Document



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
June 30, 2018
 Commission File Number 000-06253
sfnclogo.jpg
(Exact name of registrant as specified in its charter)
 
Arkansas
71-0407808
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
501 Main Street, Pine Bluff, Arkansas
71601
(Address of principal executive offices)
(Zip Code)
 
(870) 541-1000
(Registrant’s telephone number, including area code)
 
Not Applicable
Former name, former address and former fiscal year, if changed since last report
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes   ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
x Yes   ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging Growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).  ¨ Yes   x No
 
The number of shares outstanding of the Registrant’s Common Stock as of July 25, 2018, was 92,288,114.




Simmons First National Corporation
Quarterly Report on Form 10-Q
June 30, 2018

Table of Contents

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





Part I:
Financial Information
Item 1.
Financial Statements (Unaudited)
Simmons First National Corporation
Consolidated Balance Sheets
June 30, 2018 and December 31, 2017
 
June 30,
 
December 31,
(In thousands, except share data)
2018
 
2017
 
(Unaudited)
 
 

ASSETS
 

 
 

Cash and non-interest bearing balances due from banks
$
162,567

 
$
205,025

Interest bearing balances due from banks and federal funds sold
781,279

 
393,017

Cash and cash equivalents
943,846

 
598,042

Interest bearing balances due from banks - time
2,974

 
3,314

Investment securities:
 
 
 
Held-to-maturity
333,503

 
368,058

Available-for-sale
1,938,644

 
1,589,517

Total investments
2,272,147

 
1,957,575

Mortgage loans held for sale
39,812

 
24,038

Other assets held for sale
14,898

 
165,780

Loans:
 
 
 
Legacy loans
7,133,461

 
5,705,609

Allowance for loan losses
(51,732
)
 
(41,668
)
Loans acquired, net of discount and allowance
4,232,434

 
5,074,076

Net loans
11,314,163

 
10,738,017

Premises and equipment
288,777

 
287,249

Foreclosed assets and other real estate owned
30,503

 
32,118

Interest receivable
44,266

 
43,528

Bank owned life insurance
191,575

 
185,984

Goodwill
845,687

 
842,651

Other intangible assets
96,720

 
106,071

Other assets
80,165

 
71,439

Total assets
$
16,165,533

 
$
15,055,806

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing transaction accounts
$
2,683,489

 
$
2,665,249

Interest bearing transaction accounts and savings deposits
6,916,520

 
6,494,896

Time deposits
2,353,439

 
1,932,730

Total deposits
11,953,448


11,092,875

Federal funds purchased and securities sold under agreements to repurchase
99,801

 
122,444

Other borrowings
1,451,811

 
1,380,024

Subordinated notes and debentures
413,337

 
140,565

Other liabilities held for sale
1,840

 
157,366

Accrued interest and other liabilities
98,388

 
77,968

Total liabilities
14,018,625


12,971,242

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, Class A, $0.01 par value; 175,000,000 and 120,000,000 shares authorized at June 30, 2018 and December 31, 2017, respectively (1); 92,281,370 and 92,029,118 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
923

 
920

Surplus
1,594,342

 
1,586,034

Undivided profits
591,826

 
514,874

Accumulated other comprehensive loss
(40,183
)
 
(17,264
)
Total stockholders’ equity
2,146,908

 
2,084,564

Total liabilities and stockholders’ equity
$
16,165,533

 
$
15,055,806

(1)
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.

See Condensed Notes to Consolidated Financial Statements.
3




Simmons First National Corporation
Consolidated Statements of Income
Three and Six Months Ended June 30, 2018 and 2017
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share data (1))
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Unaudited)
INTEREST INCOME
 

 
 

 
 
 
 
Loans
$
150,253

 
$
73,549

 
$
293,603

 
$
142,277

Interest bearing balances due from banks and federal funds sold
1,414

 
214

 
2,423

 
336

Investment securities
14,296

 
9,990

 
26,918

 
19,441

Mortgage loans held for sale
305

 
145

 
463

 
271

TOTAL INTEREST INCOME
166,268

 
83,898

 
323,407

 
162,325

 
 
 
 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
18,461

 
4,816

 
34,058

 
9,020

Federal funds purchased and securities sold under agreements to repurchase
88

 
92

 
198

 
167

Other borrowings
5,141

 
1,559

 
10,280

 
2,753

Subordinated notes and debentures
5,741

 
619

 
7,068

 
1,193

TOTAL INTEREST EXPENSE
29,431

 
7,086

 
51,604

 
13,133

 
 
 
 
 
 
 
 
NET INTEREST INCOME
136,837

 
76,812

 
271,803

 
149,192

Provision for loan losses
9,033

 
7,023

 
18,183

 
11,330

 
 
 
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
127,804

 
69,789

 
253,620

 
137,862

 
 
 
 
 
 
 
 
NON-INTEREST INCOME
 
 
 
 
 
 
 
Trust income
5,622

 
4,113

 
10,871

 
8,325

Service charges on deposit accounts
10,063

 
8,483

 
20,408

 
16,585

Other service charges and fees
2,017

 
2,515

 
4,767

 
4,712

Mortgage and SBA lending income
3,130

 
3,961

 
7,575

 
6,384

Investment banking income
814

 
637

 
1,648

 
1,327

Debit and credit card fees
10,105

 
8,659

 
18,901

 
16,593

Bank owned life insurance income
1,102

 
859

 
2,205

 
1,677

(Loss) gain on sale of securities, net
(7
)
 
2,236

 
(1
)
 
2,299

Other income
5,202

 
4,281

 
9,209

 
7,902

TOTAL NON-INTEREST INCOME
38,048

 
35,744

 
75,583

 
65,804

 
 
 
 
 
 
 
 
NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
55,678

 
34,205

 
112,035

 
69,741

Occupancy expense, net
7,921

 
4,868

 
14,881

 
9,531

Furniture and equipment expense
4,020

 
4,550

 
8,423

 
8,993

Other real estate and foreclosure expense
1,382

 
517

 
2,402

 
1,106

Deposit insurance
1,856

 
780

 
3,984

 
1,460

Merger related costs
1,465

 
6,603

 
3,176

 
7,127

Other operating expenses
26,185

 
19,885

 
51,679

 
39,772

TOTAL NON-INTEREST EXPENSE
98,507

 
71,408

 
196,580

 
137,730

 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
67,345

 
34,125

 
132,623

 
65,936

Provision for income taxes
13,783

 
11,060

 
27,749

 
20,751

 
 
 
 
 
 
 
 
NET INCOME
$
53,562

 
$
23,065

 
$
104,874

 
$
45,185

BASIC EARNINGS PER SHARE
$
0.58

 
$
0.36

 
$
1.14

 
$
0.72

DILUTED EARNINGS PER SHARE
$
0.58

 
$
0.36

 
$
1.13

 
$
0.71

(1)
All per share amounts have been restated to reflect the effect of the two-for-one stock split on February 8, 2018.


See Condensed Notes to Consolidated Financial Statements.
4




Simmons First National Corporation
Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2018 and 2017
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Unaudited)
NET INCOME
$
53,562

 
$
23,065

 
$
104,874

 
$
45,185

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period on available-for-sale securities
(8,294
)
 
7,133

 
(31,029
)
 
8,700

Less: Reclassification adjustment for realized (losses) gains included in net income
(7
)
 
2,236

 
(1
)
 
2,299

Other comprehensive (loss) gain, before tax effect
(8,287
)

4,897

 
(31,028
)
 
6,401

Less: Tax effect of other comprehensive (loss) income
(2,166
)
 
1,921

 
(8,109
)
 
2,511

 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME
(6,121
)
 
2,976

 
(22,919
)
 
3,890

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
$
47,441


$
26,041

 
$
81,955

 
$
49,075



See Condensed Notes to Consolidated Financial Statements.
5




Simmons First National Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017
(In thousands)
June 30, 2018
 
June 30, 2017
 
(Unaudited)
OPERATING ACTIVITIES
 

 
 

Net income
$
104,874

 
$
45,185

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
13,600

 
9,649

Provision for loan losses
18,183

 
11,330

Loss (gain) on sale of investments
1

 
(2,299
)
Net accretion of investment securities and assets
(27,882
)
 
(13,884
)
Net (accretion) amortization on borrowings
(341
)
 
213

Stock-based compensation expense
5,416

 
3,958

Gain on sale of premises and equipment, net of impairment
—

 
(615
)
Loss (gain) on sale of foreclosed assets held for sale
212

 
(141
)
Gain on sale of mortgage loans held for sale
(5,832
)
 
(5,432
)
Deferred income taxes
2,052

 
2,230

Increase in cash surrender value of bank owned life insurance
(2,205
)
 
(1,677
)
Originations of mortgage loans held for sale
(265,704
)
 
(222,946
)
Proceeds from sale of mortgage loans held for sale
255,762

 
239,900

Changes in assets and liabilities:
 
 
 
Interest receivable
(555
)
 
2,283

Assets held in trading accounts
—

 
(9
)
Other assets
(7,140
)
 
11,656

Accrued interest and other liabilities
29,161

 
(12,949
)
Income taxes payable
(8,947
)
 
9,471

Net cash provided by operating activities
110,655


75,923

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net originations of loans
(519,175
)
 
(340,457
)
Decrease in due from banks - time
340

 
490

Purchases of premises and equipment, net
(10,360
)
 
(26,664
)
Proceeds from sale of premises and equipment
—

 
3,475

Proceeds from sale of foreclosed assets held for sale
8,983

 
7,510

Proceeds from sale of available-for-sale securities
7,726

 
326,937

Proceeds from maturities of available-for-sale securities
122,963

 
17,720

Purchases of available-for-sale securities
(496,664
)
 
(197,439
)
Proceeds from maturities of held-to-maturity securities
34,958

 
44,240

Purchases of held-to-maturity securities
—

 
(860
)
Proceeds from sale of held-to-maturity securities
—

 
441

Purchases of bank owned life insurance
(4,000
)
 
(25
)
Proceeds from bank owned life insurance death benefits
616

 
—

Cash paid in business combinations, net of cash received
—

 
(22,000
)
Disposition of assets and liabilities held for sale
(66,641
)
 
—

Net cash used in investing activities
(921,254
)
 
(186,632
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net change in deposits
860,573

 
(20,660
)
Proceeds from issuance of subordinated notes
326,355

 
—

Repayments of subordinated debentures
(54,642
)
 
—

Dividends paid on common stock
(27,922
)
 
(15,897
)
Net change in other borrowed funds
71,787

 
198,803

Net change in federal funds purchased and securities sold under agreements to repurchase
(22,643
)
 
(10,773
)
Net shares issued under stock compensation plans
2,895

 
3,191

Net cash provided by financing activities
1,156,403


154,664

 
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS
345,804

 
43,955

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
598,042

 
285,659

 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
943,846


$
329,614


See Condensed Notes to Consolidated Financial Statements.
6




Simmons First National Corporation
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2018 and 2017
(In thousands, except share data (1))
 
Common
Stock
 
Surplus
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Undivided
Profits
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance at, December 31, 2016
 
$
626

 
$
711,663

 
$
(15,212
)
 
$
454,034

 
$
1,151,111

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
—

 
—

 
3,890

 
45,185

 
49,075

Stock issued for employee stock purchase plan – 26,002 shares
 
—

 
618

 
—

 
—

 
618

Stock-based compensation plans, net – 244,276
 
2

 
6,529

 
—

 
—

 
6,531

Stock issued for Hardeman acquisition – 1,599,940 common shares
 
16

 
42,622

 
—

 
—

 
42,638

Dividends on common stock – $0.25 per share
 
—

 
—

 
—

 
(15,897
)
 
(15,897
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2017 (Unaudited)
 
644


761,432


(11,322
)

483,322


1,234,076

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
—

 
—

 
(2,926
)
 
47,755

 
44,829

Reclassify stranded tax effects due to 2017 tax law changes
 
—

 
—

 
(3,016
)
 
3,016

 
—

Stock-based compensation plans, net – 115,010
 
1

 
6,409

 
—

 
—

 
6,410

Stock issued for OKSB acquisition – 14,488,604 common shares
 
145

 
431,253

 
—

 
—

 
431,398

Stock issued for First Texas acquisition – 12,999,840 common shares
 
130

 
386,940

 
—

 
—

 
387,070

Dividends on common stock – $0.25 per share
 
—

 
—

 
—

 
(19,219
)
 
(19,219
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
920


1,586,034


(17,264
)

514,874


2,084,564

 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
—

 
—

 
(22,919
)
 
104,874

 
81,955

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

 
1,026

 
—

 
—

 
1,026

Stock-based compensation plans, net – 212,470
 
3

 
7,282

 
—

 
—

 
7,285

Dividends on common stock – $0.30 per share
 
—

 
—

 
—

 
(27,922
)
 
(27,922
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018 (Unaudited)
 
$
923


$
1,594,342


$
(40,183
)

$
591,826


$
2,146,908

(1)
All share and per share amounts have been restated to reflect the effect of the two-for-one stock split on February 8, 2018.


See Condensed Notes to Consolidated Financial Statements.
7




SIMMONS FIRST NATIONAL CORPORATION
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS
 
Organizational Structure
 
Simmons First National Corporation (the “Company”) is a publicly traded financial holding company that trades on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “SFNC” and the parent of Simmons Bank, an Arkansas state-chartered bank that began as a community bank in 1903. Simmons Bank is the parent of Simmons First Investment Group, Inc. (a dually registered broker-dealer and investment adviser), Simmons First Insurance Services, Inc. (an insurance agency), and Simmons First Insurance Services of TN, LLC (an insurance agency).
 
Description of Business
 
The Company is headquartered in Pine Bluff, Arkansas and conducts banking operations in communities throughout Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company, through its subsidiaries, offers consumer, real estate and commercial loans, checking, savings and time deposits from 199 financial centers conveniently located throughout its market areas. Additionally, the Company offers specialized products and services such as credit cards, trust and fiduciary services, investments, agricultural finance lending, equipment lending, insurance and small business administration (“SBA”) lending.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosures for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2017, 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, 2017, which was filed with the SEC on February 28, 2018.
 
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
 
Reporting Comprehensive Income – In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”), that allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the tax reform legislation signed into law in December 2017 (“2017 Act”). Current US GAAP requires the remeasurement of deferred tax assets and liabilities as a result of a change in tax laws or rates to be presented in net income from continuing operations. Consequently, the original deferred tax amount recorded through AOCI at the old rate will remain in AOCI despite the fact that its related deferred tax asset/liability will be reduced through continuing operations to reflect the new rate, resulting in “stranded” tax effects in AOCI. ASU 2018-02 requires a reclassification from AOCI to retained earnings for those stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of reclassification would be

8




the difference between 1) the amount initially charged or credited directly to other comprehensive income at the previous enacted federal corporate income tax rate that remains in AOCI and 2) the amount that would have been charged or credited using the newly enacted federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As permitted, the Company elected to early adopt the provisions of ASU 2018-02 during the fourth quarter 2017, which resulted in a reclassification from AOCI to retained earnings in the amount of $3.0 million related to the change in federal corporate tax rate.

Stock Compensation: Scope of Modification Accounting – In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), that provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. The guidance clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting and the guidance should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. Currently, the Company has not modified any existing awards nor has any plans to do so, therefore the adoption of ASU 2017-09 has not had a material effect on the Company’s results of operations, financial position or disclosures.
 
Premium Amortization on Purchased Callable Debt Securities – In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), that amends the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments shorten the amortization period by requiring that the premium be amortized to the earliest call date. Under previous US GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The effective date is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As permitted, the Company elected to early adopt the provisions of ASU 2017-08 during the first quarter 2017. The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or disclosures.

Statement of Cash Flows – In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), designed to address the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The amendments also provide guidance on when an entity should separate or aggregate cash flows based on the predominance principle. The effective date is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard is required to be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The adoption of 2016-15 did not have a material impact on the Company’s results of operations, financial position or disclosures since the amendment applies to the classification of cash flows. The adoption did not have a material impact on the consolidated statement of cash flows.
 
Financial Assets and Financial Liabilities – In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), that makes changes primarily affecting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In February 2018, the FASB issued 2018-03 that clarified certain guidance and contained narrow scope amendments. The effective date is for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 did not have a material impact on the Company’s results of operations or financial position. However, this new guidance requires the disclosed estimated fair value of the Company’s loan portfolio to be based on an exit price calculation, which considers liquidity, credit and nonperformance risk of its loans. The adoption of 2016-01 did not have a material impact on the Company’s fair value disclosures.
 
Revenue Recognition – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), that outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers. The core principle of this revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, deferring the effective date to annual and interim periods beginning after December 15, 2017. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other US GAAP, which comprises a significant portion of the Company’s

9




revenue stream. However, the updated guidance affects the revenue recognition pattern for certain revenue streams, including service charges on deposit accounts, gains/losses on sale of other real estate owned (“OREO”), and trust income. The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or disclosures. See below “Revenue from Contracts with Customers” for additional information.

Recently Issued Accounting Standards
 
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. The Company is currently evaluating the impact this standard will have on its results of operations, financial position or disclosures, but it is not expected to have a material impact.
 
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. ASU 2017-04 is not expected to have a material effect on the Company’s results of operations, financial position or disclosures.
 
Credit Losses on Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires earlier measurement of credit losses, expands the range of information considered in determining expected credit losses and enhances disclosures. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The effective date for these amendments is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a cross functional team that is assessing its data and system needs and evaluating 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. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact on its results of operations, financial position or disclosures. However, the Company has begun developing processes and procedures to ensure it is fully compliant at the required adoption date. Among other things, the Company has initiated data gathering and assessment to support forecasting of asset quality, loan balances, and portfolio net charge-offs and developing asset quality forecast models in preparation for the implementation of this standard.
 
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

10




opening balance of retained earnings. Based upon leases that were outstanding as of June 30, 2018, the Company does not expect the new standard to have a material impact on its results of operations, but anticipates increases in its assets and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact the level of materiality.
 
There have been no other significant changes to the Company’s accounting policies from the 2017 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.
 
Revenue from Contracts with Customers
 
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, applies to all contracts with customers to provide goods or services in the ordinary course of business. However, Topic 606 specifically does not apply to revenue related to financial instruments, guarantees, insurance contracts, leases, or nonmonetary exchanges. Given these scope exceptions, interest income recognition and measurement related to loans and investments securities, the Company’s two largest sources of revenue, are not accounted for under Topic 606. Also, the Company does not use Topic 606 to account for gains or losses on its investments in securities, loans, and derivatives due to the scope exceptions.
 
Certain revenue streams, such as service charges on deposit accounts, gains or losses on the sale of OREO, and trust income, fall under the scope of Topic 606 and the Company must recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 is applied using five steps: 1) identify the contract with the customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company has evaluated the nature of all contracts with customers that fall under the scope of Topic 606 and determined that further disaggregation of revenue from contracts with customers into categories was not necessary. There has not been significant revenue recognized in the current reporting periods resulting from performance obligations satisfied in previous periods. In addition, there has not been a significant change in timing of revenues received from customers.
 
A description of performance obligations for each type of contract with customers is as follows:
 
Service charges on deposit accounts – The Company’s primary source of funding comes from deposit accounts with its customers. Customers pay certain fees to access their cash on deposit including, but not limited to, non-transactional fees such as account maintenance, dormancy or statement rendering fees, and certain transaction-based fees such as ATM, wire transfer, overdraft or returned check fees. The Company generally satisfies its performance obligations as services are rendered. The transaction prices are fixed, and are charged either on a periodic basis or based on activity.
 
Sale of OREO – In the normal course of business, the Company will enter into contracts with customers to sell OREO, which has generally been foreclosed upon by the Company. The Company generally satisfies its performance obligation upon conveyance of property from the Company to the customer, generally by way of an executed agreement. The transaction price is fixed, and on occasion the Company will finance a portion of the proceeds the customers uses to purchase the property. These properties are generally sold without recourse or warranty.
 
Trust Income – The Company enters into contracts with its customers to manage assets for investment, and/or transact on their accounts. The Company generally satisfies its performance obligations as services are rendered. The management fee is a fixed percentage-based fee calculated upon the average balance of assets under management and is charged to customers on a monthly basis.
 
Acquisition Accounting, 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.


11




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.
 
For further discussion of acquisition and loan accounting, see Note 2, Acquisitions, and Note 6, Loans Acquired.

NOTE 2: ACQUISITIONS
 
Southwest Bancorp, Inc.
 
On October 19, 2017, the Company completed the acquisition of Southwest Bancorp, Inc. (“OKSB”) headquartered in Stillwater, Oklahoma, including its wholly-owned bank subsidiary, Bank SNB. The Company issued 14,488,604 shares of its common stock valued at approximately $431.4 million as of October 19, 2017, plus $94.9 million in cash in exchange for all outstanding shares of OKSB common stock.
 
Prior to the acquisition, OKSB conducted banking business from 29 branches located in Texas, Oklahoma, Kansas and Colorado. In addition, OKSB owned a loan production office in Denver, Colorado. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $2.7 billion in assets, including approximately $2.0 billion in loans (inclusive of loan discounts) and approximately $2.0 billion in deposits. The Company completed the systems conversion and merged Bank SNB into Simmons Bank in May 2018.
 
Goodwill of $229.1 million was recorded as a result of the transaction. The acquisition allowed the Company to enter the Texas, Oklahoma, and Colorado banking markets and it also strengthened the Company’s Kansas franchise and its product offerings in the healthcare and real estate industries, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.
 
A summary, at fair value, of the assets acquired and liabilities assumed in the OKSB transaction, as of the acquisition date, is as follows: 
(In thousands)
Acquired from
OKSB
 
Fair Value
Adjustments
 
Fair
Value
 
 
 
 
 
 
Assets Acquired
 

 
 

 
 

Cash and due from banks
$
79,517

 
$
—

 
$
79,517

Investment securities
485,468

 
(1,295
)
 
484,173

Loans acquired
2,039,524

 
(43,071
)
 
1,996,453

Allowance for loan losses
(26,957
)
 
26,957

 
—

Foreclosed assets
6,284

 
(1,127
)
 
5,157

Premises and equipment
21,210

 
5,457

 
26,667

Bank owned life insurance
28,704

 
—

 
28,704

Goodwill
13,545

 
(13,545
)
 
—

Core deposit intangible
1,933

 
40,191

 
42,124

Other intangibles
3,806

 
—

 
3,806

Other assets
33,455

 
(9,141
)
 
24,314

Total assets acquired
$
2,686,489


$
4,426


$
2,690,915


12




Liabilities Assumed
 

 
 

 
 

Deposits:
 

 
 

 
 

Non-interest bearing transaction accounts
$
485,971

 
$
—

 
$
485,971

Interest bearing transaction accounts and savings deposits
869,252

 
—

 
869,252

Time deposits
613,345

 
(2,213
)
 
611,132

Total deposits
1,968,568


(2,213
)

1,966,355

Securities sold under agreement to repurchase
11,256

 
—

 
11,256

Other borrowings
347,000

 
—

 
347,000

Subordinated debentures
46,393

 
—

 
46,393

Accrued interest and other liabilities
17,440

 
5,364

 
22,804

Total liabilities assumed
2,390,657


3,151


2,393,808

Equity
295,832

 
(295,832
)
 
—

Total equity assumed
295,832

 
(295,832
)
 
—

Total liabilities and equity assumed
$
2,686,489


$
(292,681
)

$
2,393,808

Net assets acquired
 
 
 
 
297,107

Purchase price
 
 
 
 
526,251

Goodwill
 
 
 
 
$
229,144

 
The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. 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 acquisition. Therefore, adjustments to the estimated amounts and carrying values may occur.
 
The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of OKSB subsequent to the acquisition date.
 
First Texas BHC, Inc.
 
On October 19, 2017, the Company completed the acquisition of First Texas BHC, Inc. (“First Texas”) headquartered in Fort Worth, Texas, including its wholly-owned bank subsidiary, Southwest Bank. The Company issued 12,999,840 shares of its common stock valued at approximately $387.1 million as of October 19, 2017, plus $70.0 million in cash in exchange for all outstanding shares of First Texas common stock.
 
Prior to the acquisition, First Texas operated 15 banking centers, a trust office and a limited service branch in north Texas and a loan production office in Austin, Texas. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $2.4 billion in assets, including approximately $2.2 billion in loans (inclusive of loan discounts) and approximately $1.9 billion in deposits. The Company completed the systems conversion and merged Southwest Bank into Simmons Bank in February 2018.
 
Goodwill of $240.8 million was recorded as a result of the transaction. The acquisition allowed the Company to enter the Texas banking markets and it also strengthened the Company’s specialty product offerings in the area of SBA lending and trust services, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.


13




A summary, at fair value, of the assets acquired and liabilities assumed in the First Texas transaction, as of the acquisition date, is as follows:
 
(In thousands)
Acquired from
First Texas
 
Fair Value
Adjustments
 
Fair
Value
 
 
 
 
 
 
Assets Acquired
 

 
 

 
 

Cash and due from banks
$
59,277

 
$
—

 
$
59,277

Investment securities
81,114

 
(596
)
 
80,518

Loans acquired
2,246,212

 
(37,834
)
 
2,208,378

Allowance for loan losses
(20,864
)
 
20,664

 
(200
)
Premises and equipment
24,864

 
10,123

 
34,987

Bank owned life insurance
7,190

 
—

 
7,190

Goodwill
37,227

 
(37,227
)
 
—

Core deposit intangible
—

 
7,328

 
7,328

Other assets
18,263

 
11,485

 
29,748

Total assets acquired
$
2,453,283


$
(26,057
)

$
2,427,226

 
 
 
 
 
 
Liabilities Assumed
 
 
 
 
 
Deposits:
 
 
 
 
 
Non-interest bearing transaction accounts
$
74,410

 
$
—

 
$
74,410

Interest bearing transaction accounts and savings deposits
1,683,298

 
—

 
1,683,298

Time deposits
124,233

 
(283
)
 
123,950

Total deposits
1,881,941


(283
)

1,881,658

Securities sold under agreement to repurchase
50,000

 
—

 
50,000

Other borrowings
235,000

 
—

 
235,000

Subordinated debentures
30,323

 
589

 
30,912

Accrued interest and other liabilities
11,727

 
1,669

 
13,396

Total liabilities assumed
2,208,991


1,975


2,210,966

Equity
244,292

 
(244,292
)
 
—

Total equity assumed
244,292

 
(244,292
)
 
—

Total liabilities and equity assumed
$
2,453,283


$
(242,317
)

$
2,210,966

Net assets acquired
 
 
 
 
216,260

Purchase price
 
 
 
 
457,103

Goodwill
 
 
 
 
$
240,843

 
The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. 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 acquisition. Therefore, adjustments to the estimated amounts and carrying values may occur.  
 
The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of First Texas subsequent to the acquisition date.


14




Summary of Unaudited Pro forma Information
 
The unaudited pro forma information below for the years ended December 31, 2017 and 2016 gives effect to the OKSB and First Texas acquisitions as if the acquisitions had occurred on January 1, 2016. Pro forma earnings for the year ended December 31, 2017 were adjusted to exclude $9.4 million of acquisition-related costs, net of tax, incurred by Simmons during 2017. The pro forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.
 
(In thousands, except per share data)
2017
 
2016
Revenue (1)
$
654,358

 
$
620,461

Net income
$
130,947

 
$
136,199

Diluted earnings per share
$
1.43

 
$
1.52

_________________________________________
(1) Net interest income plus non-interest income.
 
Consolidated year-to-date 2017 results included approximately $29.2 million of revenue and $10.5 million of net income attributable to the OKSB acquisition and $27.6 million of revenue and $5.7 million of net income attributable to the First Texas acquisition.
 
Hardeman County Investment Company, Inc.
 
On May 15, 2017, the Company completed the acquisition of Hardeman County Investment Company, Inc. (“Hardeman”), headquartered in Jackson, Tennessee, including its wholly-owned bank subsidiary, First South Bank. The Company issued 1,599,940 shares of its common stock valued at approximately $42.6 million as of May 15, 2017, plus $30.0 million in cash in exchange for all outstanding shares of Hardeman common stock.
 
Prior to the acquisition, Hardeman conducted banking business from 10 branches located in western Tennessee. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $462.9 million in assets, including approximately $251.6 million in loans (inclusive of loan discounts) and approximately $389.0 million in deposits. The Company completed the systems conversion and merged First South Bank into Simmons Bank in September 2017. As part of the systems conversion, five existing Simmons Bank and First South Bank branches were consolidated or closed.
 
Goodwill of $29.4 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the western Tennessee market, and the Company will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions, all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.
 

15




A summary, at fair value, of the assets acquired and liabilities assumed in the Hardeman transaction, as of the acquisition date, is as follows:
(In thousands)
Acquired from
Hardeman
 
Fair Value
Adjustments
 
Fair
Value
 
 
 
 
 
 
Assets Acquired
 

 
 

 
 

Cash and due from banks
$
8,001

 
$
—

 
$
8,001

Interest bearing balances due from banks - time
1,984

 
—

 
1,984

Investment securities
170,654

 
(285
)
 
170,369

Loans acquired
257,641

 
(5,992
)
 
251,649

Allowance for loan losses
(2,382
)
 
2,382

 
—

Foreclosed assets
1,083

 
(452
)
 
631

Premises and equipment
9,905

 
1,258

 
11,163

Bank owned life insurance
7,819

 
—

 
7,819

Goodwill
11,485

 
(11,485
)
 
—

Core deposit intangible
—

 
7,840

 
7,840

Other intangibles
—

 
830

 
830

Other assets
2,639

 
(1
)
 
2,638

Total assets acquired
$
468,829


$
(5,905
)

$
462,924

Liabilities Assumed
 

 
 

 
 

Deposits:
 

 
 

 
 

Non-interest bearing transaction accounts
$
76,555

 
$
—

 
$
76,555

Interest bearing transaction accounts and savings deposits
214,872

 
—

 
214,872

Time deposits
97,917

 
(368
)
 
97,549

Total deposits
389,344


(368
)

388,976

Securities sold under agreement to repurchase
17,163

 
—

 
17,163

Other borrowings
3,000

 
—

 
3,000

Subordinated debentures
6,702

 
—

 
6,702

Accrued interest and other liabilities
1,891

 
1,924

 
3,815

Total liabilities assumed
418,100


1,556


419,656

Equity
50,729

 
(50,729
)
 
—

Total equity assumed
50,729

 
(50,729
)
 
—

Total liabilities and equity assumed
$
468,829


$
(49,173
)

$
419,656

Net assets acquired
 
 
 
 
43,268

Purchase price
 
 
 
 
72,639

Goodwill
 
 
 
 
$
29,371

 
During 2018, the Company finalized its analysis of the loans acquired along with other acquired assets and assumed liabilities.
 
The Company’s operating results for all periods presented include the operating results of the acquired assets and assumed liabilities of Hardeman subsequent to the acquisition date.

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.

16




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. Core deposit intangible established prior to the acquisitions, if applicable, was written off.

Other intangibles – Other intangible assets represent the value of the relationships that Hardeman had with its insurance customers and the mortgage servicing rights acquired with OKSB. The fair value of Hardeman’s insurance customer relationships was estimated based on a combination of discounted cash flow methodology and a market valuation approach. Other intangibles established prior to the acquisitions, if applicable, were written off.
 
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.
 
Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities. Due to the floating rate nature of the debenture, the fair value approximates book value as of the date acquired.
 
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.



17




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, 2018
 
December 31, 2017
(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
$
36,976

 
$
—

 
$
(186
)
 
$
36,790

 
$
46,945

 
$
7

 
$
(228
)
 
$
46,724

Mortgage-backed securities
14,645

 
—

 
(603
)
 
14,042

 
16,132

 
8

 
(287
)
 
15,853

State and political subdivisions
279,787

 
3,316

 
(1,173
)
 
281,930

 
301,491

 
5,962

 
(222
)
 
307,231

Other securities
2,095

 
—

 
—

 
2,095

 
3,490

 
—

 
—

 
3,490

Total HTM
$
333,503


$
3,316


$
(1,962
)

$
334,857


$
368,058


$
5,977


$
(737
)

$
373,298

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
149,593

 
$
—

 
$
(3,826
)
 
$
145,767

 
$
141,559

 
$
116

 
$
(1,951
)
 
$
139,724

Mortgage-backed securities
1,438,716

 
274

 
(43,759
)
 
1,395,231

 
1,208,017

 
246

 
(20,946
)
 
1,187,317

State and political subdivisions
250,574

 
282

 
(5,521
)
 
245,335

 
144,642

 
532

 
(2,009
)
 
143,165

Other securities
151,211

 
1,102

 
(2
)
 
152,311

 
118,106

 
1,206

 
(1
)
 
119,311

Total AFS
$
1,990,094


$
1,658


$
(53,108
)

$
1,938,644


$
1,612,324


$
2,100


$
(24,907
)

$
1,589,517

 
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, 2018 and December 31, 2017, was $1.8 billion and $1.4 billion, which is approximately 80.2% and 73.5%, respectively, of the Company’s combined AFS and HTM investment portfolios.


18




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, 2018: 
 
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
$
5,963

 
$
(12
)
 
$
30,827

 
$
(174
)
 
$
36,790

 
$
(186
)
Mortgage-backed securities
6,106

 
(148
)
 
7,934

 
(455
)
 
14,040

 
(603
)
State and political subdivisions
94,136

 
(1,138
)
 
1,352

 
(35
)
 
95,488

 
(1,173
)
Total HTM
$
106,205


$
(1,298
)

$
40,113


$
(664
)

$
146,318


$
(1,962
)
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
113,594

 
$
(1,753
)
 
$
32,174

 
$
(2,073
)
 
$
145,768

 
$
(3,826
)
Mortgage-backed securities
685,406

 
(14,319
)
 
630,291

 
(29,440
)
 
1,315,697

 
(43,759
)
State and political subdivisions
142,104

 
(1,918
)
 
73,025

 
(3,603
)
 
215,129

 
(5,521
)
Other securities
—

 
—

 
99

 
(2
)
 
99

 
(2
)
Total AFS
$
941,104


$
(17,990
)

$
735,589


$
(35,118
)

$
1,676,693


$
(53,108
)
 
These declines primarily resulted from the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. Management does not have the intent to sell these securities and management believes it is more likely than not the Company will not have to sell these securities before recovery of their amortized cost basis less any current period credit losses.
 
Declines in the fair value of 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, 2018, 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, 2018, 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, 2018 and 2017, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Taxable:
 
 
 
 
 

 
 

Held-to-maturity
$
546

 
$
636

 
$
1,113

 
$
1,297

Available-for-sale
10,218

 
6,238

 
19,250

 
12,054

 
 
 
 
 
 
 
 
Non-taxable:
 
 
 
 
 
 
 
Held-to-maturity
1,897

 
2,217

 
3,833

 
4,500

Available-for-sale
1,635

 
899

 
2,722

 
1,590

Total
$
14,296

 
$
9,990

 
$
26,918

 
$
19,441


19




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
$
50,800

 
$
50,609

 
$
20

 
$
20

After one through five years
63,469

 
63,414

 
35,961

 
35,125

After five through ten years
94,552

 
94,503

 
22,549

 
21,895

After ten years
110,037

 
112,289

 
341,736

 
334,161

Securities not due on a single maturity date
14,645

 
14,042

 
1,438,716

 
1,395,231

Other securities (no maturity)
—

 
—

 
151,112

 
152,212

Total
$
333,503


$
334,857


$
1,990,094


$
1,938,644

 
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $1.5 billion at June 30, 2018 and $1.2 billion at December 31, 2017.
 
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. There were approximately $2.2 million of gross realized gains and $5,000 of gross realized losses from the sale of securities during the three months ended June 30, 2017, and approximately $2.3 million of gross realized gains and $5,000 of gross realized losses from the sale of securities during the six months ended June 30, 2017.
 
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: OTHER ASSETS AND OTHER LIABILITIES HELD FOR SALE
 
In August 2017, the Company, through its bank subsidiary, Simmons Bank, acquired the stock of Heartland Bank (“Heartland”) at a public auction held to satisfy certain indebtedness of Heartland’s former holding company, Rock Bancshares, Inc.
 
In March 2018, Heartland sold $141.0 million of branches and loans, as well as $154.6 million of deposits and other liabilities. At the end of the second quarter 2018, other assets held for sale of $14.9 million and other liabilities held for sale of $1.8 million related to Heartland, both recorded at fair value, remained at the Company. The Company will continue to work through the disposition of Heartland’s few remaining assets.

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the Heartland transaction.
 
Cash and 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 – The carrying amount of these assets was deemed to be a reasonable estimate of fair value, as there were no material differences to fair value based upon quoted market prices.
 
Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.
 
Premises and equipment – Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.

20




NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
 
At June 30, 2018, the Company’s loan portfolio was $11.37 billion, compared to $10.78 billion at December 31, 2017. The various categories of loans are summarized as follows:
 
(In thousands)
June 30, 2018
 
December 31, 2017
 
 
 
 
Consumer:
 

 
 

Credit cards
$
180,352

 
$
185,422

Other consumer
277,330

 
280,094

Total consumer
457,682


465,516

Real Estate:
 
 
 
Construction
967,720

 
614,155

Single family residential
1,314,787

 
1,094,633

Other commercial
2,816,420

 
2,530,824

Total real estate
5,098,927


4,239,612

Commercial:
 
 
 
Commercial
1,237,910

 
825,217

Agricultural
187,006

 
148,302

Total commercial
1,424,916


973,519

Other
151,936

 
26,962

Loans
7,133,461

 
5,705,609

Loans acquired, net of discount and allowance (1)
4,232,434

 
5,074,076

Total loans
$
11,365,895


$
10,779,685

_____________________________
(1) 
See Note 6, 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 an eight-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

21




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 all 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 if 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, 2018
 
December 31, 2017
 
 
 
 
Consumer:
 

 
 

Credit cards
$
238

 
$
170

Other consumer
3,804

 
4,605

Total consumer
4,042


4,775

Real estate:
 
 
 
Construction
1,764

 
2,242

Single family residential
15,415

 
13,431

Other commercial
11,911

 
16,054

Total real estate
29,090


31,727

Commercial:
 
 
 
Commercial
9,195

 
6,980

Agricultural
2,221

 
2,160

Total commercial
11,416


9,140

Total
$
44,548


$
45,642



22




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, 2018
 

 
 

 
 

 
 

 
 

 
 

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Credit cards
$
642

 
$
383

 
$
1,025

 
$
179,327

 
$
180,352

 
$
145

Other consumer
3,026

 
2,363

 
5,389

 
271,941

 
277,330

 
37

Total consumer
3,668


2,746


6,414


451,268


457,682


182

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
515

 
821

 
1,336

 
966,384

 
967,720

 
—

Single family residential
6,187

 
7,898

 
14,085

 
1,300,702

 
1,314,787

 
121

Other commercial
1,862

 
6,080

 
7,942

 
2,808,478

 
2,816,420

 
—

Total real estate
8,564


14,799


23,363


5,075,564


5,098,927