TMCnet News
SIMMONS FIRST NATIONAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW Our net income for the three months ended September 30, 2014, was $8.8 million and diluted earnings per share were $0.52, compared to net income of $6.9 million and $0.43 diluted earnings per share for the same period of 2013. Net income for the nine months ended September 30, 2014, was $23.0 million and diluted earnings per share were $1.39, compared to net income of $19.4 million and $1.19 diluted earnings per share for the same period of 2013. Net income for the each quarter in both 2014 and 2013 included significant nonrecurring items that impacted net income. The majority of these items, which we will discuss later in this section, were related to our acquisitions. Excluding all nonrecurring items, core earnings for the three months ended September 30, 2014 were $10.7 million, or $0.63 diluted core earnings per share, compared to $7.4 million, or $0.45 diluted core earnings per share for the same period in 2013. Diluted core earnings per share increased by $0.18,or 40.0%. Core earnings for the nine months ended September 30, 2014 were $27.3 million, or $1.65 diluted core earnings per share, compared to $19.9 million, or $1.21 diluted core earnings per share for the same period in 2013. Diluted core earnings per share increased by $0.44, or 36.4%. See Reconciliation of Non-GAAP Measures and Table 13 - Reconciliation of Core Earnings (non-GAAP) for additional discussion of non-GAAP measures. On November 25, 2013, we closed the transaction to acquire Metropolitan National Bank ("Metropolitan" or "MNB"), headquartered in Little Rock, Arkansas. During the first quarter of 2014 we completed the system integration and branch consolidation associated with the Metropolitan acquisition. We also entered into a definitive agreement and plan of merger with Delta Trust & Banking Corporation ("Delta Trust"), also headquartered in Little Rock, including its wholly-owned bank subsidiary Delta Trust & Bank, with plans to complete the transaction in the third quarter of 2014. During the second quarter of 2014, we entered into a definitive agreement and plan of merger with Community First Bancshares, Inc. ("Community First"), headquartered in Union City, Tennessee, including its wholly-owned bank subsidiary First State Bank ("First State"). During the second quarter we also entered into a definitive agreement and plan of merger with Liberty Bancshares, Inc. ("Liberty"), headquartered in Springfield, Missouri, including its wholly-owned bank subsidiary Liberty Bank. We plan to complete both of these transactions in the fourth quarter of 2014 or early in the first quarter of 2015, pending stockholder and regulatory approval The third quarter of 2014 was another significant quarter for Simmons. We finalized our acquisition of Delta Trust on August 31, 2014, and completed the systems conversion on October 24, 2014. We added approximately $417 million in assets from Delta Trust and recognized $2.2 million in after-tax merger related expenses during the quarter. We again reported record core earnings and record core earnings per share for the quarter. As a result of acquisitions and efficiency initiatives in recent reporting periods, we have and will continue to recognize one-time revenue and expense items which may skew our short-term core business results but provide long-term performance benefits. Our focus continues to be improvement in core operating income. We are also pleased with the positive trends in our balance sheet, as reflected in our organic loan growth as well as in our growth from acquisitions, which enabled us to produce a net interest margin of 4.36% for the quarter. Stockholders' equity as of September 30, 2014 was $484.0 million, book value per share was $26.90 and tangible book value per share was $19.61. Our ratio of stockholders' equity to total assets was 10.3% and the ratio of tangible stockholders' equity to tangible assets was 7.7% at September 30, 2014. The Company's Tier I leverage ratio of 9.1%, as well as our other regulatory capital ratios, remain significantly above the "well capitalized" levels (see Table 12 in the Capital section of this Item). Total assets were $4.69 billion at September 30, 2014, compared to $4.38 billion at December 31, 2013 and $3.44 billion at September 30, 2013. Total loans, including loans acquired, were $2.76 billion at September 30, 2014, compared to $2.40 billion at December 31, 2013 and $1.96 billion at September 30, 2013. We continue to have good asset quality. Simmons First National Corporation is a $4.7 billion Arkansas based financial holding company conducting financial operations throughout Arkansas, Kansas and Missouri. Including the pending acquisitions, we project pro forma assets of approximately $8.0 billion with an expansion of our operations within Arkansas, Missouri, and into Tennessee. Subsidiary Bank Consolidation We have completed the consolidation of our subsidiary banks into Simmons First National Bank ("Simmons Bank"), headquartered in Pine Bluff, Arkansas. We announced in March our plans to consolidate our seven subsidiary banks into a single banking organization, Simmons Bank. We completed the first phase by consolidating three subsidiary banks into Simmons Bank in May, and completed the final phase by consolidating the remaining three subsidiary banks into Simmons Bank in August. The elimination of the separate bank charters will increase the Company's efficiency and assist us in more effectively meeting the increased regulatory burden currently facing banking institutions. There are many operational functions that we previously performed separately for each of our seven banks; with the consolidation, these tasks will only need to be performed once. 45-------------------------------------------------------------------------------- We believe our customers will experience a positive impact from this change. All of our banking and financial services will continue to be available in the same locations as before the consolidation. Our local management and Community Boards of Directors are committed to maintaining our nearby and neighborly service and this change will allow them more opportunity to meet the needs of our customers and the communities we serve. CRITICAL ACCOUNTING POLICIES Overview We follow accounting and reporting policies that conform, in all material respects, to generally accepted accounting principles and to general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for loan losses, (b) acquisition accounting and valuation of covered loans and related indemnification asset, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of employee benefit plans and (e) income taxes. Allowance for Loan Losses on Loans Not Acquired The allowance for loan losses is management's estimate of probable losses in the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is calculated monthly based on management's assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) other factors and trends that will affect specific loans and categories of loans. We establish general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued for probable losses on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. Our evaluation of the allowance for loan losses is inherently subjective as it requires material estimates. The actual amounts of loan losses realized in the near term could differ from the amounts estimated in arriving at the allowance for loan losses reported in the financial statements. Acquisition Accounting, Acquired Loans We account for our acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. 46 -------------------------------------------------------------------------------- We evaluate loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. We evaluate purchased impaired loans 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. We evaluate all of the loans acquired in conjunction with its FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30. All loans acquired in the FDIC transactions, both covered and not covered, were deemed to be impaired loans. All loans acquired, whether or not covered by FDIC loss share agreements, are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. For impaired loans accounted for under ASC Topic 310-30, we continue to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques, and on purchased credit impaired loans. We evaluate at each balance sheet date whether the present value of our pools of loans and purchased credit impaired loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income. For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool's remaining life or over the remaining life of the purchased credit impaired loans. Covered Loans and Related Indemnification Asset Because the FDIC will reimburse us for losses incurred on certain acquired loans, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. The shared-loss agreements continue to be measured on the same basis as the related indemnified loans, as prescribed by ASC Topic 805. Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over (1) the same period or (2) the life of the shared-loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements. Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding, claim receivable is recorded until cash is received from the FDIC. For further discussion of our acquisition and loan accounting, see Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Goodwill and Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles - Goodwill and Other, as amended by ASU 2011-08 - Testing Goodwill for Impairment. ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually, or more frequently if certain conditions occur. Impairment losses, if any, will be recorded as operating expenses. 47 --------------------------------------------------------------------------------Employee Benefit Plans We have adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights and bonus stock awards. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of bonus shares granted to directors, officers and other key employees. In accordance with ASC Topic 718, Compensation - Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. For additional information, see Note 13, Stock Based Compensation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Income Taxes We are subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company's income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management's analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities. NET INTEREST INCOME Overview Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 39.225%. Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. Historically, approximately 70% of our loan portfolio and approximately 80% of our time deposits have repriced in one year or less. These historical percentages are fairly consistent with our current interest rate sensitivity. Net Interest Income Quarter-to-Date Analysis For the three month period ended September 30, 2014, net interest income on a fully taxable equivalent basis was $43.5 million, an increase of $10.6 million, or 32.2%, over the same period in 2013. The increase in net interest income was the result of a $11.2 million increase in interest income and a $0.6 million increase in interest expense. The increase in interest income primarily resulted from a $9.5 million increase in interest income on loans and a $1.7 million increase in interest income on investment securities. The increase in interest income on investment securities was primarily due to volume increases resulting from the Metropolitan acquisition in late 2013. The increase in interest income from loans consisted of a $9.1 million increase in interest income on loans acquired and a $0.4 million increase in interest income on legacy loans. Although the increase in legacy loan volume generated $1.9 million of additional interest income, a 34 basis point decline in yield resulted in a $1.5 million decrease in interest income, netting the small $0.4 million increase from legacy loans. 48 -------------------------------------------------------------------------------- The $9.1 million increase in interest income from acquired loans resulted from two sources. First, the average balance of acquired loans increased by $444.6 million from September 30, 2013 to September 30, 2014 because of the Metropolitan and Delta Trust acquisitions. Also, we recognized additional yield accretion in conjunction with the fair value of the loan pools acquired in the 2010 and 2012 FDIC-assisted transactions as discussed in Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Each quarter, we estimate the cash flows expected to be collected from the acquired loan pools. Beginning in the fourth quarter of 2011, the cash flows estimate has increased on the loans acquired in 2010 based on payment histories and reduced loss expectations of the loan pools. Beginning in the third quarter of 2013, the cash flows estimate has also increased on the loans acquired in 2012. This resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduce the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. The estimated adjustments to the indemnification assets are amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected life of the loan pools, whichever is shorter, and are recorded in non-interest expense. For the three months ended September 30, 2014, the adjustments increased interest income by an additional $1.0 million and increased non-interest income by an additional $0.1 million compared to the same period in 2013. The net increase to 2014 third quarter pre-tax income was $1.1 million from 2013. Because these adjustments will be recognized over the estimated remaining lives of the loan pools and the remainder of the loss sharing agreements, respectively, they will impact future periods as well. The current estimate of the remaining accretable yield adjustment that will positively impact interest income is $19.3 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $10.5 million. Of the remaining adjustments, we expect to recognize $3.6 million of interest income and a $2.9 million reduction of non-interest income for a net reduction to pre-tax income of approximately $0.7 million during the remainder of 2014. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loan pools. The $0.6 million increase in interest expense is primarily the result of $46.0 million in 3.25% floating rate notes payable issued as partial funding for our Metropolitan acquisition. The decrease in interest expense from lower interest rates on our deposit accounts offset most of the increase in interest expense from the growth in deposits, primarily from Metropolitan. Net Interest Income Year-to-Date Analysis For the nine month period ended September 30, 2014, net interest income on a fully taxable equivalent basis was $128.8 million, an increase of $34.1 million, or 36.0%, over the same period in 2013. The increase in net interest income was the result of a $35.5 million increase in interest income and a $1.4 million increase in interest expense. The increase in interest income resulted from a $29.3 million increase in interest income on loans and a $6.3 million increase in interest income on investment securities. The increase in interest income on investment securities was primarily due to volume increases resulting from the Metropolitan acquisition in late 2013. The increase in interest income from loans consisted of a $30.9 million increase in interest income on loans acquired and a $1.6 million decrease in interest income on legacy loans. Although the increase in legacy loan volume generated $4.4 million of additional interest income, a 45 basis point decline in yield resulted in a $6.0 million decrease in interest income, netting the $1.7 million decrease from legacy loans. The $30.9 million increase in interest income from acquired loans resulted from two sources. First, the average balance of acquired loans increased by $422.4 million because of the Metropolitan and Delta Trust acquisitions. Also, we recognized additional yield accretion from the accretable yield adjustments related to the loan pools acquired in the FDIC-assisted transactions. For the nine months ended September 30, 2014, the adjustments increased interest income by an additional $8.1 million and decreased non-interest income by an additional $7.7 million compared to the same period in 2013. The net increase to 2014 year-to-date pre-tax income was $0.4 million from 2013. The $1.4 million increase in interest expense is primarily the result of the $46.0 million in 3.25% floating rate notes payable issued as partial funding for our Metropolitan acquisition. The decrease in interest expense from lower interest rates on our deposit accounts offset most of the increase in interest expense from the growth in deposits, primarily from Metropolitan. 49 --------------------------------------------------------------------------------Net Interest Margin Our net interest margin increased 9 basis points to 4.36% for the three month period ended September 30, 2014, when compared to 4.27% for the same period in 2013. For the nine month period ended September 30, 2014, net interest margin increased 33 basis points to 4.41% when compared to 4.08% for the same period in 2013. The margin has been strengthened from the impact of the accretable yield adjustments discussed above. Also, the acquisition of loans, along with our ability to stabilize the size of our legacy loan portfolio, has allowed us to increase our level of higher yielding assets. Conversely, while keeping us prepared to benefit from rising interest rates, our high levels of liquidity continue to compress our margin. Although interest income from our accretable yield adjustments has increased from 2013, the total accretable yield is declining as our FDIC-assisted acquired loan portfolios begin to mature. This reduction in total accretable yield also acts to compress our margin. Net Interest Income Tables Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three month and nine month periods ended September 30, 2014 and 2013, respectively, as well as changes in fully taxable equivalent net interest margin for the three month and nine month periods ended September 30, 2014, versus September 30, 2013. Table 1: Analysis of Net Interest Margin (FTE =Fully Taxable Equivalent) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2014 2013 2014 2013 Interest income $ 45,215 $ 34,411 $ 134,092 $ 100,213 FTE adjustment 1,702 1,324 5,089 3,492 Interest income - FTE 46,917 35,735 139,181 103,705 Interest expense 3,443 2,847 10,403 8,994 Net interest income - FTE $ 43,474 $ 32,888 $ 128,778 $ 94,711 Yield on earning assets - FTE 4.71 % 4.63 % 4.77 % 4.46 % Cost of interest bearing liabilities 0.44 % 0.47 % 0.44 % 0.49 % Net interest spread - FTE 4.27 % 4.16 % 4.33 % 3.97 % Net interest margin - FTE 4.36 % 4.27 % 4.41 % 4.08 % Table 2: Changes in Fully Taxable Equivalent Net Interest Margin Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2014 vs. 2013 2014 vs. 2013 Increase due to change in earning assets $ 16,775 $ 47,129 Decrease due to change in earning asset yields (5,593 ) (11,653 ) Decrease due to change in interest bearing liabilities (850 ) (2,479 ) Increase due to change in interest rates paid on interest bearing liabilities 254 1,070 Increase in net interest income $ 10,586 $ 34,067 50-------------------------------------------------------------------------------- Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three and nine month periods ended September 30, 2014 and 2013. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans. Table 3: Average Balance Sheets and Net Interest Income Analysis Three Months Ended September 30, 2014 2013 Average Income/ Yield/ Average Income/ Yield/ ($ in thousands) Balance Expense Rate(%) Balance Expense Rate(%) ASSETS Earning assets: Interest bearing balances due from banks $ 288,258 $ 132 0.18 $ 365,504 $ 234 0.25 Federal funds sold 6,794 12 0.70 3,719 6 0.64 Investment securities - taxable 789,252 2,043 1.03 492,063 1,357 1.09 Investment securities - non-taxable 321,760 4,369 5.39 253,867 3,384 5.29 Mortgage loans held for sale 24,942 269 4.28 12,171 122 3.98 Assets held in trading accounts 6,841 3 0.17 8,731 6 0.27 Legacy loans 1,917,155 23,848 4.94 1,766,576 23,494 5.28 Loans acquired 601,030 16,241 10.72 156,392 7,132 18.09 Total interest earning assets 46,917 4.71 3,059,023 35,735 4.63 Non-earning assets 482,775 364,397 Total assets $ 4,438,807 $ 3,423,420 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Interest bearing liabilities Interest bearing transaction and savings accounts $ 1,869,095 $ 771 0.16 $ 1,444,058 $ 601 0.17 Time deposits 1,013,326 1,461 0.57 819,408 1,392 0.67 Total interest bearing deposits 2,882,421 2,232 0.31 2,263,466 1,993 0.35 Federal funds purchased and securities sold under agreement to repurchase 108,357 55 0.20 67,924 46 0.27 Other borrowings 117,664 996 3.36 75,704 646 3.39 Subordinated debentures 20,620 160 3.08 20,620 162 3.12 Total interest bearing liabilities 3,129,062 3,443 0.44 2,427,714 2,847 0.47 Non-interest bearing liabilities: Non-interest bearing deposits 828,340 559,461 Other liabilities 38,950 31,867 Total liabilities 3,996,352 3,019,042 Stockholders' equity 442,455 404,378 Total liabilities and stockholders' equity $ 4,438,807 $ 3,423,420 Net interest spread 4.27 4.16 Net interest margin $ 43,474 4.36 $ 32,888 4.27 51-------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 2013 Average Income/ Yield/ Average Income/ Yield/ ($ in thousands) Balance Expense Rate(%) Balance Expense Rate(%) ASSETS Earning assets: Interest bearing balances due from banks $ 417,709 $ 691 0.22 $ 484,684 $ 875 0.24 Federal funds sold 2,721 16 0.79 4,709 14 0.40Investment securities - taxable 725,088 6,050 1.12 486,810 3,886 1.07 Investment securities - non-taxable 318,724 13,046 5.47 222,622 8,921 5.36 Mortgage loans held for sale 15,637 506 4.33 15,256 395 3.46 Assets held in trading accounts 6,968 13 0.25 8,516 23 .36 Legacy loans 1,819,069 68,149 5.01 1,708,110 69,815 5.46 Loans acquired 597,374 50,710 11.35 174,999 19,776 15.11 Total interest earning assets 3,903,290 139,181 4.77 3,105,706 103,705 4.46 Non-earning assets 499,947 374,810 Total assets $ 4,403,237 $ 3,480,516 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Interest bearing liabilities Interest bearing transaction and savings accounts $ 1,844,679 $ 2,185 0.16 $ 1,447,851 $ 1,814 0.17 Time deposits 1,053,271 4,552 0.58 837,561 4,460 0.71 Total interest bearing deposits 2,897,950 6,737 0.31 2,285,412 6,274 0.37 Federal funds purchased and securities sold under agreement to repurchase 108,303 194 0.24 91,979 165 0.24 Other borrowings 117,111 2,995 3.42 79,888 2,072 3.47 Subordinated debentures 20,620 477 3.09 20,620 483 3.13 Total interest bearing liabilities 3,143,984 10,403 0.44 2,477,899 8,994 0.49 Non-interest bearing liabilities: Non-interest bearing deposits 795,665 562,617 Other liabilities 41,649 32,833 Total liabilities 3,981,298 3,073,349 Stockholders' equity 421,939 407,167 Total liabilities and stockholders' equity $ 4,403,237 $ 3,480,516 Net interest spread 4.33 3.97 Net interest margin $ 128,778 4.41 $ 94,711 4.08 52-------------------------------------------------------------------------------- Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three month and nine month periods ended September 30, 2014, as compared to the same period of the prior year. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume. Table 4: Volume/Rate Analysis Three Months Ended Nine Months Ended September 30, September 30, 2014 over 2013 2014 over 2013 (In thousands, on a fully Yield/ Yield/ taxable equivalent basis) Volume Rate Total Volume Rate Total Increase (decrease) in: Interest income: Interest bearing balances due from banks $ (43 ) $ (59 ) $ (102 ) $ (115 ) $ (69 ) $ (184 ) Federal funds sold 5 1 6 (8 ) 10 2 Investment securities - taxable 775 (89 ) 686 1,981 183 2,164 Investment securities - non-taxable 921 64 985 3,930 195 4,125 Mortgage loans held for sale 137 10 147 10 101 111 Assets held in trading accounts (1 ) (2 ) (3 ) (4 ) (6 ) (10 ) Legacy loans 1,930 (1,576 ) 354 4,370 (6,036 ) (1,666 ) Loans acquired 13,051 (3,942 ) 9,109 36,965 (6,031 ) 30,934 Total 16,775 (5,593 ) 11,182 47,129 (11,653 ) 35,476 Interest expense: Interest bearing transaction and savings accounts 175 (5 ) 170 474 (103 ) 371 Time deposits 298 (229 ) 69 1,024 (932 ) 92 Federal funds purchased and securities sold under agreements to repurchase 22 (13 ) 9 29 - 29 Other borrowings 355 (5 ) 350 952 (29 ) 923 Subordinated debentures - (2 ) (2 ) - (6 ) (6 ) Total 850 (254 ) 596 2,479 (1,070 ) 1,409 (Decrease) increase in net interest income $ 15,925 $ (5,339 ) $ 10,586 $ 44,650 $ (10,583 ) $ 34,067 PROVISION FOR LOAN LOSSES The provision for loan losses represents management's determination of the amount necessary to be charged against the current period's earnings in order to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk inherent in the loan portfolio. The level of provision to the allowance is based on management's judgment, with consideration given to the composition, maturity and other qualitative characteristics of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loan loss experience. It is management's practice to review the allowance on a monthly basis, and, after considering the factors previously noted, to determine the level of provision made to the allowance. The provision for loan losses for the three month period ended September 30, 2014, was $1.1 million, compared to $1.0 million for the three month period ended September 30, 2013, an increase of $0.1 million. The provision for loan losses for the nine month period ended September 30, 2014, was $3.6 million, compared to $3.0 million for the nine month period ended September 30, 2013, an increase of $0.6 million. See Allowance for Loan Losses section for additional information. NON-INTEREST INCOME Total non-interest income was $16.0 million for the three month period ended September 30, 2014, an increase of $5.7 million, or 55.5%, compared to $10.3 million for the same period in 2013. Total non-interest income was $40.7 million for the nine month period ended September 30, 2014, an increase of $7.8 million, or 23.7%, compared to $32.9 million for the same period in 2013. 53 -------------------------------------------------------------------------------- During the three and nine months ended September 30, 2014 we recognized $0.9 million and $3.2 million, respectively, in net gains from the sale of nine former branch locations. These branches were closed in March as part of our initial branch right sizing strategy related to the November 2013 acquisition of Metropolitan. We are very pleased with the market demand for our former branches, allowing us to negotiate quick sales on several of these non-earning assets. We expect to liquidate the majority of the remaining former branch locations by the end of the year. We also recorded a $1.0 million gain from the sale of our merchant services business during the second quarter. The sale of this service business became necessary as the chip technology in debit and credit cards comes to fruition. The new contract we have with our vendor serves to eliminate most of our risk while providing our customers with service and support from experts in their field. While our revenue from these services will decline, so will our support expenses. We believe that by selling our merchant services and entering into a third-party contract we have mitigated our risk with a neutral financial impact. Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and debit and credit card fees. Non-interest income also includes mortgage lending income, investment banking income, income from the increase in cash surrender values of bank owned life insurance, gains (losses) from sales of securities and gains (losses) related to FDIC-assisted transactions and covered assets. Table 5 shows non-interest income for the three and nine month periods ended September 30, 2014 and 2013, respectively, as well as changes in 2014 from 2013. Table 5: Non-Interest Income Three Months 2014 Nine Months 2014 Ended September 30 Change from Ended September 30 Change from (In thousands) 2014 2013 2013 2014 2013 2013 Trust income $ 1,838 $ 1,448 $ 390 26.93% $ 4,929 $ 4,234 $ 695 16.41 % Service charges on deposit accounts 6,238 4,603 1,635 35.52 19,098 13,318 5,780 43.40 Other service charges and fees 808 728 80 10.99 2,490 2,294 196 8.54 Mortgage lending income 1,812 1,122 690 61.50 3,885 3,677 208 5.66 Investment banking income 284 240 44 18.33 620 1,390 (770 ) -55.40 Debit and credit card fees 5,769 4,400 1,369 31.11 17,213 12,779 4,434 34.70 Bank owned life insurance income 411 328 83 25.30 1,117 974 143 14.68 Gain (loss) on sale of securities (18 ) - (18 ) - 20 (193 ) 213 -110.36 Net gain (loss) on assets covered by FDIC loss share agreements (3,744 ) (3,443 ) (301 ) 8.74 (17,303 ) (8,200 ) (9,103 ) 111.01 Net gain on sale of premises held for sale 856 - 856 - 3,167 - 3,167 - Other income 1,781 887 894 100.79 5,452 2,626 2,826 107.62 Total non-interest income $ 16,035 $ 10,313 $ 5,722 55.48 % $ 40,688 $ 32,899 $ 7,789 23.68 % Recurring fee income (service charges, trust fees and debit and credit card fees) for the three month period ended September 30, 2014, was $14.7 million, an increase of $3.5 million, or 31.13%, from the three month period ended September 30, 2013. Service charges on deposit accounts increased by $1.6 million or 35.5%. Debit and credit card fees increased by $1.4million, or 31.1%. While some of the service charge income increase was due to paper statement fees implemented during 2013, the majority of these increases were due to the additions of accounts from the Metropolitan and Delta Trust acquisitions. Trust income increased by $390,000, or 26.9%, due primarily to growth in our personal trust and investor management client base. Recurring fee income for the nine month period ended September 30, 2014, was $43.7 million, an increase of $11.1 million, or 34.0%, from the nine month period ended September 30, 2013. Service charges on deposit accounts increased by $5.8 million, or 43.4%. Debit and credit card fees increased by $4.4 million, or 34.7%. While some of the service charge income increase was due to paper statement fees implemented during 2013, the majority of these increases were due to the additions of accounts from the Metropolitan and Delta Trust acquisitions. Trust income increased by $695,000, or 16.4%, due primarily to growth in our personal trust and investor management client base. Mortgage lending income increased by $690,000 and $208,000 for the three and nine months ended September 30, 2014, compared to last year. The mortgage market is improving again, as indicated by our 61.5% increase in mortgage lending income during the third quarter, following significant decreases in the previous quarters of 2014, when compared to 2013.. Investment banking income decreased by $770,000 for the nine months ended September 30, 2014, due primarily to an industry-wide decline in dealer bank activities. 54 -------------------------------------------------------------------------------- We recognized $18,000 in net losses from the sale of securities during the three months ended September 30, 2014, and $20,000 in net gains during the nine months ended September 30, 2014. We recorded a nonrecurring $193,000 loss from the sale of securities during the nine months ended September 30, 2013, as we liquidated the investment portfolios remaining from our 2012 FDIC-assisted acquisitions. There were no realized gains or losses during the three months ended September 30, 2013, and no realized gains during the three months ended September 30, 2013. Net loss on assets covered by FDIC loss share agreements increased by $301,000 and $9.1 million for the three and nine months ended September 30, 2014, compared to last year. As previously described, due to the increase in cash flows expected to be collected from the FDIC-covered loan portfolios, an additional $7.8 million of amortization, a reduction of non-interest income, was recorded during the nine months ended September 30, 2014, as compared to 2013, related to reductions of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. A reduction of income from the normal accretion of the FDIC indemnification assets, net of amortization of the FDIC true-up liability, was the primary cause of the remainder of the increase in net loss. For the three months ended September 30, 2014, the amortization expense recorded was $0.1 million less than the same period of 2013. This decrease results from smaller indemnification assets to be amortized as we approach the end of loss share coverage on some of our agreements with the FDIC. Other income increased by $0.9 million and $2.8 million for the three and nine months ended September 30, 2014, due primarily to miscellaneous items, including a $0.8 million gain from the recovery of Metropolitan loans that were charged-off prior to acquisition. The increase for the nine months includes the $1.0 million gain from the sale of our merchant services business. NON-INTEREST EXPENSE Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for the operation of the Company. Management remains committed to controlling the level of non-interest expense, through the continued use of expense control measures that have been installed. We utilize an extensive profit planning and reporting system involving all subsidiaries. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management on a monthly basis. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. We also regularly monitor staffing levels at Simmons Bank to ensure productivity and overhead are in line with existing workload requirements. Non-interest expense for the three months ended September 30, 2014, was $44.4 million, an increase of $13.5 million, or 43.5%, from the same period in 2013. This increase includes $3.6 million in third quarter 2014 merger related costs associated with our recently announced acquisitions. During the same quarter of 2013 we incurred $0.2 million of merger related costs.. As a result, total merger related expenses increased by $3.4 million from the third quarter last year. During August we completed our charter consolidation by consolidating our three remaining subsidiary banks into Simmons Bank and incurred $0.2 million of charter consolidation costs, mostly related to systems conversions. We also recorded $0.2 million in branch rightsizing costs related to the maintenance of our closed branches. Normalizing for the nonrecurring merger related costs, branch right sizing expenses and charter consolidation costs, non-interest expense for the three months ended September 30, 2014 increased $10.8 million, or 36.5%, from the same period in 2013, primarily due to the incremental operating expenses of the acquired Metropolitan and Delta Trust locations. Non-interest expense for the nine months ended September 30, 2014 was $128.8 million, an increase of $35.6 million, or 38.3%, from the same period in 2013. This increase includes expenses of $4.3 million associated with the closure and maintenance of eleven legacy Simmons branches. These branches, along with sixteen former Metropolitan branches, were closed in March as part of our initial branch right sizing strategy related to the November 2013 acquisition of Metropolitan. The costs of closing the former Metropolitan locations were included as merger related costs in the fourth quarter of 2013. Also included in non-interest expense for the nine months ended September 30, 2014 were an additional $6.3 million of merger related expenses associated with Metropolitan and Delta Trust. We consolidated our six subsidiary banks into Simmons Bank in May and August, 2014, and recorded $0.6 million of charter consolidation costs. Normalizing for the nonrecurring merger related costs, branch right sizing expenses and charter consolidation costs, non-interest expense for the nine months ended September 30, 2014 increased $24.9 million, or 26.9 %, from the same period in 2013, primarily due to the incremental operating expenses of the acquired Metropolitan and Delta Trust locations. 55 -------------------------------------------------------------------------------- Salaries and employee benefits increased by $3.2 million and $10.2 million for the three and nine months ended September 30, 2014. Occupancy expense increased by $719,000 and $2.8 million for the same periods, while furniture and equipment expense increased by $750,000 and $1.2 million for the same periods. These increases, along with the increases in several other operating expense categories, were a result of the Metropolitan and Delta acquisitions. Increases in other real estate and foreclosure expense were primarily the result of the write-down of OREO properties, based on updated appraisals, and from property taxes on acquired OREO. Included in professional services were $0.3 million in legal fees related to acquired assets and $0.3 million in consulting fees for efficiency analysis, peer benchmarking and compensation and incentive plan reviews. Table 6 below shows non-interest expense for the three month and nine month periods ended September 30, 2014 and 2013, respectively, as well as changes in 2014 from 2013. Table 6: Non-Interest Expense Three Months 2014 Nine Months 2014 Ended September 30 Change from Ended September 30 Change from (In thousands) 2014 2013 2013 2014 2013 2013 Salaries and employee benefits $ 20,892 $ 17,701 $ 3,191 18.03 % $ 64,338 $ 54,146 $ 10,192 18.82 % Occupancy expense, net 3,204 2,485 719 28.93 10,338 7,490 2,848 38.02 Furniture and equipment expense 2,363 1,613 750 46.50 6,592 5,367 1,225 22.82 Other real estate and foreclosure expense 1,864 385 1,479 384.16 3,112 775 2,337 301.55 Deposit insurance 877 595 282 47.39 2,630 1,862 768 41.25 Merger related costs 3,628 190 3,438 1809.47 6,255 (37 ) 6,290 - Other operating expenses: Professional services 2,201 913 1,288 141.07 5,447 3,160 2,287 72.37 Postage 853 597 256 42.88 2,603 1,838 765 41.62 Telephone 774 542 232 42.80 2,179 1,751 428 24.44 Credit card expenses 2,231 1,706 525 30.77 6,553 5,038 1,515 30.07 Operating supplies 507 341 166 48.68 1,473 1,136 337 29.67 Amortization of intangibles 454 135 319 236.30 1,374 408 966 236.76 Branch right sizing expense 151 533 (382 ) -71.67 4,329 533 3,796 712.20 Other expense 4,355 3,167 1,188 37.51 11,534 9,665 1,872 19.35 Total non-interest expense $ 44,354 $ 30,903 $ 13,451 43.53 % $ 128,757 $ 93,132 $ 35,625 38.25 % LOAN PORTFOLIO Our legacy loan portfolio, excluding loans acquired, averaged $1.819 billion and $1.708 billion during the first nine months of 2014 and 2013, respectively. As of September 30, 2014, total loans, excluding loans acquired, were $1.963 billion, an increase of $221 million from December 31, 2013. The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans). When we make a credit decision on an acquired loan not covered by FDIC loss share as a result of the loan maturing or renewing, the outstanding balance of that loan migrates from loans acquired to legacy loans. Our legacy loan growth from December 31, 2013 to September 30, 2014 included $54.4 million in balances that migrated from acquired loans during the period. These migrated loan balances are included in the legacy loan balances as of September 30, 2014. Excluding the migrated balances from the growth calculation, our legacy loans have grown at a 12.8% annualized rate during 2014. We seek to manage our credit risk by diversifying our loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an adequate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region. We seek to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. We use the allowance for loan losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits. 56 --------------------------------------------------------------------------------The balances of loans outstanding, excluding loans acquired, at the indicated dates are reflected in Table 7, according to type of loan. Table 7: Loan Portfolio September 30, December 31, (In thousands) 2014 2013 Consumer: Credit cards $ 175,822 $ 184,935 Student loans - 25,906 Other consumer 105,508 98,851 Total consumer 281,330 309,692 Real estate: Construction 163,364 146,458 Single family residential 436,925 392,285 Other commercial 681,848 626,333 Total real estate 1,282,137 1,165,076 Commercial: Commercial 249,186 164,329 Agricultural 145,157 98,886 Total commercial 394,343 263,215 Other 5,568 4,655 Total loans, excluding loans acquired, before allowance for loan losses $ 1,963,378 $ 1,742,638 Consumer loans consist of credit card loans, student loans and other consumer loans. Consumer loans were $281.3 million at September 30, 2014, or 14.3% of total loans, compared to $309.7 million, or 17.8% of total loans at December 31, 2013. The decrease in consumer loans was primarily in student loans, a valuable business line eliminated from the private sector by Government legislation after the 2009 - 2010 school year. Since that time we continued to service our remaining student loans internally until the loans paid off, while searching for a suitable buyer. During the second quarter of 2014 we sold substantially our entire student loan portfolio at par, and are now completely out of the student loan business. As expected, credit card loans decreased $9.1 million due to seasonality, but were offset by a $6.7 million increase in other consumer loans. Real estate loans consist of construction loans, single-family residential loans and commercial real estate loans. Real estate loans were $1.282 billion at September 30, 2014, or 65.3% of total loans, compared to the $1.165 billion, or 66.9%, of total loans at December 31, 2013, an increase of $117.1 million. Commercial loans consist of non-agricultural commercial loans and agricultural loans. Commercial loans were $394.3 million at September 30, 2014, or 20.1% of total loans, compared to $263.2 million, or 15.1% of total loans at December 31, 2013, an increase of $131.1 million. This increase was primarily due to an increase in non-agricultural commercial loans to $249.2 million, an $84.9 million, or 51.7%, growth from December 31, 2013. Agricultural loans increased to $145.2 million, a $46.3 million, or 46.8%, growth primarily due to seasonality of the portfolio, which normally peaks in the third quarter and is at its lowest point at the end of the first quarter. LOANS ACQUIRED On August 31, 2014, we completed the acquisition of Delta Trust, and issued 1,629,424 shares of the Company's common stock valued at approximately $65.0 million as of August 29, 2014, plus $2.4 million in cash in exchange for all outstanding shares of Delta Trust common stock. Included in the acquisition were loans with a fair value of $311.7 million and foreclosed assets with a fair value of $1.8 million. On November 25, 2013, we completed the acquisition of Metropolitan, in which the Company purchased all the stock of Metropolitan for $53.6 million in cash. The acquisition was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code. Included in the acquisition were loans with a fair value of $457.4 million and foreclosed assets with a fair value of $42.9 million. On September 30, 2013 we acquired a $9.8 million credit card portfolio for a premium of $1.3 million. On September 14, 2012, the Company acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Truman Bank of St. Louis, Missouri, in an FDIC-assisted transaction. On October 19, 2012, we acquired certain assets and assumed certain deposits and other liabilities of Excel Bank of Sedalia, Missouri, in an FDIC-assisted transaction. In 2010, we acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of two other failed banks in FDIC-assisted transactions. Loans comprise the majority of the assets acquired in the FDIC-assisted transactions. The majority of the loans acquired, along with the majority of the foreclosed assets acquired, are subject to loss share agreements with the FDIC whereby SFNB is indemnified against 80% of losses. These loans and foreclosed assets, as well as the related indemnification asset from the FDIC, are presented as covered assets in the accompanying consolidated financial statements. 57 -------------------------------------------------------------------------------- A summary of the covered assets, along with the acquired loans and foreclosed assets held for sale that are not covered under FDIC loss share agreements, are reflected in Table 8 below as of September 30, 2014 and December 31, 2013. Table 8: Assets Acquired September 30, December 31, (In thousands) 2014 2013 Loans acquired, covered by FDIC loss share (net of discount) $ 118,158 $ 146,653 Foreclosed assets covered by FDIC loss share 15,212 20,585 FDIC indemnification asset 25,694 48,791 Total covered assets $ 159,064 $ 216,029 Loans acquired, not covered by FDIC loss share (net of discount) $ 676,506 $ 515,644 Foreclosed assets acquired, not covered by FDIC loss share 37,603 45,459 Total assets acquired, not covered by FDIC loss share $ 714,109 $ 561,103 Approximately $730.0 million of the loans acquired in the Metropolitan and Delta Trust acquisitions were evaluated and are being accounted for in accordance with ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. We evaluated the remaining loans purchased in conjunction with the acquisitions of Metropolitan and Delta Trust 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. We evaluated all of the loans purchased in conjunction with the acquisition of Truman, Excel and our previous FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30. All loans acquired in the FDIC transactions, both covered and not covered, were deemed to be impaired loans. These loans were not classified as nonperforming assets at September 30, 2014, or December 31, 2013, as the loans are accounted for on a pooled basis and the pools are considered to be performing. For further discussion of loans acquired, see Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. ASSET QUALITY A loan is considered impaired when it is probable that we will not receive all amounts due according to the contractual terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and nonaccrual loans) and certain other loans identified by management that are still performing. Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. Simmons Bank recognizes income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses. Credit card loans are classified as impaired when payment of interest or principal is 90 days past due. Litigation accounts are placed on nonaccrual until such time as deemed uncollectible. Credit card loans are generally charged off when payment of interest or principal exceeds 180 days past due, but are turned over to the credit card recovery department, to be pursued until such time as they are determined, on a case-by-case basis, to be uncollectible. 58 -------------------------------------------------------------------------------- Total non-performing assets, excluding all loans acquired and foreclosed assets covered by FDIC loss share agreements, decreased by $11.3 million from December 31, 2013 to September 30, 2014. Foreclosed assets held for sale (legacy and acquired, not covered) decreased by $14.1 million, as we were able to rid ourselves of several significant non-performing assets through liquidation. Nonaccrual loans increased by $5.0 million during the period, primarily CRE loans. Non-performing assets, including trouble debt restructurings ("TDRs") and acquired non-covered foreclosed assets, as a percent of total assets were 1.39% at September 30, 2014, compared to 1.91% at December 31, 2013. From time to time, certain borrowers of all types are experiencing declines in income and cash flow. As a result, many borrowers are seeking to reduce contractual cash outlays, the most prominent being debt payments. In an effort to preserve our net interest margin and earning assets, we are open to working with existing customers in order to maximize the collectability of the debt. When we restructure a loan to a borrower that is experiencing financial difficulty and grant a concession that we would not otherwise consider, a "troubled debt restructuring" results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. Under ASC Topic 310-10-35 - Subsequent Measurement, a TDR is considered to be impaired, and an impairment analysis must be performed. We assess the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determine if a specific allocation to the allowance for loan losses is needed. Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. During 2013, we had several large TDRs yielding a market interest rate that no longer had any concession regarding payment amount or amortization. Because those loans are no longer considered TDRs, our TDR balance declined to $3.3 million at September 30, 2014, compared to $10.2 million at December 31, 2013. The majority of our TDRs remain in the CRE portfolio. We return TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months. We continue to maintain good asset quality, compared to the industry. The allowance for loan losses as a percent of total loans was 1.38% as of September 30, 2014. Non-performing loans equaled 0.61% of total loans. Non-performing assets were 1.34% of total assets, a 35 basis point improvement from December 31, 2013. The allowance for loan losses was 227% of non-performing loans. Our annualized net charge-offs to total loans for the first nine months of 2014 was 0.29%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.19%. Year-to-date annualized net credit card charge-offs to total credit card loans were 1.22%, compared to 1.33% during the full year 2013, and more than 200 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks. 59--------------------------------------------------------------------------------Table 9 presents information concerning non-performing assets, including nonaccrual loans and foreclosed assets held for sale (excluding all loans acquired and excluding foreclosed assets covered by FDIC loss share). Table 9: Non-performing Assets September 30, December 31, ($ in thousands) 2014 2013 Nonaccrual loans (1) $ 11,212 $ 6,261 Loans past due 90 days or more (principal or interest payments): Government guaranteed student loans (2) - 2,264 Other loans 713 687 Total loans past due 90 days or more 713 2,951 Total non-performing loans 11,925 9,212 Other non-performing assets: Foreclosed assets held for sale 13,167 19,361 Acquired foreclosed assets held for sale, not covered by loss share 37,603 45,459 Other non-performing assets 72 75 Total other non-performing assets 50,842 64,895 Total non-performing assets $ 62,767 $ 74,107 Performing TDRs $ 2,234 $ 9,497 Allowance for loan losses to non-performing loans 227 % 298 % Non-performing loans to total loans 0.61 % 0.53 % Non-performing loans to total loans (excluding Government guaranteed student loans) (2) 0.61 % 0.40 % Non-performing assets to total assets (3) 1.34 % 1.69 % Non-performing assets to total assets (excluding Government guaranteed student loans) (2) (3) 1.34 % 1.64 % _________________________ (1) Includes nonaccrual TDRs of approximately $1.1 million at September 30, 2014 and $0.7 million at December 31, 2013. (2) Student loans past due 90 days or more are included in non-performing loans. Student loans are Government guaranteed and will be purchased at 97% of principal and accrued interest when they exceed 270 days past due; therefore, non-performing ratios have been calculated excluding these loans. (3) Excludes all loans acquired and excludes foreclosed assets acquired, covered by FDIC loss share agreements, except for their inclusion in total assets. There was no interest income on nonaccrual loans recorded for the three and nine month periods ended September 30, 2014 and 2013. At September 30, 2014, impaired loans, net of government guarantees and loans acquired, were $16.9 million compared to $18.3 million at December 31, 2013. On an ongoing basis, management evaluates the underlying collateral on all impaired loans and allocates specific reserves, where appropriate, in order to absorb potential losses if the collateral were ultimately foreclosed. ALLOWANCE FOR LOAN LOSSES Overview The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company's allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310-10, Receivables, and allowance allocations calculated in accordance with ASC Topic 450-20, Loss Contingencies. Accordingly, the methodology is based on our internal grading system, specific impairment analysis, qualitative and quantitative factors. 60 --------------------------------------------------------------------------------As mentioned above, allocations to the allowance for loan losses are categorized as either specific allocations or general allocations. Specific Allocations A loan is considered impaired when it is probable that we will not receive all amounts due according to the contractual terms of the loan, including scheduled principal and interest payments. For a collateral dependent loan, our evaluation process includes a valuation by appraisal or other collateral analysis. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for loan losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan. General Allocations The general allocation is calculated monthly based on management's assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) other factors and trends that will affect specific loans and categories of loans. We established general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. Reserve for Unfunded Commitments In addition to the allowance for loan losses, we have established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level sufficient to absorb losses arising from unfunded loan commitments. The adequacy of the reserve for unfunded commitments is determined monthly based on methodology similar to our methodology for determining the allowance for loan losses. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense. An analysis of the allowance for loan losses is shown in Table 10. 61 --------------------------------------------------------------------------------Table 10: Allowance for Loan Losses (In thousands) 2014 2013 Balance, beginning of year $ 27,442 $ 27,882 Loans charged off: Credit card 2,329 2,422 Other consumer 1,220 1,133 Real estate 2,484 1,373 Commercial 734 249 Total loans charged off 6,767 5,177 Recoveries of loans previously charged off: Credit card 676 675 Other consumer 376 425 Real estate 1,510 514 Commercial 201 180 Total recoveries 2,763 1,794 Net loans charged off 4,004 3,383 Provision for loan losses 3,638 3,034 Balance, September 30 $ 27,076 27,533 Loans charged off: Credit card 841 Other consumer 428 Real estate 255 Commercial 133 Total loans charged off 1,657 Recoveries of loans previously charged off: Credit card 226 Other consumer 166 Real estate 78 Commercial 12 Total recoveries 482 Net loans charged off 1,175 Provision for loan losses 1,084 Balance, end of year $ 27,442 Provision for Loan Losses The amount of provision to the allowance during the three and nine months ended September 30, 2014 and 2013, and for the year ended December 31, 2013, was based on management's judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loss experience. It is management's practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance. 62--------------------------------------------------------------------------------Allowance for Loan Losses Allocation As of September 30, 2014, the allowance for loan losses reflects a decrease of $366,000 from December 31, 2013, while total loans, excluding loans acquired, increased by $220.7 million over the same nine month period. The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix. The following table sets forth the sum of the amounts of the allowance for loan losses attributable to individual loans within each category, or loan categories in general. The table also reflects the percentage of loans in each category to the total loan portfolio, excluding loans acquired, for each of the periods indicated. These allowance amounts have been computed using the Company's internal grading system, specific impairment analysis, qualitative and quantitative factor allocations. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories. We had no allocation of our allowance to loans acquired for any of the periods presented. Table 11: Allocation of Allowance for Loan Losses September 30, 2014 December 31, 2013 Allowance % of Allowance % of ($ in thousands) Amount Loans (1) Amount Loans (1) Credit cards $ 5,488 9.0 % $ 5,430 10.6 % Other consumer 1,296 5.4 1,758 7.2 Real estate 15,595 65.3 16,885 66.9 Commercial 4,642 20.1 3,205 15.1 Other 55 0.2 164 0.2 Total $ 27,076 100.0 % $ 27,442 100.0 % ___________________________ (1) Percentage of loans in each category to total loans, excluding loans acquired. DEPOSITS Deposits are our primary source of funding for earning assets and are primarily developed through our network of over 100 financial centers. We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of September 30, 2014, core deposits comprised 87.6% of our total deposits. We continually monitor the funding requirements along with competitive interest rates in the markets we serve. Because of our community banking philosophy, our executives in the local markets establish the interest rates offered on both core and non-core deposits. This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet the funding requirements. We believe we are paying a competitive rate when compared with pricing in those markets. We manage our interest expense through deposit pricing and do not anticipate a significant change in total deposits. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs. We can also utilize brokered deposits as an additional source of funding to meet liquidity needs. Our total deposits as of September 30, 2014, were $3.909 billion, an increase of $211.4 million from December 31, 2013. We have continued our strategy to move more volatile time deposits to less expensive, revenue enhancing transaction accounts. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $2.868 billion at September 30, 2014, compared to $2.581 billion at December 31, 2013, a $287.4 million increase. Total time deposits decreased $76.1 million to $1.040 billion at September 30, 2014, from $1.117 billion at December 31, 2013. In an attempt to utilize some of our excess liquidity, we have priced deposits in a manner to encourage a reduction in non-relationship time deposits. We had $9.5 million and $16.8 million of brokered deposits at September 30, 2014, and December 31, 2013, respectively. 63--------------------------------------------------------------------------------OTHER BORROWINGS AND SUBORDINATED DEBENTURES Our total debt was $144.0 million and $137.7 million at September 30, 2014 and December 31, 2013, respectively. The outstanding long-term debt balance for September 30, 2014 includes $77.4 million in FHLB long-term advances, $46.0 million in notes payable and $20.6 million of trust preferred securities. The outstanding balance for December 31, 2013 included $71.1 million in FHLB long-term advances, $46.0 million in notes payable and $20.6 million of trust preferred securities. The $46.0 million notes payable is unsecured debt from correspondent banks used as partial funding for our Metropolitan acquisition in 2013. These notes carry a 3.25% floating rate to be repaid in three years or less. During the nine months ended September 30, 2014, we increased total debt by $6.3 million from December 31, 2013 primarily due to adding $11.0 million in FHLB borrowings as part of the Delta Trust acquisition, partially offset by early payoffs and other scheduled payoffs of FHLB advances during the period. CAPITAL Overview At September 30, 2014, total capital was $484.0 million. Capital represents shareholder ownership in the Company - the book value of assets in excess of liabilities. At September 30, 2014, our equity to asset ratio was 10.3%, up 108 basis points from year-end 2013. Capital Stock On February 27, 2009, at a special meeting, our shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000. As of September 30, 2014, no preferred stock has been issued. Stock Repurchase During 2012, the Company announced the substantial completion of the existing stock repurchase program and the adoption by our Board of Directors of a new stock repurchase program. The new program authorizes the repurchase of up to 850,000 additional shares of Class A common stock, or approximately 5% of the shares outstanding. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that we intend to repurchase. We intend to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes. As a result of our announced acquisition of Metropolitan, we suspended the stock repurchases in August of 2013. Under the current repurchase plan, we can repurchase an additional 154,136 shares. On March 4, 2014 the Company filed a shelf registration statement with the Securities and Exchange Commission ("SEC"). Subsequently, on June 18, 2014 the Company filed Amendment No. 1 to the shelf registration statement. After becoming effective, the shelf registration statement allows us to raise capital from time to time, up to an aggregate of $300 million, through the sale of common stock, preferred stock, stock warrants, stock rights or a combination thereof, subject to market conditions. Specific terms and prices are determined at the time of any offering under a separate prospectus supplement that we are required to file with the SEC at the time of the specific offering. Cash Dividends We declared cash dividends on our common stock of $0.66 per share for the first nine months of 2014 compared to $0.63 per share for the first nine months of 2013, an increase of $0.03, or 4.8%. The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors. Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all. 64 --------------------------------------------------------------------------------Parent Company Liquidity The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and the share repurchase plan. The primary sources for meeting these liquidity needs are the current cash on hand at the parent company and the future dividends received from Simmons Bank. Payment of dividends by the subsidiary bank is subject to various regulatory limitations. See the Liquidity and Market Risk Management discussions of Item 3 - Quantitative and Qualitative Disclosure About Market Risk for additional information regarding the parent company's liquidity. Risk Based Capital Our subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of September 30, 2014, we meet all capital adequacy requirements to which we are subject. As of the most recent notification from regulatory agencies, the subsidiaries were well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' categories. 65 --------------------------------------------------------------------------------Our risk-based capital ratios at September 30, 2014, and December 31, 2013, are presented in Table 12 below: Table 12: Risk-Based Capital September 30, December 31, ($ in thousands) 2014 2013 Tier 1 capital: Stockholders' equity $ 484,005 $ 403,832 Trust preferred securities 20,000 20,000 Goodwill and core deposit premiums (111,061 ) (75,501 ) Unrealized loss on available-for-sale securities, net of income taxes 1,952 3,002 Total Tier 1 capital 394,896 351,333 Tier 2 capital: Qualifying unrealized gain on available-for-sale equity securities - 45 Qualifying allowance for loan losses 29,167 28,967 Total Tier 2 capital 29,167 29,012 Total risk-based capital $ 424,063 $ 380,345 Risk weighted assets $ 3,063,801 $ 2,697,630 Assets for leverage ratio $ 4,331,488 $ 3,811,793 Ratios at end of period: Tier 1 leverage ratio 9.12 % 9.22 % Tier 1 risk-based capital ratio 12.89 % 13.02 % Total risk-based capital ratio 13.84 % 14.10 % Minimum guidelines: Tier 1 leverage ratio 4.00 % 4.00 % Tier 1 risk-based capital ratio 4.00 % 4.00 % Total risk-based capital ratio 8.00 % 8.00 % Well capitalized guidelines: Tier 1 leverage ratio 5.00 % 5.00 % Tier 1 risk-based capital ratio 6.00 % 6.00 % Total risk-based capital ratio 10.00 % 10.00 % Regulatory Capital Changes In July 2013, the Company's primary federal regulator, the Federal Reserve, published final rules (the "Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banks. The rules implement the Basel Committee's December 2010 framework known as "Basel III" for strengthening international capital standards. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate. The final rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules are effective for the Company and Simmons Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management believes that, as of September 30, 2014, the Company and Simmons Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective. 66 --------------------------------------------------------------------------------RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See the section titled Recently Issued Accounting Pronouncements in Note 1, Basis of Presentation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on the Company's ongoing financial position and results of operation. FORWARD-LOOKING STATEMENTS Certain statements contained in this quarterly report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "estimate," "expect," "foresee," "believe," "may," "might," "will," "would," "could" or "intend," future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company's future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company's stock repurchase program, allowance for loan losses, the effect of certain new accounting standards on the Company's financial statements, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy, efficiency initiatives, legal and regulatory limitations and compliance and competition. These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions, governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; the failure of assumptions underlying the establishment of reserves for possible loan losses; and those factors set forth under Item 1A. Risk-Factors of this report and other cautionary statements set forth elsewhere in this report. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance. We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof. However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this section. 67 --------------------------------------------------------------------------------RECONCILIATION OF NON-GAAP MEASURES The table below presents computations of core earnings (net income excluding nonrecurring items {gain on sale of merchant services, merger related costs, loss on sale of securities related to FDIC-assisted acquisitions, branch right sizing gains and costs and charter consolidation costs}) and diluted core earnings per share (non-GAAP). Nonrecurring items are included in financial results presented in accordance with generally accepted accounting principles ("GAAP"). The Company believes the exclusion of these nonrecurring items in expressing earnings and certain other financial measures, including "core earnings", provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. This non-GAAP financial measure is also used by management to assess the performance of the Company's business, because management does not consider these nonrecurring items to be relevant to ongoing financial performance. Management and the Board of Directors utilize "core earnings" (non-GAAP) for the following purposes: • Preparation of the Company's operating budgets • Monthly financial performance reporting • Monthly "flash" reporting of consolidated results (management only) • Investor presentations of Company performance The Company believes the presentation of "core earnings" on a diluted per share basis, "diluted core earnings per share" (non-GAAP), provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. This non-GAAP financial measure is also used by management to assess the performance of the Company's business, because management does not consider these nonrecurring items to be relevant to ongoing financial performance on a per share basis. Management and the Board of Directors utilize "diluted core earnings per share" (non-GAAP) for the following purposes: • Calculation of annual performance-based incentives for certain executives • Calculation of long-term performance-based incentives for certain executives • Investor presentations of Company performance The Company believes that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management and the Board of Directors. "Core earnings" and "diluted core earnings per share" (non-GAAP) have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Company has procedures in place to identify and approve each item that qualifies as nonrecurring to ensure that the Company's "core" results are properly reflected for period-to-period comparisons. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a Company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes nonrecurring items does not represent the amount that effectively accrues directly to stockholders (i.e., nonrecurring items are included in earnings and stockholders' equity). 68--------------------------------------------------------------------------------See Table 13 below for the reconciliation of non-GAAP financial measures, which exclude nonrecurring items for the periods presented. Table 13: Reconciliation of Core Earnings (non-GAAP) Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2014 2013 2014 2013 Net Income $ 8,788 $ 6,932 $ 23,049 $ 19,445 Nonrecurring items: Gain on sale of merchant services - - (1,000 ) - Merger related costs 3,628 190 6,255 (37 ) Loss on sale of securities related to FDIC-assisted acquisitions - - - 193 Branch right sizing (1) (705 ) 533 1,162 533 Charter consolidation costs 196 - 610 - Tax effect (2) (1,223 ) (284 ) (2,746 ) (271 ) Net nonrecurring items 1,896 439 4,281 418 Core earnings (non-GAAP) $ 10,684 $ 7,371 $ 27,330 $ 19,863 Diluted earnings per share $ 0.52 $ 0.43 $ 1.39 $ 1.19 Nonrecurring items: Gain on sale of merchant services - - (0.06 ) - Merger related costs 0.21 0.01 0.37 (0.01 ) Loss on sale of securities related to FDIC-assisted acquisitions - - - 0.01 Branch right sizing (0.04 ) 0.03 0.08 0.03 Charter consolidation costs 0.01 - 0.04 - Tax effect (2) (0.07 ) (0.02 ) (0.17 ) (0.01 ) Net nonrecurring items 0.11 0.02 0.26 0.02 Diluted core earnings per share (non-GAAP) $ 0.63 $ 0.45 $ 1.65 $ 1.21 __________________________ (1) Includes $856 and $3,167 gains on sale of previously closed branches, respectively, for the three and nine months ended September 30, 2014. (2) Effective tax rate of 39%. |