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Note 6 - Loans Acquired

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Loans Acquired [Text Block]

NOTE

6:

LOANS ACQUIRED

During the

fourth

quarter of

2017,

the Company evaluated

$1.985

billion of net loans (

$2.021

billion gross loans less

$36.3

 million discount) purchased in conjunction with the acquisition of OKSB, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans. The Company evaluated the remaining

$11.4

million of net loans (

$18.1

million gross loans less

$6.7

million discount) purchased in conjunction with the acquisition of OKSB for impairment in accordance with the provisions of ASC Topic

310

-

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that

not

all contractually required payments will be collected.

Also during the

fourth

quarter of

2017,

the Company evaluated

$2.208

billion of net loans (

$2.246

billion gross loans less

$37.8

 million discount) purchased in conjunction with the acquisition of First Texas, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans.

During the

second

quarter of

2017,

the Company evaluated

$249.2

million of net loans (

$254.2

million gross loans less

$5.0

 million discount) purchased in conjunction with the acquisition of Hardeman, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans. The Company evaluated the remaining

$2.4

million of net loans (

$3.4

million gross loans less

$990,000

discount) purchased in conjunction with the acquisition of Hardeman for impairment in accordance with the provisions of ASC Topic

310

-

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

.

During the

third

quarter of

2016,

the Company evaluated

$340.1

million of net loans (

$348.8

million gross loans less

$8.7

 million discount) purchased in conjunction with the acquisition of Citizens, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans. The Company evaluated the remaining

$757,000

of net loans (

$1.6

million gross loans less

$848,000

discount) purchased in conjunction with the acquisition of Citizens for impairment in accordance with the provisions of ASC Topic

310

-

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

.

During the

first

quarter of

2015,

the Company evaluated

$769.9

million of net loans (

$774.8

million gross loans less

$4.9

 million discount) purchased in conjunction with the acquisition of Liberty, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans. The Company evaluated the remaining

$10.7

million of net loans (

$15.7

million gross loans less

$5.0

million discount) purchased in conjunction with the acquisition of Liberty for impairment in accordance with the provisions of ASC Topic

310

-

30.

Also during the

first

quarter of

2015,

the Company evaluated

$1.13

billion of net loans (

$1.15

billion gross loans less

$23.7

 million discount) purchased in conjunction with the acquisition of Community First, described in Note

2,

Acquisitions, in accordance with the provisions of ASC Topic

310

-

20.

The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are

not

considered to be impaired loans. The Company evaluated the remaining

$7.0

million of net loans (

$10.1

million gross loans less

$3.1

million discount) purchased in conjunction with the acquisition of Community First for impairment in accordance with the provisions of ASC Topic

310

-

30.

See Note

2,

Acquisitions, for further discussion of loans acquired.

On

September 15, 2015,

the Company entered into an agreement with the FDIC to terminate all loss share agreements which were entered into in

2010

and

2012

in conjunction with the Company’s acquisition of substantially all of the assets (“covered assets”) and assumption of substantially all of the liabilities of

four

failed banks in FDIC-assisted transactions. Under the early termination, all rights and obligations of the Company and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated.

Under the terms of the agreement, the FDIC made a net payment of

$2,368,000

to Simmons Bank as consideration for the early termination of the loss share agreements. The early termination was recorded in the Company’s financial statements by removing the FDIC Indemnification Asset, receivable from FDIC, the FDIC True-up liability and recording a

one

-time, pre-tax charge of

$7,476,000.

As a result, the Company reclassified loans previously covered by FDIC loss share to loans acquired,

not

covered by FDIC loss share. Foreclosed assets previously covered by FDIC loss share were reclassified to foreclosed assets

not

covered by FDIC loss share.

The following table reflects the carrying value of all loans acquired as of

December 31, 2017

and

2016:

		Loans Acquired At December 31,
(In thousands)		2017				2016
Consumer:
Other consumer		$	51,467			$	49,677
Total consumer			51,467				49,677
Real estate:
Construction			637,032				57,587
Single family residential			793,228				423,176
Other commercial			2,387,777				690,108
Total real estate			3,818,037				1,170,871
Commercial:
Commercial			995,587				81,837
Agricultural			66,576				3,298
Total commercial			1,062,163				85,135
Other			142,409				--
Total loans acquired (1)		$	5,074,076			$	1,305,683

(1 ) Loans acquired are reported net of a $418,000 and $954,000 allowance as of December 31, 2017 and 2016, respectively.

Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic

310

-

30,

segregated by class of loans, are as follows (see Note

5,

Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):

(In thousands)		December 31, 2017				December 31, 2016
Consumer:
Other consumer		$	334			$	456
Total consumer			334				456
Real estate:
Construction			1,767				7,961
Single family residential			12,151				13,366
Other commercial			7,401				22,045
Total real estate			21,319				43,372
Commercial:
Commercial			1,748				2,806
Agricultural			84				198
Total commercial			1,832				3,004
Total		$	23,485			$	46,832

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note

5,

Loans and Allowance for Loan Losses, for discussion of past due loans):

(In thousands)		Gross 30-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total Loans				90 Days Past Due & Accruing
December 31, 2017
Consumer:
Other consumer		$	889			$	260			$	1,149			$	50,318			$	51,467			$	108
Total consumer			889				260				1,149				50,318				51,467				108
Real estate:
Construction			2,577				1,448				4,025				633,007				637,032				279
Single family residential			12,936				3,302				16,238				776,990				793,228				126
Other commercial			17,176				5,647				22,823				2,364,954				2,387,777				2,565
Total real estate			32,689				10,397				43,086				3,774,951				3,818,037				2,970
Commercial:
Commercial			2,344				1,039				3,383				992,204				995,587				67
Agricultural			51				--				51				66,525				66,576				--
Total commercial			2,395				1,039				3,434				1,058,729				1,062,163				67
Other			15				--				15				142,394				142,409				--
Total		$	35,988			$	11,696			$	47,684			$	5,026,392			$	5,074,076			$	3,145
December 31, 2016
Consumer:
Other consumer		$	571			$	189			$	760			$	48,917			$	49,677			$	--
Total consumer			571				189				760				48,917				49,677				--
Real estate:
Construction			132				7,332				7,464				50,123				57,587				--
Single family residential			8,358				4,857				13,215				409,961				423,176				11
Other commercial			2,836				10,741				13,577				676,531				690,108				--
Total real estate			11,326				22,930				34,256				1,136,615				1,170,871				11
Commercial:
Commercial			723				2,153				2,876				78,961				81,837				--
Agricultural			48				--				48				3,250				3,298				--
Total commercial			771				2,153				2,924				82,211				85,135				--
Total		$	12,668			$	25,272			$	37,940			$	1,267,743			$	1,305,683			$	11

The following table presents a summary of loans acquired by credit risk rating, segregated by class of loans (see Note

5,

Loans and Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic

310

-

30

are all included in Risk Rate

1

-

4

in this table.

(In thousands)		Risk Rate 1-4				Risk Rate 5				Risk Rate 6				Risk Rate 7				Risk Rate 8				Total
December 31, 2017
Consumer:
Other consumer		$	50,625			$	21			$	821			$	--			$	--			$	51,467
Total consumer
Real estate:
Construction			468,610				166,710				1,712				--				--				637,032
Single family residential			770,954				2,618				19,656				--				--				793,228
Other commercial			2,337,097				15,064				35,616				--				--				2,387,777
Total real estate			3,576,661				184,392				56,984												3,818,037
Commercial:
Commercial			946,322				13,901				35,364				--				--				995,587
Agricultural			66,367				--				209				--				--				66,576
Total commercial			1,012,689				13,901				35,573				--				--				1,062,163
Other			142,409				--				--				--				--				142,409
Total		$	4,782,384			$	198,314			$	93,378			$	--			$	--			$	5,074,076
December 31, 2016
Consumer:
Other consumer		$	48,992			$	14			$	671			$	--			$	--			$	49,677
Total consumer			48,992				14				671				--				--				49,677
Real estate:
Construction			50,704				88				6,795				--				--				57,587
Single family residential			400,553				2,696				18,392				1,535				--				423,176
Other commercial			641,018				17,384				31,706				--				--				690,108
Total real estate			1,092,275				20,168				56,893				1,535				--				1,170,871
Commercial:
Commercial			73,609				1,965				6,257				6				--				81,837
Agricultural			3,010				34				254				--				--				3,298
Total commercial			76,619				1,999				6,511				6				--				85,135
Total		$	1,217,886			$	22,181			$	64,075			$	1,541			$	--			$	1,305,683

Loans acquired were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans are systematically reviewed by the Company to determine the risk of losses that

may

exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Company’s legacy loan portfolio, with most focus being placed on those loans which include the larger loan relationships and those loans which exhibit higher risk characteristics.

The following is a summary of the loans acquired in the OKSB acquisition on

October 19, 2017,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	2,021,388			$	18,136
Non-accretable difference (expected losses and foregone interest)			--				(6,731	)
Cash flows expected to be collected at acquisition			2,021,388				11,405
Accretable yield			(36,340	)			--
Basis in acquired loans at acquisition		$	1,985,048			$	11,405

The following is a summary of the loans acquired in the First Texas acquisition on

October 19, 2017,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	2,246,212			$	--
Non-accretable difference (expected losses and foregone interest)			--				--
Cash flows expected to be collected at acquisition			2,246,212				--
Accretable yield			(37,834	)			--
Basis in acquired loans at acquisition		$	2,208,378			$	--

The following is a summary of the loans acquired in the Hardeman acquisition on

May 15, 2017,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	254,189			$	3,452
Non-accretable difference (expected losses and foregone interest)			--				(990	)
Cash flows expected to be collected at acquisition			254,189				2,462
Accretable yield			(5,002	)			--
Basis in acquired loans at acquisition		$	249,187			$	2,462

The following is a summary of the loans acquired in the Citizens acquisition on

September 9, 2016,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	348,756			$	1,605
Non-accretable difference (expected losses and foregone interest)			--				(848	)
Cash flows expected to be collected at acquisition			348,756				757
Accretable yield			(8,663	)			--
Basis in acquired loans at acquisition		$	340,093			$	757

The following is a summary of the loans acquired in the Liberty acquisition on

February 27, 2015,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	774,777			$	15,716
Non-accretable difference (expected losses and foregone interest)			--				(4,978	)
Cash flows expected to be collected at acquisition			774,777				10,738
Accretable yield			(4,869	)			12
Basis in acquired loans at acquisition		$	769,908			$	10,750

The following is a summary of the loans acquired in the Community First acquisition on

February 27, 2015,

as of the date of acquisition.

(In thousands)		Not Impaired				Impaired
Contractually required principal and interest at acquisition		$	1,153,255			$	10,143
Non-accretable difference (expected losses and foregone interest)			--				(3,247	)
Cash flows expected to be collected at acquisition			1,153,255				6,896
Accretable yield			(23,712	)			104
Basis in acquired loans at acquisition		$	1,129,543			$	7,000

In addition to the accretable yield on acquired loans

not

considered to be impaired, the amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield.  The accretable yield is recognized as interest income over the estimated lives of the loans.  Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments

may

or

may

not

be required.  This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans. For those loans previously covered by FDIC loss share, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which was recorded as indemnification assets.  The estimated adjustments to the indemnification assets were amortized on a level-yield basis over the remainder of the loss-sharing agreements or the remaining expected lives of the loans, whichever was shorter. Because the Company’s loss share agreements with the FDIC have been terminated, there will be

no

further indemnification asset amortization in future quarters.

The impact of these adjustments on the Company’s financial results for the years ended

December 31, 2017,

2016

and

2015

is shown below:

(In thousands)		2017				2016				2015
Impact on net interest income		$	4,105			$	3,072			$	19,995
Non-interest income (1)			--				--				(7,719	)
Net impact to pre-tax income			4,105				3,072				12,276
Net impact, net of taxes		$	2,495			$	1,867			$	7,461

(1 ) Negative non-interest income resulted from the amortization of the FDIC indemnification assets. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization.

These adjustments will be recognized over the remaining lives of the purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the years ended

December 31, 2017,

2016

and

2015.

(In thousands)		Accretable Yield				Carrying Amount of Loans
Balance, January 1, 2015		$	20,635			$	169,098
Additions			(116	)			17,750
Accretable yield adjustments			6,593				--
Accretion			(21,038	)			21,038
Payments and other reductions, net			(5,120	)			(184,417	)
Balance, December 31, 2015			954				23,469
Additions			19				757
Accretable yield adjustments			5,122				--
Accretion			(4,440	)			4,440
Payments and other reductions, net			--				(10,864	)
Balance, December 31, 2016			1,655				17,802
Additions			--				13,793
Accretable yield adjustments			4,893				--
Accretion			(5,928	)			5,928
Payments and other reductions, net			--				(20,407	)
Balance, December 31, 2017		$	620			$	17,116

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan losses for loans acquired resulting in a total allowance on loans acquired of

$418,000

at

December 31, 2017

and

$954,000

at

December 31, 2016

and

2015.

The purchase and assumption agreements for the FDIC-assisted acquisitions allowed for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses failed to reach the expected loss level under a claw back provision (“true-up provision”). The amount of the true-up provision for each acquisition was measured and recorded at Day

1

fair values. It was calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement, then discounted back to net present value.

Under the terms of the loss share termination agreement, the FDIC made a net payment of

$2.4

million to Simmons Bank as consideration for early termination. The early termination was recorded in the Company’s financial statements by removing the FDIC indemnification asset, receivable from FDIC, the FDIC true-up provision and recording a

one

-time, pre-tax charge of

$7.5

 million.

The following table presents a summary of the changes in the FDIC true-up provision for the year ended

December 31, 2015

which were included in other assets on the balance sheet. Due to the termination of the FDIC agreements in

September 2015

there was

no

amortization expense recorded for the years ended

December 31, 2017

and

2016.

(In thousands)		FDIC True-up Provision
Balance, January 1, 2015		$	8,308
Amortization expense			107
Adjustments related to changes in expected losses			720
Loss share termination agreement			(9,135	)
Balance, December 31, 2015		$	--

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