f10q_111014.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For Quarter Ended September 30, 2014
 Commission File Number 000-06253
 
SIMMONS FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Arkansas
71-0407808
(State or other jurisdiction of
(I.R.S. Employer
 incorporation or organization)
Identification No.)
   
 501 Main Street, Pine Bluff, Arkansas
71601
 (Address of principal executive offices)
(Zip Code)
 
870-541-1000
(Registrant's telephone number, including area code)

Not Applicable
Former name, former address and former fiscal year, if changed since last report

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
x Yes   o No

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

Large accelerated filer o      Accelerated filer x        Non-accelerated filer o     Smaller reporting company o

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

The number of shares outstanding of the Registrant’s Common Stock as of October 24, 2014, was 18,022,011.

 
 
 
Simmons First National Corporation
Quarterly Report on Form 10-Q
September 30, 2014


Table of Contents
 
   
Page
 
 
 
 
 
 
 
 
 
     
 
     
 
 
 
 
Part I: 
Item 1. 

Simmons First National Corporation
Consolidated Balance Sheets
September 30, 2014 and December 31, 2013
 
(In thousands, except share data)
  
September 30,
2014
    
December 31,
2013
  
   
(Unaudited)
        
ASSETS
            
Cash and non-interest bearing balances due from banks
  
$
73,554
    
$
69,827
  
Interest bearing balances due from banks
    
210,742
      
469,553
  
Federal funds sold
    
10,000
      
-
  
Cash and cash equivalents
    
294,296
      
539,380
  
Investment securities
    
1,140,203
      
957,965
  
Mortgage loans held for sale
    
22,003
      
9,494
  
Assets held in trading accounts
    
6,819
      
8,978
  
Loans:
                
Legacy loans
    
1,963,378
      
1,742,638
  
Allowance for loan losses
    
(27,076
)
    
(27,442
)
Loans acquired, not covered by FDIC loss share (net of discount)
    
676,056
      
515,644
  
Loans acquired, covered by FDIC loss share (net of discount)
    
118,158
      
146,653
  
Net loans
    
2,730,516
      
2,377,493
  
FDIC indemnification asset
    
25,694
      
48,791
  
Premises and equipment
    
115,639
      
119,614
  
Premises held for sale
    
15,856
      
19,466
  
Foreclosed assets not covered by FDIC loss share
    
50,770
      
64,820
  
Foreclosed assets covered by FDIC loss share
    
15,212
      
20,585
  
Interest receivable
    
18,006
      
15,654
  
Bank owned life insurance
    
75,357
      
60,384
  
Goodwill
    
108,158
      
78,529
  
Other intangible assets
    
22,988
      
14,972
  
Other assets
    
49,705
      
46,975
  
Total assets
  
$
4,691,222
    
$
4,383,100
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Deposits:
                
Non-interest bearing transaction accounts
  
$
884,064
    
$
718,438
  
Interest bearing transaction accounts and savings deposits
    
1,984,422
      
1,862,618
  
Time deposits
    
1,040,429
      
1,116,511
  
Total deposits
    
3,908,915
      
3,697,567
  
Federal funds purchased and securities sold under agreements to repurchase
    
112,977
      
107,887
  
Other borrowings
    
123,396
      
117,090
  
Subordinated debentures
    
20,620
      
20,620
  
Accrued interest and other liabilities
    
41,309
      
36,104
  
Total liabilities
    
4,207,217
      
3,979,268
  
                 
Stockholders’ equity:
                
Preferred stock, $0.01 par value; 40,040,000 shares authorized and unissued at September 30, 2014 and December 31, 2013
    
-
      
-
  
Common stock, Class A, $0.01 par value; 60,000,000 shares authorized; 17,992,261 and 16,226,256 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
    
180
      
162
  
Surplus
    
155,592
      
88,095
  
Undivided profits
    
330,185
      
318,577
  
Accumulated other comprehensive loss
    
(1,952
)
    
(3,002
)
Total stockholders’ equity
    
484,005
      
403,832
  
Total liabilities and stockholders’ equity
  
$
4,691,222
    
$
4,383,100
  
 

See Condensed Notes to Consolidated Financial Statements.
 
 
3
 
Simmons First National Corporation
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2014 and 2013
 
   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands, except per share data)
  
2014
    
2013
    
2014
    
2013
  
   
(Unaudited)
    
(Unaudited)
  
INTEREST INCOME
                        
Legacy loans
  
$
23,841
    
$
23,483
    
$
68,124
    
$
69,781
  
Loans acquired
    
16,241
      
7,132
      
50,710
      
19,776
  
Federal funds sold
    
12
      
6
      
16
      
14
  
Investment securities
    
4,717
      
3,428
      
14,032
      
9,349
  
Mortgage loans held for sale
    
269
      
122
      
506
      
395
  
Assets held in trading accounts
    
3
      
6
      
13
      
23
  
Interest bearing balances due from banks
    
132
      
234
      
691
      
875
  
TOTAL INTEREST INCOME
    
45,215
      
34,411
      
134,092
      
100,213
  
                                 
INTEREST EXPENSE
                                
Deposits
    
2,232
      
1,993
      
6,737
      
6,274
  
Federal funds purchased and securities sold under agreements to repurchase
    
55
      
46
      
194
      
165
  
Other borrowings
    
996
      
646
      
2,995
      
2,072
  
Subordinated debentures
    
160
      
162
      
477
      
483
  
TOTAL INTEREST EXPENSE
    
3,443
      
2,847
      
10,403
      
8,994
  
                                 
NET INTEREST INCOME
    
41,772
      
31,564
      
123,689
      
91,219
  
Provision for loan losses
    
1,128
      
1,081
      
3,638
      
3,034
  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
40,644
      
30,483
      
120,051
      
88,185
  
                                 
NON-INTEREST INCOME
                                
Trust income
    
1,838
      
1,448
      
4,929
      
4,234
  
Service charges on deposit accounts
    
6,238
      
4,603
      
19,098
      
13,318
  
Other service charges and fees
    
808
      
728
      
2,490
      
2,294
  
Mortgage lending income
    
1,812
      
1,122
      
3,885
      
3,677
  
Investment banking income
    
284
      
240
      
620
      
1,390
  
Debit and credit card fees
    
5,769
      
4,400
      
17,213
      
12,779
  
Bank owned life insurance income
    
411
      
328
      
1,117
      
974
  
(Loss) gain on sale of securities
    
(18
)
    
-
      
20
      
(193
)
Net (loss) gain on assets covered by FDIC loss share agreements
    
(3,744
)
    
(3,443
)
    
(17,303
)
    
(8,200
)
Other income
    
2,637
      
887
      
8,619
      
2,626
  
TOTAL NON-INTEREST INCOME
    
16,035
      
10,313
      
40,688
      
32,899
  
                                 
NON-INTEREST EXPENSE
                                
Salaries and employee benefits
    
20,892
      
17,701
      
64,338
      
54,146
  
Occupancy expense, net
    
3,204
      
2,485
      
10,338
      
7,490
  
Furniture and equipment expense
    
2,363
      
1,613
      
6,592
      
5,367
  
Other real estate and foreclosure expense
    
1,864
      
385
      
3,112
      
775
  
Deposit insurance
    
877
      
595
      
2,630
      
1,862
  
Merger related costs
    
3,628
      
190
      
6,255
      
(37
)
Other operating expenses
    
11,526
      
7,934
      
35,492
      
23,529
  
TOTAL NON-INTEREST EXPENSE
    
44,354
      
30,903
      
128,757
      
93,132
  
                                 
INCOME BEFORE INCOME TAXES
    
12,325
      
9,893
      
31,982
      
27,952
  
Provision for income taxes
    
3,537
      
2,961
      
8,933
      
8,507
  
NET INCOME
  
$
8,788
    
$
6,932
    
$
23,049
    
$
19,445
  
BASIC EARNINGS PER SHARE
  
$
0.52
    
$
0.43
    
$
1.40
    
$
1.19
  
DILUTED EARNINGS PER SHARE
  
$
0.52
    
$
0.43
    
$
1.39
    
$
1.19
  

 
See Condensed Notes to Consolidated Financial Statements. 
 
 
4
 
Simmons First National Corporation
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2014 and 2013
 
   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands, except per share data)
  
2014
    
2013
    
2014
    
2013
  
   
(Unaudited)
    
(Unaudited)
  
NET INCOME
  
$
8,788
    
$
6,932
    
$
23,049
    
$
19,445
  
                                 
OTHER COMPREHENSIVE INCOME
                                
Unrealized holding gains (losses) arising during the period on available-for-sale securities
    
(911
)
    
(314
)
    
1,748
      
(4,896
)
Less: Reclassification adjustment for realized gains (losses) included in net income
    
(18
)
    
-
      
20
      
(193
)
Other comprehensive gain (loss), before tax effect
    
(893
)
    
(314
)
    
1,728
      
(4,703
)
Less: Tax effect of other comprehensive gain (loss)
    
(350
)
    
(123
)
    
678
      
(1,845
)
                                 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
    
(543
)
    
(191
)
    
1,050
      
(2,858
)
                                 
COMPREHENSIVE INCOME
  
$
8,245
    
$
6,741
    
$
24,099
    
$
16,587
  
 

See Condensed Notes to Consolidated Financial Statements.
 
 
5
 
Simmons First National Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2014 and 2013
 
(In thousands)
  
September 30,
2014
    
September 30,
2013
  
   
(Unaudited)
  
OPERATING ACTIVITIES
            
Net income
  
$
23,049
    
$
19,445
  
Items not requiring (providing) cash:
                
Depreciation and amortization
    
5,221
      
4,416
  
Provision for loan losses
    
3,638
      
3,034
  
Net accretion of investment securities and assets not covered by FDIC loss share
    
(2,768
)
    
(389
)
Stock-based compensation expense
    
962
      
1,039
  
Net accretion on assets covered by FDIC loss share
    
(1,541
)
    
(4,553
)
Deferred income taxes
    
(4,456
)
    
(2,274
)
(Gain) loss on sale of investments
    
(20
)
    
193
  
Gain on sale of premises and equipment
    
(3,156
)
    
-
  
Bank owned life insurance income
    
(1,117
)
    
(974
)
Changes in:
                
Interest receivable
    
(873
)
    
(1,078
)
Mortgage loans held for sale
    
(12,509
)
    
14,762
  
Assets held in trading accounts
    
2,159
      
(2,520
)
Other assets
    
(4,893
)
    
1,594
  
Accrued expenses and other liabilities
    
11,706
      
(1,680
)
Income taxes payable
    
(3,328
)
    
(462
)
Net cash provided by operating activities
    
12,074
      
30,553
  
                 
INVESTING ACTIVITIES
                
Net originations of loans
    
(96,670
)
    
(97,444
)
Net collections of loans covered by FDIC loss share
    
41,649
      
68,674
  
Proceeds from sale of student loans
    
22,136
      
-
  
Proceeds from sale of premises held for sale
    
13,917
      
-
  
Purchase of premises and equipment, net
    
(3,629
)
    
(3,516
)
Proceeds from sale of foreclosed assets held for sale
    
19,733
      
12,943
  
Proceeds from sale of foreclosed assets held for sale, covered by FDIC loss share
    
10,853
      
11,684
  
Proceeds from sale of short-term investment securities
    
1,504
      
-
  
Proceeds from sale of available-for-sale securities
    
13,159
      
16,029
  
Proceeds from maturities of available-for-sale securities
    
122,041
      
53,144
  
Purchases of available-for-sale securities
    
(200,284
)
    
(60,848
)
Proceeds from maturities of held-to-maturity securities
    
325,895
      
113,289
  
Purchases of held-to-maturity securities
    
(381,175
)
    
(199,201
)
Purchase of bank owned life insurance
    
(6,326
)
    
(7,000
)
Cash received on FDIC loss share
    
13,325
      
11,621
  
Purchase of Delta Trust & Bank, net of cash received
    
11,343
      
-
  
Net cash used in investing activities
    
(92,529
)
    
(80,625
)
                 
FINANCING ACTIVITIES
                
Net change in deposits
    
(144,014
)
    
(35,365
)
Dividends paid
    
(11,441
)
    
(10,304
)
Net change in other borrowed funds
    
(4,671
)
    
(13,454
)
Net change in federal funds purchased and securities sold under agreements to repurchase
    
(6,010
)
    
(41,767
)
Net shares issued under stock compensation plans
    
1,507
      
498
  
Repurchase of common stock
    
-
      
(10,848
)
Net cash used in financing activities
    
(164,629
)
    
(111,240
)
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    
(245,084
)
    
(161,312
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
539,380
      
537,797
  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
294,296
    
$
376,485
  
 
 
See Condensed Notes to Consolidated Financial Statements. 
 
 
6
 
Simmons First National Corporation
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2014 and 2013
 
(In thousands, except share data)
  
Common
Stock
    
Surplus
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Undivided
Profits
    
Total
  
                               
Balance, December 31, 2012
  
$
165
    
$
96,587
    
$
257
    
$
309,053
    
$
406,062
  
Comprehensive income:
                                        
Net income
    
-
      
-
      
-
      
19,445
      
19,445
  
Change in unrealized appreciation on available-for-sale securities, net of income taxes of ($1,845)
    
-
      
-
      
(2,858
)
    
-
      
(2,858
)
Comprehensive income
                                    
16,587
  
Stock issued as bonus shares – 64,506 shares
    
1
      
228
      
-
      
-
      
229
  
Vesting bonus shares
    
-
      
1,012
      
-
      
-
      
1,012
  
Stock issued for employee stock purchase plan – 5,244 shares
    
-
      
126
      
-
      
-
      
126
  
Exercise of stock options – 6,000 shares
    
-
      
143
      
-
      
-
      
143
  
Stock granted under stock-based compensation plans
    
-
      
27
      
-
      
-
      
27
  
Repurchase of common stock – (419,564 shares)
    
(4
)
    
(10,844
)
    
-
      
-
      
(10,844
)
Cash dividends – $0.63 per share
    
-
      
-
      
-
      
(10,304
)
    
(10,304
)
                                         
Balance, September 30, 2013 (Unaudited)
    
162
      
87,279
      
(2,601
)
    
318,194
      
403,034
  
Comprehensive income:
                                        
Net income
    
-
      
-
      
-
      
3,786
      
3,786
  
Change in unrealized depreciation on available-for-sale securities, net of income taxes of ($258)
    
-
      
-
      
(401)
      
-
      
(401
)
Comprehensive income
                                    
3,385
  
Stock issued as bonus shares – 10,500 shares
                                        
Vesting bonus shares, net of forfeitures – (829 shares)
    
-
      
378
      
-
      
-
      
378
  
Exercise of stock options – 18,290 shares
    
-
      
461
      
-
      
-
      
461
  
Securities exchanged under stock option plan – (669 shares)
    
-
      
(23
)
    
-
      
-
      
(23
)
Cash dividends – $0.21 per share
    
-
      
-
      
-
      
(3,403
)
    
(3,403
)
                                         
Balance, December 31, 2013
    
162
      
88,095
      
(3,002
)
    
318,577
      
403,832
  
Comprehensive income:
                                        
Net income
    
-
      
-
      
-
      
23,049
      
23,049
  
Change in unrealized (depreciation) on available-for-sale securities, net of income taxes of $678
    
-
      
-
      
1,050
      
-
      
1,050
  
Comprehensive income
                                    
24,099
  
Stock issued as bonus shares – 92,6300 shares
    
1
      
441
      
-
      
-
      
442
  
Vesting bonus shares, net of forfeitures – (1,560 shares)
    
-
      
962
      
-
      
-
      
962
  
Stock issued for employee stock purchase plan – 4,897 shares
    
-
      
118
      
-
      
-
      
118
  
Exercise of stock options – 45,160 shares
    
1
      
1,131
      
-
      
-
      
1,132
  
Securities exchanged under stock option plan – (4,546 shares)
    
-
      
(185
)
    
-
      
-
      
(185
)
Delta Trust & Bank acquisition – 1,629,424 shares
    
16
      
65,030
      
-
      
-
      
65,046
  
Repurchase of common stock
    
-
      
-
      
-
      
-
      
-
  
Cash dividends – $0.66 per share
    
-
      
-
      
-
      
(11,441
)
    
(11,441
)
                                         
Balance, September 30, 2014 (Unaudited)
  
$
180
    
$
155,592
    
$
(1,952
)
  
$
330,185
    
$
484,005
  
 
 
See Condensed Notes to Consolidated Financial Statements.
 
 
7
 
SIMMONS FIRST NATIONAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: 
BASIS OF PRESENTATION

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

All adjustments made to the unaudited financial statements were of a normal recurring nature.  In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made.  Certain prior year amounts are reclassified to conform to current year classification.  The consolidated balance sheet of the Company as of December 31, 2013, has been derived from the audited consolidated balance sheet of the Company as of that date.  The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report for 2013 filed with the U.S. Securities and Exchange Commission (the “SEC”).

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability.  The provisions of ASU 2013-11 became effective for the Company on January 1, 2014, and did not have a significant impact on the Company’s ongoing financial position or results of operations.

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (Topic 310-40): Receivables – Troubled Debt Restructurings by Creditors.  The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  ASU 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, ASU 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  ASU 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014.  An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method.  Early adoption is permitted.  The Company is in the process of evaluating the impact of ASU 2014-04 on its financial statements.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.  The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.  The Company will be required to adopt this ASU beginning with the quarter ending March 31, 2015.  The adoption of ASU 2014-08 is not expected to have a significant impact on the Company’s ongoing financial position or results of operations.

 
8
 
In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure impacting FASB ASC 310-40, Receivables – Troubled Debt Restructuring by Creditors.  This update affects creditors that hold government-guaranteed mortgage loans.  The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim; (3) at the time of foreclosure, the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  ASU 2014-14 is effective for interim and annual reporting periods beginning after December 15, 2014.  The Company is in the process of evaluating the impact of ASU 2014-04 on its financial statements.
 
There have been no other significant changes to the Company’s accounting policies from the 2013 Form 10-K.  Presently, the Company is not aware of any other changes to the Accounting Standards Codification that will have a material impact on the Company’s present or future financial position or results of operations.

Acquisition Accounting, Acquired Loans

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

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

The Company evaluates all of the loans purchased in conjunction with its FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30.  All loans acquired in the FDIC transactions, both covered and not covered, were deemed to be impaired loans.  All loans acquired, whether or not covered by FDIC loss share agreements, are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

For impaired loans accounted for under ASC Topic 310-30, we continue to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques.  We evaluate at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.

Covered Loans and Related Indemnification Asset

Because the FDIC will reimburse us for certain losses incurred on certain acquired loans, an indemnification asset is recorded at fair value at the acquisition date.  The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations.  The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

The shared-loss agreements continue to be measured on the same basis as the related indemnified loans, as prescribed by ASC Topic 805.  Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income.  Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over 1) the same period or 2) the life of the shared-loss agreements, whichever is shorter.  Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset.  Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements.

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC.  A corresponding, claim receivable is recorded until cash is received from the FDIC.  For further discussion of the Company’s acquisition and loan accounting, see Note 5, Loans Acquired.
 
 
9
 
Earnings Per Share (“EPS”)

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

Following is the computation of per share earnings for the three and nine months ended September 30, 2014 and 2013:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands, except per share data)
  
2014
    
2013
    
2014
    
2013
  
Net income
  
$
8,788
    
$
6,932
    
$
23,049
    
$
19,445
  
                                 
Average common shares outstanding
    
16,873
      
16,220
      
16,489
      
16,383
  
Average potential dilutive common shares
    
44
      
5
      
44
      
5
  
Average diluted common shares
    
16,917
      
16,225
      
16,533
      
16,388
  
                                 
Basic earnings per share
  
$
0.52
    
$
0.43
    
$
1.40
    
$
1.19
  
Diluted earnings per share
  
$
0.52
    
$
0.43
    
$
1.39
    
$
1.19
  

Stock options to purchase 138,528 shares for the three and nine months ended September 30, 2013 were not included in the diluted EPS calculation because the exercise price of those options exceeded the average market price.

NOTE 2: 
ACQUISITIONS

Metropolitan National Bank

On November 25, 2013, Simmons First National Corporation (the “Company”, or “Simmons”) completed the acquisition of Metropolitan National Bank (“Metropolitan” or “MNB”), with its principal office located in Little Rock, Arkansas, pursuant to a Stock Purchase Agreement between the Company and Rogers Bancshares, Inc. (“RBI”), in which the Company purchased all the stock of Metropolitan for $53.6 million in cash.  The acquisition was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code.  As part of the acquisition, Metropolitan was merged into the Company’s wholly-owned subsidiary, Simmons First National Bank (“Simmons Bank”).  The Company funded the transaction with $46 million in unsecured debt from correspondent banks with a 3.25% floating rate to be repaid in three years or less.  The Company recorded $6.6 million of pre-tax merger costs during 2013 related to the acquisition.

Prior to the acquisition, Metropolitan conducted banking business from 45 branches located in central and northwest Arkansas.  Including the effects of the purchase accounting adjustments, the Company acquired approximately $884 million in assets, approximately $457 million in loans, net of discounts, and $838 million of deposits.  During the first quarter of 2014, the Company completed the system integration and branch consolidation associated with the Metropolitan acquisition.

Delta Trust & Banking Corporation

On August 31, 2014, the Simmons First National Corporation completed the acquisition of Delta Trust & Banking Corporation (“Delta Trust”), headquartered in Little Rock, Arkansas, including its wholly-owned bank subsidiary Delta Trust & Bank (“DTB”).  Simmons issued 1,629,424 shares of its common stock valued at approximately $65.0 million as of August 29, 2014, plus $2.4 million in cash in exchange for all outstanding shares of Delta Trust common stock.

Prior to the acquisition, Delta Trust conducted banking business from 9 branches located in central, south and northwest Arkansas.  Including the effects of the purchase accounting adjustments, the Company acquired approximately $417 million in assets, approximately $312 million in loans including loan discounts and approximately $355 million in deposits.  The Company completed the systems conversion and merged DTB into Simmons Bank on October 24, 2014.
 
 
10
 
A summary, at fair value, of the assets acquired and liabilities assumed in the Delta Trust transaction, as of the acquisition date, is as follows:
 
(In thousands)
  
Acquired from
Delta Trust
    
Fair Value
Adjustments
    
Fair
Value
  
                   
Assets Acquired
                  
Cash and due from banks
  
$
13,739
    
$
-
    
$
13,739
  
Investment securities
    
62,410
      
(37
)
   
62,373
  
Loans acquired, not covered by FDIC loss share
    
326,829
      
(15,149
)
    
311,680
  
Allowance for loan losses
    
(6,008
)
   
6,008
      
-
  
Foreclosed assets not covered by FDIC loss share
    
3,262
      
(1,471
)
    
1,791
  
Premises and equipment
    
4,405
      
(433
)
   
3,972
  
Bank owned life insurance
    
7,530
      
-
      
7,530
  
Goodwill
    
822
      
(822
)
    
-
  
Core deposit intangible
    
-
      
4,318
      
4,318
  
Other intangibles
    
137
      
4,904
      
5,041
  
Deferred tax asset
    
1,859
      
597
      
2,456
  
Other assets
    
5,807
      
(1,381
)
   
4,426
  
Total assets acquired
  
$
420,792
    
$
(3,466
)
  
$
417,326
  
                         
Liabilities Assumed
                        
Deposits:
                        
Non-interest bearing transaction accounts
  
$
63,259
    
$
-
    
$
63,259
  
Interest bearing transaction accounts and savings deposits
    
200,596
      
-
      
200,596
  
Time deposits
    
91,507
      
-
      
91,507
  
Total deposits
    
355,362
      
-
      
355,362
  
Fed funds purchased
    
11,100
              
11,100
  
Other borrowings
    
11,106
      
(129
)
    
10,977
  
Accrued interest and other liabilities
    
1,528
      
-
      
1,528
  
Total liabilities assumed
    
379,096
      
(129
)
    
378,967
  
Equity
    
41,696
      
(41,696
)
   
-
  
Total equity assumed
    
41,696
      
(41,696
)
    
-
  
Total liabilities and equity assumed
  
$
420,792
    
$
(41,825
)
 
$
378,967
  
Net assets acquired
                    
38,359
  
Purchase price
                    
67,441
  
Goodwill
                  
$
29,082
  

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

Cash and due from banks and interest bearing balances 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.  This adjustment is primarily the result of marking the held-to-maturity securities to 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.

 
11
 
Foreclosed assets held for sale – These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.

Premises and equipment – Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property values completed in connection with the acquisition and book value acquired.
 
Bank owned life insurance – Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value.
 
Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill, of $29.1 million.
 
Core deposit premium – This intangible asset represents the value of the relationships that Delta Trust had with its deposit customers.  The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.

Other intangibles – These intangible assets represent the value of the relationships that Delta Trust’s investment subsidiary, insurance subsidiary and trust department had with their customers.  The fair value of these intangible assets was estimated based on a combination of discounted cash flow methodology and a market valuation approach.

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

Other assets – The fair value adjustment results from certain assets whose value was estimated to be less than book value, such as certain prepaid assets, receivables and other miscellaneous assets.

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 Delta Trust’s certificates of deposits compared to the current market rates. Based on the results of the analysis, the estimated fair value adjustment was immaterial.

Federal funds purchased – The carrying amount of federal funds purchased is a reasonable estimate of fair value based on the short-term nature of these liabilities.

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

Accrued interest and other liabilities – The fair value used represents the adjustment of certain estimated liabilities from Delta Trust.

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition and due to the number of assets acquired and liabilities assumed.  Management will continue to review the estimated fair values of loans, foreclosed assets, property and equipment, intangible assets, and other assets and liabilities, and to evaluate the assumed tax positions.  The Company expects to finalize its analysis of the acquired loans along with the other acquired assets and assumed liabilities in this transaction over the next few months, within one year of the acquisition.  Therefore, adjustments to the estimated amounts and carrying values may occur.  See Note 5, Loans Acquired, for discussion regarding subsequent evaluation of future cash flows.

The Company’s operating results for the three and nine months ended September 30, 2014 include the operating results of the acquired assets and assumed liabilities of Delta Trust subsequent to the acquisition date.
 
 
12
 
Community First Bancshares, Inc. (Pending Acquisition)

On May 6, 2014, the Company announced that it has entered into a definitive agreement and plan of merger (“Community First Agreement”) with Community First Bancshares, Inc. (“Community First”), headquartered in Union City, Tennessee, including its wholly-owned bank subsidiary First State Bank (“First State”).  According to the terms of the Community First Agreement, the Company will acquire all of the outstanding common stock of Community First in a transaction valued at approximately $275.9 million (based on the Company’s May 2, 2014 closing price), subject to potential adjustments.  The transaction is expected to be immediately accretive to the Company’s diluted core earnings per common share.

Community First conducts banking business from 31 branches located throughout Tennessee.  As of September 30, 2014, Community First had approximately $1.9 billion in assets, $1.2 billion in loans and $1.5 billion in deposits.  Completion of the transaction is expected in the fourth quarter of 2014 or early in the first quarter of 2015 and is subject to certain closing conditions, including approval by the shareholders of both Community First and the Company and customary regulatory approvals.  Upon closing, Community First will merge into the Company.

Liberty Bancshares, Inc. (Pending Acquisition)

On May 27, 2014, the Company announced that it has entered into a definitive agreement and plan of merger (“Liberty Agreement”) with Liberty Bancshares, Inc. (“Liberty”), headquartered in Springfield, Missouri, including its wholly-owned bank subsidiary Liberty Bank.  According to the terms of the Liberty Agreement, the Company will acquire all of the outstanding common stock of Liberty in a transaction valued at approximately $208.8 million (based on the Company’s May 23, 2014 closing price), subject to potential adjustments.  The transaction is expected to be immediately accretive to the Company’s diluted core earnings per common share.

Liberty conducts banking business from 24 branches located in southwest Missouri, including five in Springfield, Missouri.  As of September 30, 2014, Liberty had approximately $1.1 billion in assets, $806 million in loans and $886 million in deposits.  Completion of the transaction is expected in the fourth quarter of 2014 or early in the first quarter of 2015 and is subject to certain closing conditions, including approval by the shareholders of both Liberty and the Company and customary regulatory approvals.  Upon closing, Liberty will merge into the Company.
 
 
13
 
NOTE 3: 
INVESTMENT SECURITIES

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

   
September 30, 2014
    
December 31, 2013
  
(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
  
$
455,827
    
$
961
    
$
(5,403
)
  
$
451,385
    
$
395,198
    
$
50
    
$
(10,535
)
  
$
384,713
  
Mortgage-backed securities
    
30,954
      
9
      
(602
)
    
30,361
      
34,425
      
17
      
(442
)
   
34,000
  
State and political subdivisions
    
335,329
      
8,762
      
(872
)
    
341,080
      
315,445
      
2,165
      
(5,498
)
    
312,112
  
Other securities
    
620
      
-
      
-
      
620
      
620
      
-
      
-
      
620
  
Total HTM
  
$
822,730
    
$
9,732
    
$
(6,877
)
  
$
823,446
    
$
745,688
    
$
2,232
    
$
(16,475
)
  
$
731,445
  
                                                                 
Available-for-Sale
                                                                
U.S. Treasury
  
$
4,000
    
$
-
    
$
(10
)
  
$
3,991
    
$
4,001
    
$
-
    
$
(16
)
  
$
3,985
  
U.S. Government agencies
    
283,620
      
17
      
(3,316
)
    
280,321
      
183,781
      
8
      
(5,572
)
    
178,217
  
Mortgage-backed securities
    
52
      
1
      
(21
)
    
32
      
1,735
      
156
      
-
      
1,891
  
State and political subdivisions
    
8,892
      
12
      
(2
)
    
8,903
      
7,860
      
4
      
(3
)
    
7,861
  
Other securities
    
23,839
      
395
      
(9
)
    
24,226
      
19,840
      
484
      
(1
)
    
20,323
  
Total AFS
  
$
320,405
    
$
425
    
$
(3,358
)
  
$
317,473
    
$
217,217
    
$
652
    
$
(5,592
)
  
$
212,277
  

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

 
14
 
As of September 30, 2014, securities with unrealized losses, segregated by length of impairment, were as follows:
 
   
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
  
$
316,956
    
$
(4,059
)
  
$
72,610
    
$
(1,343
)
  
$
389,566
    
$
(5,403
)
Mortgage-backed securities
    
27,239
      
(602
)
    
-
      
-
      
27,239
      
(602
)
State and political subdivisions
    
42,626
      
(425
)
    
24,636
      
(447
)
    
67,263
      
(872
)
Total HTM
  
$
386,821
    
$
(5,086
)
  
$
97,246
    
$
(1,790
)
  
$
484,068
    
$
(6,877
)
                                                 
Available-for-Sale
                                                
U.S. Treasury
  
$
3,991
    
$
(10
)
  
$
-
    
$
-
    
$
3,991
    
$
(10
)
U.S. Government agencies
    
211,696
      
(2,092
)
    
59,080
      
(1,224
)
    
270,776
      
(3,316
)
Mortgage-backed securities
    
1,570
      
(21
)
    
-
      
-
      
1,570
      
(21
)
State and political subdivisions
    
699
      
(2
)
    
-
      
-
      
699
      
(2
)
Other securities
    
1,681
      
(9
)
    
-
      
-
      
1,681
      
(9
)
Total AFS
  
$
219,637
    
$
(2,134
)
  
$
59,080
    
$
(1,224
)
  
$
278,717
    
$
(3,358
)

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

Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company expects to receive full value for the securities.  Furthermore, as of September 30, 2014, management also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2014, management believes the impairments detailed in the table above are temporary.

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $532.9 million at September 30, 2014, and $587.9 million at December 31, 2013.

The book value of securities sold under agreements to repurchase equaled $86.2 million and $102.8 million for September 30, 2014, and December 31, 2013, respectively.

Income earned on securities for the three and nine months ended September 30, 2014 and 2013, is as follows:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2014
    
2013
    
2014
    
2013
  
Taxable:
                        
Held-to-maturity
  
$
1,440
    
$
818
    
$
4,167
    
$
2,281
  
Available-for-sale
    
603
      
540
      
1,882
      
1,605
  
Non-taxable:
                                
Held-to-maturity
    
2,647
      
2,066
      
7,900
      
5,450
  
Available-for-sale
    
27
      
4
      
83
      
13
  
Total
  
$
4,717
    
$
3,428
    
$
14,032
    
$
9,349
  
 
 
15
 
Maturities of investment securities at September 30, 2014, are as follows:

   
Held-to-Maturity
    
Available-for-Sale
  
(In thousands)
  
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
                         
One year or less
  
$
19,171
    
$
19,201
    
$
4,972
    
$
4,981
  
After one through five years
    
378,700
      
376,377
      
179,804
      
179,154
  
After five through ten years
    
214,805
      
213,800
      
25,236
      
24,813
  
After ten years
    
210,054
      
214,068
      
87,891
      
85,630
  
Other securities
    
-
      
-
      
22,502
      
22,895
  
Total
  
$
822,730
    
$
823,446
    
$
320,405
    
$
317,473
  

There were $153,000 of realized gains and $171,000 of realized losses on investment securities for the three months ended September 30, 2014.  There were $191,000 of realized gains and $171,000 of realized losses for the nine months ended September 30, 2014.  There were no realized gains and losses on investment securities for the three months ended September 30, 2013.  There were no realized gains and realized losses of $193,000 for the nine months ended September 30, 2013.

The state and political subdivision debt obligations are primarily non-rated bonds and represent small, Arkansas and Texas issues, which are evaluated on an ongoing basis.
 
 
16
 
NOTE 4: 
LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2014, the Company’s loan portfolio was $2.76 billion, compared to $2.40 billion at December 31, 2013.  The various categories of loans are summarized as follows:
 
(In thousands)
  
September 30,
2014
    
December 31,
2013
  
             
Consumer:
            
Credit cards
  
$
175,822
    
$
184,935
  
Student loans
    
-
      
25,906
  
Other consumer
    
105,508
      
98,851
  
Total consumer
    
281,330
      
309,692
  
Real Estate:
                
Construction
    
163,364
      
146,458
  
Single family residential
    
436,925
      
392,285
  
Other commercial
    
681,848
      
626,333
  
Total real estate
    
1,282,137
      
1,165,076
  
Commercial:
                
Commercial
    
249,186
      
164,329
  
Agricultural
    
145,157
      
98,886
  
Total commercial
    
394,343
      
263,215
  
Other
    
5,568
      
4,655
  
Loans
    
1,963,378
      
1,742,638
  
Loans acquired, not covered by FDIC loss share (net of discount)
    
676,056
      
515,644
  
Loans acquired, covered by FDIC loss share (net of discount)
    
118,158
      
146,653
  
Total loans before allowance for loan losses
  
$
2,757,592
    
$
2,404,935
  

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, when required, is based on credit assessments of borrowers and may be used to recover the debt in case of default.  Furthermore, factors that influenced the Company’s judgment regarding the allowance for loan losses consists of a three-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, student loans and other consumer loans.  The Company no longer originates student loans, and the current portfolio is guaranteed by the Department of Education at 97% of principal and interest.  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 the impact of economic downturns which produce increased 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 and has no significant concentrations in its real estate loan portfolio.

 
17
 
Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchase or other expansion projects.  Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations.  The Company continues its efforts to keep loan terms short, reducing the potential negative impact of upward movement in interest rates.  Term loans are generally set up with a one or three year balloon.  It is standard practice to require personal guaranties on all commercial loans, particularly as they relate to closely-held or limited liability entities.
 
Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of 30 days from the date such payments were due.  Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

 (In thousands)
  
September 30,
 2014
    
December 31,
 2013
  
             
Consumer:
            
Credit cards
  
$
249
    
$
290
  
Other consumer
    
663
      
677
  
Total consumer
    
912
      
967
  
Real estate:
                
Construction
    
1,924
      
116
  
Single family residential
    
4,328
      
2,957
  
Other commercial
    
2,872
      
1,726
  
Total real estate
    
9,124
      
4,799
  
Commercial:
                
Commercial
    
623
      
378
  
Agricultural
    
553
      
117
  
Total commercial
    
1,176
      
495
  
Total
  
$
11,212
    
$
6,261
  
 
 
18
 
An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:
 
(In thousands)
  
Gross
30-89 Days
Past Due
    
90 Days
or More
Past Due
    
Total
Past Due
    
Current
    
Total
Loans
    
90 Days
Past Due &
Accruing
  
                                     
September 30, 2014
                                    
Consumer:
                                    
Credit cards
  
$
575
    
$
267
    
$
842
    
$
174,980
    
$
175,822
    
$
18
  
Other consumer
    
1,125
      
449
      
1,574
      
103,934
      
105,508
      
130
  
Total consumer
    
1,700
      
716
      
2,416
      
278,914
      
281,330
      
148
  
Real estate:
                                                
Construction
    
275
      
194
      
469
      
162,895
      
163,364
      
103
  
Single family residential
    
2,662
      
1,649
      
4,311
      
432,614
      
436,925
      
212
  
Other commercial
    
1,134
      
2,064
      
3,198
      
678,650
      
681,848
      
-
  
Total real estate
    
4,071
      
3,907
      
7,978
      
1,274,159
      
1,282,137
      
315
  
Commercial:
                                                
Commercial
    
686
      
474
      
1,160
      
248,026
      
249,186
      
1
  
Agricultural
    
28
      
134
      
162
      
144,995
      
145,157
      
-
  
Total commercial
    
714
      
608
      
1,322
      
393,021
      
394,343
      
1
  
Other
    
-
      
-
      
-
      
5,568
      
5,568
      
-
  
Total
  
$
6,485
    
$
5,231
    
$
11,716
    
$
1,951,662
    
$
1,963,378
    
$
464
  
                                                 
December 31, 2013
                                                
Consumer:
                                                
Credit cards
  
$
712
    
$
520
    
$
1,232
    
$
183,703
    
$
184,935
    
$
230
  
Student loans
    
627
      
2,264
      
2,891
      
23,015
      
25,906
      
2,264
  
Other consumer
    
911
      
458
      
1,369
      
97,482
      
98,851
      
185
  
Total consumer
    
2,250
      
3,242
      
5,492
      
304,200
      
309,692
      
2,679
  
Real estate:
                                                
Construction
    
583
      
30
      
613
      
145,845
      
146,458
      
-
  
Single family residential
    
2,793
      
1,114
      
3,907
      
388,378
      
392,285
      
94
  
Other commercial
    
1,019
      
1,533
      
2,552
      
623,781
      
626,333
      
82
  
Total real estate
    
4,395
      
2,677
      
7,072
      
1,158,004
      
1,165,076
      
176
  
Commercial:
                                                
Commercial
    
357
      
376
      
733
      
163,596
      
164,329
      
96
  
Agricultural
    
42
      
37
      
79
      
98,807
      
98,886
      
-
  
Total commercial
    
399
      
413
      
812
      
262,403
      
263,215
      
96
  
Other
    
-
      
-
      
-
      
4,655
      
4,655
      
-
  
Total
  
$
7,044
    
$
6,332
    
$
13,376
    
$
1,729,262
    
$
1,742,638
    
$
2,951
  

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.

 
19
 
Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:

(In thousands)
  
Unpaid
Contractual
Principal
 Balance
    
Recorded 
Investment
 With No
Allowance
    
Recorded
Investment
 With 
Allowance
    
Total
 Recorded
Investment
    
Related
Allowance
    
Average
Investment
in 
Impaired
 Loans
    
Interest
 Income
Recognized
    
Average 
Investment
in
 Impaired
 Loans
    
Interest
 Income 
Recognized
  
September 30, 2014
                                
Three Months Ended
 September 30, 2014
    
Nine Months Ended
 September 30, 2014
  
Consumer:
                                                      
Credit cards
  
$
517
    
$
517
    
$
-
    
$
517
    
$
-
    
$
471
    
$
-
    
$
482
    
$
9
  
Other consumer
    
832
      
780
      
35
      
815
      
28
      
781
      
14
      
821
      
30
  
Total consumer
    
1,349
      
1,297
      
35
      
1,332
      
-
      
1,252
      
14
      
1,303
      
39
  
Real estate:
                                                                        
Construction
    
4,496
      
2,028
      
3,733
      
5,761
      
-
      
4,323
      
49
      
3,662
      
114
  
Single family residential
    
4,953
      
4,291
      
379
      
4,670
      
180
      
4,583
      
52
      
4,282
      
133
  
Other commercial
    
3,288
      
2,830
      
1,320
      
4,150
      
298
      
6,663
      
75
      
8,115
      
252
  
Total real estate
    
12,737
      
9,149
      
5,432
      
14,581
      
478
      
15,569
      
176
      
16,059
      
499
  
Commercial:
                                                                        
Commercial
    
791
      
592
      
-
      
592
      
-
      
654
      
7
      
646
      
20
  
Agricultural
    
460
      
436
      
-
      
436
      
-
      
274
      
3
      
178
      
6
  
Total commercial
    
1,251
      
1,028
      
-
      
1,028
      
-
      
928
      
10
      
824
      
26
  
Total
  
$
15,337
    
$
11,474
    
$
5,467
    
$
16,941
    
$
506
    
$
17,749
  
  
$
200
    
$
18,186
    
$
564
  
 
December 31, 2013
                                          
Three Months Ended
September 30, 2013
    
Nine Months Ended
September 30, 2013
  
Consumer:
                                                                        
Credit cards
  
$
520
    
$
520
    
$
-
    
$
520
    
$
16
    
$
514
    
$
3
    
$
517
    
$
11
  
Other consumer
    
925
      
878
      
32
      
910
      
171
      
946
      
9
      
1,014
      
30
  
Total consumer
    
1,445
      
1,398
      
32
      
1,430
      
187
      
1,460
      
12
      
1,531
      
41
  
Real estate:
                                                                        
Construction