level 2 inputs.
Derivative instruments
– The Company’s derivative instruments are reported at fair value utilizing Level 2 inputs. The Company obtains fair value measurements from dealer quotes.
The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a recurring basis as of
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
(In thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
197,656
|
|
|
$
|
—
|
|
|
$
|
197,656
|
|
|
$
|
—
|
|
|
Mortgage-backed securities
|
1,345,760
|
|
|
—
|
|
|
1,345,760
|
|
|
—
|
|
|
State and political subdivisions
|
636,558
|
|
|
—
|
|
|
636,558
|
|
|
—
|
|
|
Other securities
|
162,413
|
|
|
—
|
|
|
162,413
|
|
|
—
|
|
|
Derivative asset
|
9,871
|
|
|
—
|
|
|
9,871
|
|
|
—
|
|
|
Derivative liability
|
(9,884
|
)
|
|
—
|
|
|
(9,884
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
154,301
|
|
|
$
|
—
|
|
|
$
|
154,301
|
|
|
$
|
—
|
|
|
Mortgage-backed securities
|
1,522,900
|
|
|
—
|
|
|
1,522,900
|
|
|
—
|
|
|
States and political subdivisions
|
314,843
|
|
|
—
|
|
|
314,843
|
|
|
—
|
|
|
Other securities
|
159,708
|
|
|
—
|
|
|
159,708
|
|
|
—
|
|
|
Derivative asset
|
6,242
|
|
|
—
|
|
|
6,242
|
|
|
—
|
|
|
Derivative liability
|
(5,283
|
)
|
|
—
|
|
|
(5,283
|
)
|
|
—
|
|
Certain financial assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and liabilities measured at fair value on a nonrecurring basis include the following:
Impaired loans (collateral dependent)
– Loan impairment is reported when full payment under the loan terms is not expected. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Appraisals are updated at renewal, if not more frequently, for all collateral dependent loans that are deemed impaired by way of impairment testing. Impairment testing is performed on all loans over
$1.5 million
rated Substandard or worse, all existing impaired loans regardless of size and all TDRs. All collateral dependent impaired loans meeting these thresholds have had updated appraisals or internally prepared evaluations within the last one to two years and these updated valuations are considered in the quarterly review and discussion of the corporate Special Asset Committee. On targeted CRE loans, appraisals/internally prepared valuations may be updated before the typical 1-3 year balloon/maturity period. If an updated valuation results in decreased value, a specific (ASC 310) impairment is placed against the loan, or a partial charge-down is initiated, depending on the circumstances and anticipation of the loan’s ability to remain a going concern, possibility of foreclosure, certain market factors, etc.
Foreclosed assets and other real estate owned
– Foreclosed assets and other real estate owned are reported at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the
Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets and other real estate owned is estimated using Level 3 inputs based on unobservable market data. As of
June 30, 2019
and
December 31, 2018
, the fair value of foreclosed assets and other real estate owned less estimated costs to sell was
$24.8 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
June 30, 2019
and
December 31, 2018
, the aggregate fair value of mortgage loans held for sale exceeded their cost. Accordingly,
no
mortgage loans held for sale were marked down and reported at fair value.
The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a nonrecurring basis as of
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
(In thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
(1) (2)
(collateral dependent)
|
$
|
2,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,866
|
|
|
Foreclosed assets and other real estate owned
(1)
|
7,202
|
|
|
—
|
|
|
—
|
|
|
7,202
|
|
|
|
|
|
|
|
|
|
|
|
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
June 30, 2019
and
December 31, 2018
, respectively.
ASC Topic 825,
Financial Instruments
, requires disclosure in annual and interim financial statements of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following methods and assumptions were used to estimate the fair value of each class of financial instruments not previously disclosed.
Cash and cash equivalents
– The carrying amount for cash and cash equivalents approximates fair value (Level 1).
Interest bearing balances due from banks
– The fair value of interest bearing balances due from banks – time is estimated using a discounted cash flow calculation that applies the rates currently offered on deposits of similar remaining maturities (Level 2).
Held-to-maturity securities
– Fair values for held-to-maturity securities equal quoted market prices, if available, such as for highly liquid government bonds (Level 1). If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things (Level 2). In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Loans
– The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Additional factors considered include the type of loan and related collateral, variable or fixed rate, classification status, remaining term, interest rate, historical delinquencies, loan to value ratios, current market rates and remaining loan balance. The loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans were based on current market rates for new originations of similar loans. Estimated credit losses were also factored into the projected cash flows of the loans. The fair value of loans is estimated on an exit price basis incorporating the above factors (Level 3).
Deposits
– The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities (Level 3).
Federal Funds purchased, securities sold under agreement to repurchase and short-term debt
– The carrying amount for Federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value (Level 2).
Other borrowings
– For short-term instruments, the carrying amount is a reasonable estimate of fair value. For long-term debt, rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value (Level 2).
Subordinated debentures
– The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities (Level 2).
Accrued interest receivable/payable
– The carrying amounts of accrued interest approximated fair value (Level 2).
Commitments to extend credit, letters of credit and lines of credit
– The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair Value Measurements
|
|
|
|
(In thousands)
|
Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
655,256
|
|
|
$
|
655,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
655,256
|
|
|
Interest bearing balances due from banks - time
|
5,041
|
|
|
—
|
|
|
5,041
|
|
|
—
|
|
|
5,041
|
|
|
Held-to-maturity securities
|
47,455
|
|
|
—
|
|
|
48,640
|
|
|
—
|
|
|
48,640
|
|
|
Mortgage loans held for sale
|
34,999
|
|
|
—
|
|
|
—
|
|
|
34,999
|
|
|
34,999
|
|
|
Interest receivable
|
54,781
|
|
|
—
|
|
|
54,781
|
|
|
—
|
|
|
54,781
|
|
|
Legacy loans, net
|
9,199,430
|
|
|
—
|
|
|
—
|
|
|
9,160,613
|
|
|
9,160,613
|
|
|
Loans acquired, net
|
3,864,516
|
|
|
—
|
|
|
—
|
|
|
3,848,210
|
|
|
3,848,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing transaction accounts
|
2,954,032
|
|
|
—
|
|
|
2,954,032
|
|
|
—
|
|
|
2,954,032
|
|
|
Interest bearing transaction accounts and savings deposits
|
7,258,005
|
|
|
—
|
|
|
7,258,005
|
|
|
—
|
|
|
7,258,005
|
|
|
Time deposits
|
3,304,176
|
|
|
—
|
|
|
—
|
|
|
3,295,504
|
|
|
3,295,504
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
130,470
|
|
|
—
|
|
|
130,470
|
|
|
—
|
|
|
130,470
|
|
|
Other borrowings
|
1,324,094
|
|
|
—
|
|
|
1,324,038
|
|
|
—
|
|
|
1,324,038
|
|
|
Subordinated notes and debentures
|
354,132
|
|
|
—
|
|
|
364,873
|
|
|
—
|
|
|
364,873
|
|
|
Interest payable
|
11,325
|
|
|
—
|
|
|
11,325
|
|
|
—
|
|
|
11,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.