UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the fiscal year ended December 31, 20192020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _____ to _____
Commission file number 000-06253
SIMMONS FIRST NATIONAL (Exact name of registrant as specified in its charter)
| Arkansas | 71-0407808 | ||||
| (State or other jurisdiction of | (I.R.S. Employer | ||||
| incorporation or organization) | Identification No.) | ||||
| 501 Main Street | 71601 | ||||
| Pine Bluff | (Zip Code) | ||||
| Arkansas | |||||
| (Address of principal executive offices) | |||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.01 per share | SFNC | The Nasdaq Global Select Market | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
| Smaller reporting company | ☐ | Emerging Growth company | ☐ | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). ☐ Yes ☒ No
The aggregate market value of the Registrant’s Common Stock, par value $0.01 per share, held by non-affiliates on June 30, 2019,2020, was $2,187,379,555$1,825,590,184 based upon the last trade price as reported on the Nasdaq Global Select Market® of $23.26.$17.11.
The number of shares outstanding of the Registrant’s Common Stock as of February 25, 2020,22, 2021, was 113,281,297.108,087,110.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders of the Registrant to be held on April 23, 2020,May 20, 2021, are incorporated by reference into Part III of this Form 10-K.
SIMMONS FIRST NATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K may not be based on historical facts and should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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,” “believe,” “budget,” “contemplate,” “continue,” estimate,” “expect,” “foresee,” “anticipate,” “intend,” “indicate,” “likely,” “target,” “estimate,” “plan,” “project,” “continue,” “contemplate,” “positions,” “prospects,” “project,” “predict,” or “potential,” by future conditional verbs such as “will,“could,” “would,“may,” “might,” “should,” “could,” “might” or “may,“will,” or “would,” by variations of such words or by similar expressions. These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, expenses, assets, asset quality, profitability, andearnings, accretion, customer service, investment in digital channels, critical accounting policies, net interest margin, non-interest revenue, market conditions related to and the impact of the Company’s stock repurchase program, consumer habits, the Company’s ability to recruit and retain key employees, the adequacy of the allowance for loancredit losses, the effectimpacts of certain new accounting standards onthe COVID-19 pandemic and the ability of the Company to manage the impacts of the COVID-19 pandemic, the impacts of the Company’s financial statements (including, without limitation, the Current Expected Credit Losses (“CECL”) methodology and its anticipated effect oncustomers’ participation in the provision for credit losses),Paycheck Protection Program, 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,plans for investments in securities, effect of future litigation, acquisition strategy, 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: changes in the Company’s operating, acquisition, or expansion strategy; the effects of future economic conditions (including unemployment levels and slowdowns in economic growth), governmental monetary and fiscal policies, as well as legislative and regulatory changes; the impacts of the COVID-19 pandemic on the Company’s operations and performance; the ultimate effect of measures the Company takes or has taken in response to the COVID-19 pandemic; the severity and duration of the COVID-19 pandemic, including the effectiveness of vaccination efforts; the pace of recovery when the COVID-19 pandemic subsidies and the heightened impact it has on many of the risks described herein; changes in real estate values; changes in interest rates and their effects onrates; changes in the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest sensitive assets and liabilities; changes in the securities markets generally or the price of the Company’s common stock specifically; developments in information technology affecting the financial industry; cyber threats, attacks or events; reliance on third parties for the provision of key services; further changes in accounting principles relating to loan loss recognition; uncertainty and disruption associated with the assumptions, forecasts, models, and methodology used to calculatediscontinued use of the expected impact of CECL on the Company’s financial statements;London Inter-Bank Offered Rate; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; possible adverse rulings; judgements, settlements, and other outcomes of pending or future litigation; 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 loancredit losses, fair value for loans, other real estate owned, 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, and actual results could differ materially from those indicated in or implied by the forward-looking statements due to these factors and others. 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 assumptions and expectations that underlie or are 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 or whether our future performance will differ materially from the performance reflected in or implied by our forward-looking statements, and you should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date hereof, and 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.
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PART I
ITEM 1. BUSINESS
Company Overview
Simmons First National Corporation, (“Company”), an Arkansas corporation organized in 1968, is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. The terms “Company,” “we,” “us,” and “our” refer to the CompanySimmons First National Corporation and, where appropriate, its subsidiaries. The Company is headquartered in Pine Bluff, Arkansas, and had total consolidated assets of $21.3$22.4 billion, total consolidated loans of $14.4$12.9 billion, total consolidated deposits of $16.1$17.0 billion and equity capital of $3.0 billion as of December 31, 2019.2020. The Company, through its subsidiaries, provides banking and other financial products and services in markets located in Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.
We seek to build shareholder value by, among other things, focusing on strong asset quality, maintaining strong capital, managing our liquidity position, improving our operational efficiency and opportunistically growing our business, both organically and through mergers with and acquisitions of other financial institutions. Our business philosophy centers on building strong, deep customer relationships through excellent customer service and integrity in our operations. While we have grown in recent years into a regional financial institution and one of the largest bank/financial holding companies headquartered in the State of Arkansas, we continue to emphasize, where practicable, a community-based mindset focused on local associates responding to local banking needs and making business decisions in the markets they serve. Those efforts, though, are buttressed by experienced, centralized support functions in select, critical areas. While we serve a variety of customers and industries, we are not dependent on any single customer or industry.
Subsidiary Bank
The Company’s lead subsidiary, Simmons Bank, is an Arkansas state-chartered bank that has been in operation since 1903. Simmons First Insurance Services, Inc. and Simmons First Insurance Services of TN, LLC are wholly-owned subsidiaries of Simmons Bank and are insurance agencies that offer various lines of personal and corporate insurance coverage to individual and commercial customers.
Simmons Bank provides banking and other financial products and services to individuals and businesses using a network of approximately 251204 financial centers in Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. Simmons Bank offers commercial banking products and services to business and other corporate customers. Simmons Bank extends loans for a broad range of corporate purposes, including financing commercial real estate, construction of particular properties, commercial and industrial uses, acquisition and equipment financings, and other general corporate needs. Simmons Bank also engages in small business administration (“SBA”) and agricultural finance lending, and it offers corporate credit card products, as well as corporate deposit products and treasury management services.
In addition, Simmons Bank offers a variety of consumer banking products and services, including savings, time, and checking deposit products; ATM and ITM services; internet and mobile banking platforms; overdraft facilities; real estate, home equity, and other consumer loans and lines of credit; consumer credit card products; and safe deposit boxes. Simmons Bank also maintains a networking arrangement with a third-party broker-dealer that offers brokerage services to Simmons Bank customers, as well as a trust department that provides a variety of trust, investment, agency, and custodial services for individual and corporate clients (including, among other things, administration of estates and personal trusts, and management of investment accounts).
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Community Bank Strategy
Historically, the Company utilized separately chartered community bank subsidiaries to provide full-service banking products and services across our footprint. During 2014, we consolidated all separately chartered banks into Simmons Bank in order to more effectively meet the increased regulatory burden facing banks, reduce certain operating costs, and more efficiently perform operational duties. After the charter consolidation, Simmons Bank has operated using a divisional structure based on geography as a way to continue to maintain a locally-oriented, community-based organization. Currently, Simmons Bank has the following six operating divisions, which are composed of various community banking groups:
| Division | Community Banking Groups | ||||
| Arkansas Communities | Pine Bluff, South Arkansas (Lake Village/El Dorado), North Central Arkansas (Conway), Northeast Arkansas (Jonesboro), East Central Arkansas (Searcy), River Valley (Fort Smith/Russellville) and Hot Springs | ||||
| Central Arkansas | Little Rock Metropolitan Statistical Area | ||||
| Western | Stillwater, Oklahoma City, Tulsa, Southeast Oklahoma, Wichita, and Northwest Arkansas, (Fayetteville/Rogers/Springdale/Bentonville) | ||||
| Tennessee | West Tennessee (Jackson/Union City), Southwest Tennessee (Memphis), Middle Tennessee (Nashville), and East Tennessee (Knoxville) | ||||
| Missouri | St. Louis, Kansas City, Central Missouri (Columbia), Southwest Missouri (Springfield), and | ||||
| Texas | Fort Worth, Dallas, and North | ||||
While Simmons Bank has operated successfully under this structure, as it has grown, the bank has established a presence in a greater number of metro markets, which often have different characteristics from the community markets Simmons Bank has traditionally served. As a result, during 2021, Simmons Bank expects to make additional organizational changes to provide for community bank and metro bank divisions as a way to further enhance its ability to both effectively compete in and service the needs of the different types of markets that are now included in its footprint.
Growth Strategy
Over the past 3031 years, as we have expanded our markets and services, our growth strategy has evolved and diversified. We have used varying acquisition and internal branching methods to enter key growth markets and increase the size of our footprint.
Since 1990 we have completed 18 whole bank acquisitions, one trust company acquisition, five bank branch deals,acquisitions, one bankruptcy (363) acquisition, four FDIC failed bank acquisitions and four Resolution Trust Corporation failed thrift acquisitions. The following summary provides additional details concerning our more recent acquisition activity during the previous five fiscal years.activity.
In 2013, we completed the acquisition of Metropolitan National Bank (“Metropolitan” or “MNB”) from Rogers Bancshares, Inc. (“RBI”). The purchase was completed through an auction of the MNB stock by the U. S. Bankruptcy Court as a part of the Chapter 11 proceeding of RBI. MNB, which was headquartered in Little Rock, Arkansas, served central and northwest Arkansas and had total assets of $950 million. Upon completion of the acquisition, MNB and our Rogers, Arkansas chartered bank, Simmons First Bank of Northwest Arkansas were merged into Simmons Bank. As an in-market acquisition, MNB had significant branch overlap with our existing branch footprint. We completed the systems conversion for MNB on March 21, 2014, and simultaneously closed 27 branch locations that had overlapping footprints with other locations.
On August 31, 2014, we completed the acquisition of Delta Trust & Banking Corporation (“Delta Trust”), including its wholly-owned bank subsidiary, Delta Trust & Bank. Also headquartered in Little Rock, Arkansas, Delta Trust had total assets of $420 million. The acquisition further expanded Simmons Bank's presence in south, central and northwest Arkansas and allowed us the opportunity to provide services that had not previously been offered with the addition of Delta Trust's insurance agency and securities brokerage service. We merged Delta Trust & Bank into Simmons Bank and completed the systems conversion on October 24, 2014. At that time, we also closed 4 branch locations with overlapping footprints.
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In February 2015, we completed the acquisition of Liberty Bancshares, Inc. (“Liberty”), including its wholly-owned bank subsidiary, Liberty Bank. Liberty was headquartered in Springfield, Missouri, served southwest Missouri and had total assets of $1.1 billion. The acquisition enhanced Simmons Bank’s presence not only in southwest Missouri but also in the St. Louis and Kansas City metropolitan areas. The acquisition also allowed us the opportunity to provide services that we had not previously offered in these areas such as trust and securities brokerage services. In addition, Liberty’s expertise in SBA lending enhanced our commercial offerings throughout our geographies. We merged Liberty Bank into Simmons Bank and completed the systems conversion in April 2015.
Also in February 2015, we completed the acquisition of Community First Bancshares, Inc. (“Community First”), including its wholly-owned bank subsidiary, First State Bank. Community First was headquartered in Union City, Tennessee, served customers throughout Tennessee and had total assets of $1.9 billion. The acquisition expanded our footprint into Tennessee and allowed us the opportunity to provide additional services to customers in this area and expand our community banking strategy. In addition, Community First’s expertise in SBA and consumer lending benefited our customers across each region. We merged First State Bank into Simmons Bank and completed the systems conversion in September 2015.
In October 2015, we completed the acquisition of Ozark Trust & Investment Corporation (“Ozark Trust”), including its wholly-owned non-deposit trust company, Trust Company of the Ozarks. Headquartered in Springfield, Missouri, Ozark Trust had over $1 billion in assets under management and provided a wide range of financial services for its clients including investment management, trust services, IRA rollover or transfers, successor trustee services, personal representatives and custodial services. As our first acquisition of a fee-only financial firm, Ozark Trust provided a new wealth management capability that can be leveraged across the Company’s entire geographic footprint.
In September 2016, we completed the acquisition of Citizens National Bank (“Citizens”), headquartered in Athens, Tennessee. Citizens had total assets of $585 million and strengthened our position in east Tennessee by nine branches. The acquisition expanded our footprint in east Tennessee and allowed us the opportunity to provide additional services to customers in this area and expand our community banking strategy. We merged Citizens into Simmons Bank and completed the systems conversion in October 2016.
In May 2017, we completed the acquisition of Hardeman County Investment Company, Inc. (“Hardeman”), headquartered in Jackson, Tennessee, including its wholly-owned bank subsidiary, First South Bank. We acquired approximately $463 million in assets and strengthened our position in the western Tennessee market. We merged First South Bank into Simmons Bank and completed the systems conversion in September 2017. As part of the systems conversion, we consolidated or closed three existing Simmons Bank and two First South Bank branches due to overlapping footprint.
In October 2017, we completed the acquisition of First Texas BHC, Inc. (“First Texas”), headquartered in Fort Worth, Texas, including its wholly-owned bank subsidiary, Southwest Bank. Southwest Bank had total assets of $2.4 billion. This acquisition allowed us to enter the Texas banking markets, and it also strengthened our specialty product offerings in the areas of SBA lending and trust services. The systems conversion was completed in February 2018, at which time Southwest Bank was merged into Simmons Bank.
Also in October 2017, we completed the acquisition of Southwest Bancorp, Inc. (“OKSB”), including its wholly-owned bank subsidiary, Bank SNB. Headquartered in Stillwater, Oklahoma, OKSB provided us with $2.7 billion in assets, allowed us additional entry into the Oklahoma, Texas and Colorado banking markets, and strengthened our Kansas franchise and our product offerings in the healthcare and real estate industries. The systems conversion was completed in May 2018, at which time Bank SNB was merged into Simmons Bank.
In April 2019, we completed the acquisition of Reliance Bancshares, Inc. (“Reliance”), headquartered in Des Peres, Missouri -part of the greater St. Louis metropolitan area, including its wholly-owned bank subsidiary, Reliance Bank. We acquired approximately $1.5 billion in assets and added 22 branches to the Simmons Bank footprint, substantially enhancing our retail presence within the St. Louis market, and entering the state of Illinois for the first time. The systems conversion was completed in April 2019, at which time Reliance Bank was merged into Simmons Bank.
In October 2019, we completed the acquisition of The Landrum Company (“Landrum”), headquartered in Columbia, Missouri, including its wholly-owned bank subsidiary, Landmark Bank. We acquired approximately $3.4 billion in assets and further strengthened our position in Missouri, Oklahoma and Texas. The systems conversion was completed in February 2020, at which time Landmark Bank merged into Simmons Bank. In connection with the systems conversion, we closed five existing Landmark Bank branches.
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Merger and Acquisition Strategy
Merger and acquisition activities are an important part of the Company’s growth strategy. We intend to focus our near-term merger and acquisition strategy on traditional mergers and acquisitions. We continue to believe that the current economic conditions combined with the possibility of a more restrictive bank regulatory environment will cause many financial institutions to seek merger partners in the near-to-intermediate future. We also believe our community banking philosophy, access to capital and successful merger and acquisition history positions us as a purchaser of choice for community and regional banks seeking a strong partner.
We expect that our target areas for mergers and acquisitions will continue to be primarily banks operating in growth markets within our existing footprint of Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas markets.Texas. In addition, we will pursue opportunities with financial service companies with specialty lines of business and branch acquisitions within the existing markets as and when they arise.
As consolidations continue to unfold in the banking industry, the management of risk is an important consideration in how the Company evaluates and consummates thosethese transactions. The senior management teams of both our parent companythe Company and bankSimmons Bank have had extensive experience during the past 30 years in acquiring banks, branches and deposits and post-acquisition integration of operations. We believe this experience positions us to successfully acquire and integrate banks.
The process of merging or acquiring banking organizations is extremely complex; it requires a great deal of time and effort from both buyer and seller. The business, legal, operational, organizational, accounting, and tax issues all must be addressed if the merger or acquisition is to be successful. Throughout the process, valuation is an important input toaspect of the decision-making process, from initial target analysis through integration of the entities. Merger and acquisition strategies are vitally important in order to derive the maximum benefit out of a potential deal.
Strategic reasons with respect to negotiated community and regional bank mergers and acquisitions include, among other things:
•Potentially retaining the target institution’s senior management and providing them with an appealing level of autonomy post-integration. We intend to continue to pursue negotiated community and regional bank acquisitions, and we believe that our history with respect to such acquisitions has positioned us as an acquirer of choice for community and regional banks.
•Encouraging acquired community banks, their boards and their associates to maintain their community involvement, while empowering the banks to offer a broader array of financial products and services. We believe this approach leads to enhanced profitability of the combined franchise after the acquisition.
•Taking advantage of future opportunities that can be exploited when the two companies are combined. Companies need to position themselves to take advantage of emerging trends in the marketplace.
•Strengthening the bench. One company may have a major weakness (such as poor distribution or service delivery) whereas the other company has some significant strength. By combining the two companies, each company fills in strategic gaps that are essential for long-term survival.
•Acquiring human resources and intellectual capital can help improve innovative thinking and development within the Company.
•Acquiring a regional or multi-state bank can provide the Company with access to emerging/established markets and/or increased products and services.
•Providing additional scale and market share within our existing footprint.
Loan Risk Assessment
As part of our ongoing risk assessment and analysis, the Company utilizes credit policies and procedures, internal credit expertise and several internal layers of review. The internal layers of ongoing review include Division Presidents, Division and Senior Credit Officers, the Chief Credit Officer and Corporate Credit Officer, Division Loan Committees, an Agriculture Loan Committee, an Executive Loan Committee, Senior LoanCredit Committee, and a Directors’ Credit Committee.
Additionally, the Company has an Asset Quality Review Committee comprised of management that meets quarterly to review the adequacy of the allowance for loancredit losses. The Committee reviews the status of past due, non-performing and other impaired loans, reserve ratios, and additional performance indicators for Simmons Bank. The appropriateness of the allowance for loancredit losses is determined based upon the aforementioned performance factors, and provision adjustments are made accordingly.
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The Board of Directors reviews the adequacy of its allowance for loancredit losses on a periodic basis giving consideration to past due loans, non-performing loans, other impaired loans, and current economic conditions. Our loan review department monitors loan information monthly. In order to verify the accuracy of the monthly analysis of the allowance for loancredit losses, the loan review department performs a detailed review of each loan product on an annual basis or more often if warranted. Additionally, we have instituted a Special Asset Committee for the purpose of reviewing criticized loans in regard to collateral adequacy, workout strategies and proper reserve allocations.
Competition
There is significant competition among commercial banks in our various market areas. In addition, we also compete with other providers of financial services, such as savings and loan associations, credit unions, finance companies, securities firms, insurance companies, full service brokerage firms, and discount brokerage firms.firms and fintech companies. Some of our competitors have greater resources and, as such, may have higher lending limits and may offer other services that we do not provide. Some of our competitors operate only in digital channels, which may result in those competitors investing greater resources in information technology and digital product and service delivery without the overhead associated with a branch network. We generally compete on the basis of customer service and responsiveness to customer needs, available loan and deposit products, the rates of interest charged on loans, the rates of interest paid for funds, and the availability and pricing of trust and brokerage services.
Principal Offices and Available Information
Our principal executive offices are located at 501 Main Street, Pine Bluff, Arkansas 71601, and our telephone number is (870) 541-1000. We also have corporate offices located at 601 E. 3rd Street, Little Rock, Arkansas 72201. We maintain a website at http://www.simmonsbank.com. On this website under the Investor Relations section, “Investor Relations,” we make our filings with the Securities and Exchange Commission (“SEC”) (including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended) available free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, our website contains other news and announcements about the Company and its subsidiaries.
Our associates are a critical component of our success. Because our business depends on our ability to attract, develop, and retain highly qualified, skilled lending, operations, information technology, and other associates, as well as managers who are experienced and effective at leading their respective departments, we have implemented wide-ranging programs focused on identifying and recruiting new talent, as well as enhancing the skills, qualifications, and satisfaction of our current associate base, under the umbrella program “Banking on Our People.” In recruiting, we employ a variety of strategies, including, among other things, the use of in-house recruiters, search firms, and employment agencies, designed to attract qualified and diverse candidates. We offer, among other opportunities, student internships and a management trainee program that provides recent graduates the opportunity to gain insight into several Company departments. We believe our compensation program, which, in addition to base and incentive compensation, includes health, retirement, and an array of other benefit plans and programs, is competitive within the financial industry, and we periodically review our plans and programs, as well as market surveys, to help ensure that our compensation program is consistent with our level of performance and that we have a current understanding of peer practices.
We provide our associates a variety of professional development opportunities, including participation in industry conferences, instructor-led continuing education and training sessions, as well as online training sessions that focus, among other things, on industry, regulatory, business, and leadership topics. We offer mentorship opportunities through our “Simmons Sidekick” and “Ambassadors” programs, and we provide tuition reimbursement for associates to attend a higher education facility to obtain bachelor’s and master’s degrees that are relevant to the finance industry and/or their positions within the Company. We seek to promote from within the Company when feasible and have established programs, such as our “Next Generation Leadership Program,” to help develop future managerial talent.
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We are committed to maintaining a strong culture that not only earns loyalty but also serves as a catalyst for growth. Our values-based culture is memorialized in a set of “Culture Cornerstones” that are communicated to all associates and incorporated in various ways throughout our operations. We strive for all five of our Culture Cornerstones - Better Together; Integrity; Passion; High Performance; and Pursue Growth - to be reflected in everything we do, including how we interact with each other, how we interact with our customers, and how we interact with our vendors and business partners. We are also committed to promoting our associates’ well-being. Our wellness program, “Ultimate You,” assists associates in improving their level of physical, financial, and mental fitness through offerings such as discounted gym memberships, associate meditation classes in select locations, financial literacy training, channels for counseling, and health-focused challenges and contests. Finally, our inclusion program, “We Are Simmons,” celebrates and supports the unique perspectives, experiences, and backgrounds of our associates. We believe these differences help us better serve our customers and make us stronger as a whole.
As of December 31, 2019,2020, the Company and its subsidiaries had approximately 3,2702,923 full time equivalent employees.associates. None of the employees isour associates are represented by any union or similar groups, and we have not experienced any labor disputes or strikes arising from any such organized labor groups. We consider our relationship with our employeesassociates to be good and have been recognized with “Best Places to Work” awards in several of our markets.
SUPERVISION AND REGULATION
The Company
The Company, as a bank holding company, is subject to both federal and state regulation. Under federal law, a bank holding company generally must obtain approval from the Board of Governors of the Federal Reserve System (“FRB”) before acquiring ownership or control of the assets or stock of a bank or a bank holding company. Prior to approval of any proposed acquisition, the FRB will review the effect on competition of the proposed acquisition, as well as other regulatory issues.
The federal law generally prohibits a bank holding company from directly or indirectly engaging in non-banking activities. This prohibition does not include loan servicing, liquidating activities or other activities so closely related to banking as to be a proper incident thereto. Bank holding companies, including the Company, which have elected to qualify as financial holding companies, are authorized to engage in financial activities. Financial activities include any activity that is financial in nature or any activity that is incidental or complimentary to a financial activity.
As a financial holding company, we are required to file with the FRB an annual report and such additional information as may be required by law. From time to time, the FRB examines the financial condition of the Company and its subsidiaries. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The FRB, through civil and criminal sanctions, is authorized to exercise enforcement powers over bank holding companies (including financial holding companies) and non-banking subsidiaries, to limit activities that represent unsafe or unsound practices or constitute violations of law.
Federal law also requires the Company to act as a source of financial and managerial strength for our bank subsidiary and to commit resources to support that subsidiary. This support may be required by federal banking agencies even at times when a bank holding company may not have the resources to provide the support. Further, if the FRB believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of its subsidiary bank, then the FRB could require that bank holding company to terminate the activities, liquidate the assets or divest the affiliates. Federal banking agencies, including the FRB, may require these and other actions in support of a subsidiary bank even if such actions are not in the best interests of the bank holding company or its stockholders.
We are subject to certain laws and regulations of the State of Arkansas applicable to financial and bank holding companies, including examination and supervision by the Arkansas Bank Commissioner. Under Arkansas law, a financial or bank holding company is prohibited from owning more than one subsidiary bank if any subsidiary bank owned by the holding company has been chartered for less than five years and, further, requires the approval of the Arkansas Bank Commissioner for any acquisition of more than 25% of the capital stock of any other bank located in the State of Arkansas. No bank acquisition may be approved if, after such acquisition, the holding company would control, directly or indirectly, banks having 25% of the total bank deposits in the stateState of Arkansas, excluding deposits of other banks and public funds.
Additionally, under federal and state law, acquisitions of the Company’s common stock above certain thresholds or in connection with certain governance rights or business relationships may be subject to certain regulatory restrictions, including prior notice and approval requirements, and investors in the Company’s common stock are responsible for ensuring that they comply with these restrictions to the extent they are applicable.
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Federal legislation allows bank holding companies (including financial holding companies) from any state to acquire banks located in any state without regard to state law, provided that the holding company (1) is well capitalized, (2) is well managed, (3) would not control more than 10% of the insured deposits in the United States or more than 30% of the insured deposits in such state, and (4) such bank has been in existence at least five years if so required by the applicable state law.
The principal source of the Company’s liquidity is dividends from Simmons Bank, the payment of which is subject to certain limitations imposed by federal and state laws. The approval of the Arkansas Bank Commissioner is, for instance, required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent (75%) of the total of its net profits, as defined, for that year combined with seventy-five percent (75%) of its retained net profits of the preceding year. At December 31, 2019,2020, Simmons Bank had approximately $160.2$45.6 million available for payment of dividends to the Company, without prior regulatory approval. This amount is not necessarily indicative of amounts that may be paid or available to be paid in future periods
In 2019, final rules were adopted that, among other things, eliminated a prior approval requirement in the Basel III Capital Rules (discussed below) for a bank holding company to repurchase shares of its common stock, provided that the bank holding company is well capitalized both before and after the proposed repurchase, well-managed, and not the subject of any unresolved supervisory issues. However, a bank holding company’s repurchases of shares of its common stock may, in certain circumstances, be subject to approval or notice requirements under other regulations, policies, or supervisory expectations of the bank holding company’s regulators, may be discouraged by regulators in the form of supervisory feedback on the bank holding company’s regulatory capital levels or plan, and must comply with all applicable state and federal corporate and securities laws and regulations.
Subsidiary Bank
Simmons Bank is an Arkansas state-chartered bank and a member of the Federal Reserve System through the Federal Reserve Bank of St. Louis. Due to the Company’s typical acquisition process, there may be brief periods of time during which the Company may operate another subsidiary bank that the Company acquired through a merger with a target bank holding company as a separate subsidiary while preparing for the merger and integration of that subsidiary bank into Simmons Bank. However, it is the Company’s intent to generally maintain Simmons Bank as the Company’s sole subsidiary bank.
The lending powers of the subsidiary bank are generally subject to certain restrictions, including the amount which may be loaned to a single borrower. Our subsidiary bank is a member of the FDIC, which provides insurance on deposits of each member bank up to applicable limits by the Deposit Insurance Fund. For this protection, our bank pays a statutory assessment to the FDIC each year.
Furthermore, as a member of the Federal Reserve System, our subsidiary bank is required by law to maintain reserves against its transaction deposits.deposits as required by the FRB. The reserves must be held in cash or with the FRB. Banks are permitted to meet this requirement by maintaining the specified amount as an average balance over a two-week period. The total ofDuring 2020, due to the COVID-19 pandemic, the FRB acting pursuant to the Federal Reserve Act reduced the reserve balances was approximately $94.0 millionrequirements to zero until further notice. As a result, as of December 31, 2019.2020, the Company’s reserve balances were zero.
Pursuant to federal laws and regulations, national and state-chartered banks may establish branches in their home states, as well as in other states. Applications to establish branches must be filed with the appropriate primary federal regulator and, where applicable, the bank’s state regulatory authority. As an Arkansas state-chartered bank, our subsidiary bank files branch applications with both the FRB and the Arkansas State Bank Department.
Federal laws and regulations also restrict banks, including our subsidiary bank, from establishing certain tying arrangements. In particular, subject to certain exceptions, banks, including our subsidiary bank, are prohibited from extending credit, leasing or selling property, furnishing services, or varying prices on the condition that the customer obtain an additional product or service from the bank or its affiliates or not obtain services of a competitor of the bank or its affiliates.
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Transactions with Affiliates and Insiders
Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Regulation W. In a bank holding company context, at a minimum, the parent holding company of a bank, and any companies which are controlled by such parent holding company, and financial subsidiaries of the bank, are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms consistent with safe and sound banking practices.
Further, Section 22(h) of the Federal Reserve Act and its implementing regulation, Regulation O restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of a majority of the board of directors. Further, under Section 22(h) of the Federal Reserve Act, loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive officers.
As a result, our subsidiary bank is limited in its ability to make extensions of credit to the Company, investing in the stock or other securities of the Company, and engaging in other affiliated financial transactions with the Company.
Potential Enforcement Action for Bank Holding Companies and Banks
Enforcement proceedings seeking civil or criminal sanctions may be instituted against any bank, any financial or bank holding company, any director, officer, employee or agent of the bank or holding company, which is believed by the federal banking agencies to be violating any administrative pronouncement or engaged in unsafe and unsound practices. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; the termination of a bank’s deposit insurance; the appointment of a conservator or receiver for a bank; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
Risk-Weighted Capital Requirements for the Company and the Subsidiary Bank
Since 1993, banking organizations (including financial holding companies, bank holding companies and banks) were required to meet a minimum ratio of Total Capital to Total Risk-Weighted Assets of 8%, of which at least 4% must be in the form of Tier 1 Capital. A well-capitalized institution was one that had at least a 10% “total risk-based capital” ratio.
Effective January 1, 2015, the Company and its subsidiary bank became subject to new capital regulations (“Basel III Capital Rules”) adopted by the Federal Reserve in July 2013 establishing a new comprehensive capital framework for U.S. banks. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the previous U.S. risk-based capital rules. Full compliance with the Basel III Capital Rules’ requirements was phased in over a multi-year schedule, which was completed in 2019. For a tabular summary of our risk-weighted capital ratios, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital” and Note 23, Stockholders’ Equity, of the Notes to Consolidated Financial Statements.
The Basel III Capital Rules include a common equity Tier 1 capital to risk-weighted assets (“CET1”) ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income and certain minority interests; all subject to applicable regulatory adjustments and deductions. The Company and its subsidiary bank must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements.
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A banking organization’s qualifying total capital consists of two components: Tier 1 Capital and Tier 2 Capital. Tier 1 Capital is an amount equal to the sum of common stockholders’ equity, hybrid capital instruments (instruments with characteristics of debt and equity) in an amount up to 25% of Tier 1 Capital, certain preferred stock and the minority interest in the equity accounts of consolidated subsidiaries. For bank holding companies and financial holding companies, goodwill (net of any deferred tax liability associated with that goodwill) may not be included in Tier 1 Capital. Identifiable intangible assets may be included in Tier 1 Capital for banking organizations, in accordance with certain further requirements. At least 50% of the banking organization’s total regulatory capital must consist of Tier 1 Capital.
Tier 2 Capital is an amount equal to the sum of the qualifying portion of the allowance for loancredit losses, certain preferred stock not included in Tier 1, hybrid capital instruments (instruments with characteristics of debt and equity), certain long-term debt securities and eligible term subordinated debt, in an amount up to 50% of Tier 1 Capital. The eligibility of these items for inclusion as Tier 2 Capital is subject to certain additional requirements and limitations of the federal banking agencies.
The Basel III Capital Rules expanded the risk-weighting categories from the previous 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.
Accordingly, under the fully-phased in Basel III Capital Rules, the capital standards applicable to the Company include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (1) CET1 to risk-weighted assets of at least 7%, (2) Tier 1 capital to risk-weighted assets of at least 8.5%, and (3) Total capital to risk-weighted assets of at least 10.5%.
In August 2020, the FRB, along with the other federal bank regulatory agencies, adopted a final rule that allows the Company and the Bank to phase-in the impact of adopting the Current Expected Credit Losses (or “CECL”) methodology up to two years, with a three-year period to phase out the cumulative benefit to regulatory capital provided during the two year delay.
Prompt Corrective Action
The Basel III Capital Rules also affected the FDIC’s prompt correction action standards. Those standards seek to address problems associated with undercapitalized financial institutions and provide for five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
For purposes of prompt corrective action, to be:
•well capitalized, a bank must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%;
•adequately capitalized, a bank must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%;
•undercapitalized, a bank would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%;
•significantly undercapitalized, a bank would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%; and
•critically undercapitalized, a bank would have a ratio of tangible equity to total assets that is less than or equal to 2%.
Institutions that fall into the latter three categories are subject to restrictions on their growth and are required to submit a capital restoration plan. There is also a method by which an institution may be downgraded to a lower capital category based on supervisory factors other than capital. As of December 31, 2019,2020, Simmons Bank was “well capitalized” based on the aforementioned ratios.
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Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), enacted in 1991, requires the FDIC to increase assessment rates for insured banks and authorizes one or more “special assessments,” as necessary for the repayment of funds borrowed by the FDIC or any other necessary purpose. As directed in FDICIA, the FDIC has adopted a transitional risk-based assessment system, under which the assessment rate for insured banks will vary according to the level of risk incurred in the bank’s activities. The risk category and risk-based assessment for a bank is determined, in part, from its prompt corrective action, as well capitalized, adequately capitalized or undercapitalized. Please refer to the section below titled “FDICFDIC Deposit Insurance and Assessments”Assessments for more information.
Pursuant to the FDICIA and Federal Deposit Insurance Act (“FDIA”), the federal banking agencies must promptly mandate corrective actions by banks that fail to meet the capital and related requirements in order to minimize losses to the FDIC and the Deposit Insurance Fund. At its most recent regulatory examinations in 2019, the Company’s subsidiary bank was determined to be well capitalized under these regulations.
The federal banking agencies are also required by FDICIA to prescribe standards for banks and bank holding companies (including financial holding companies) relating to operations and management, asset quality, earnings, stock valuation and compensation. A bank or bank holding company that fails to comply with such standards will be required to submit a plan designed to achieve compliance. If no plan is submitted or the plan is not implemented, the bank or holding company would become subject to additional regulatory action or enforcement proceedings.
A variety of other provisions included in FDICIA may affect the operations of the Company and the subsidiary bank, including reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act included provisions affecting large and small financial institutions alike, including several provisions that profoundly affected how community banks, thrifts, and small bank and thrift holding companies are regulated. Among other things, these provisions relaxed rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, and revised capital requirements on bank and thrift holding companies.
The Dodd-Frank Act also established the Bureau of Consumer Financial Protection (“CFPB”) as an independent entity within the Federal Reserve and provided it with the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act included a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payment penalties. The Dodd-Frank Act contained numerous other provisions affecting financial institutions of all types, many of which have an impact on our operating environment, including among other things, our regulatory compliance costs. However, the Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards thatthan those promulgated by the CFPB. State regulation of financial products and potential enforcement actions could also adversely affect the Company’s business, financial condition, or operations.
The EGRRCPA
In May 2018, the Economic Growth, Regulatory Reform, and Consumer Protection Act (“EGRRCPA”) was enacted, which, among other things, amended certain provisions of the Dodd-Frank Act. The EGRRCPA provides targeted regulatory relief to financial institutions while preserving the existing framework under which U.S. financial institutions are regulated. The EGRRCPA relieves bank holding companies with less than $100 billion in assets, such as the Company, from the enhanced prudential standards imposed under Section 165 of the Dodd-Frank Act (including, but not limited to, resolution planning and enhanced liquidity and risk management requirements). Please see the section below titled “ImpactsImpacts of Growth”Growth for more information.
In addition to amending the Dodd Frank Act, the EGRRCPA also includes certain additional banking-related provisions, consumer protection provisions and securities law-related provisions. Many of the EGRRCPA’s changes have beenwere implemented through rules finalized by the federal banking agencies over the course of 2019. These rules and their enforcement are subject to the substantial regulatory discretion of the federal banking agencies. The Company continues to evaluate the potential impact of the EGRRCPA as it is further implemented by the federal banking agencies.
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Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule,” restricts the ability of banking entities from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the Volcker Rule, the term “covered funds” is defined as any issuer that would be an investment company under the Investment Company Act but for the exemption in Section 3(c)(1) or 3(c)(7) of that Act. There are also several exemptions from the definition of covered fund, including, among other things, loan securitizations, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered investment companies. The EGRRCPA and the subsequently promulgated inter-agency agency rules have aimed at simplifying and tailoring certain requirements related to the Volcker Rule.
Brokered Deposits
Section 29 of the FDIA and the FDIC regulations promulgated thereunder limit the ability of any bank to accept, renew or roll over any brokered deposit unless it is well capitalized or, with the FDIC’s approval, adequately capitalized. However, a result of the EGRRCPA, the FDIC has undertaken a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits, and interest rate caps applicable to banks that are less than well capitalized. In December 2019,2020, the FDIC issued a notice of proposedfinal rulemaking to modernize its brokered deposit regulations. At this time, itAmong other things, the final rule establishes a new framework for analyzing certain provisions of the “deposit broker” definition and establishes certain automatic “primary purpose” exemptions from the deposit broker definition, as well as revises certain interest rate restrictions that apply to less than well capitalized insured depository institutions. The final rule becomes effective April 1, 2021; however, the deadline for full compliance is difficultextended to predict what changes, if any, toJanuary 1, 2022. The Company is evaluating the brokered deposit regulations will actually be implemented orpotential impact of the effect of such changes,final rule, if any, on our subsidiary bank.
FDIC Deposit Insurance and Assessments
Our customer deposit accounts are insured up to applicable limits by the FDIC’s Deposit Insurance Fund (“DIF”) up to $250,000 per separately insured depositor. Simmons Bank is required to pay deposit insurance assessments to maintain the DIF. Because Simmons Bank’s assets exceed $10 billion, its deposit insurance assessment is based on a scoring system that examines the institution’s supervisory ratings and certain financial measures. The scoring system assesses risk measures to produce two scores, a performance score and a loss severity score, that are combined and converted to an initial assessment rate. The FDIC has the ability to make discretionary adjustments to the total score based upon significant risk factors not adequately captured in the calculations.
As described above in the section titled “PotentialPotential Enforcement Action for Bank Holding Companies and Banks”, the FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires that federal banking agencies evaluate the record of each financial institution in meeting the credit needs of the market areas they serve, including low and moderate-income (“LMI”) individuals and communities. These activities are also considered in connection with, among other things, applications for mergers, acquisitions and the opening of a branch or facility, and negative results of these evaluations could prevent us from engaging in these types of transactions. Simmons Bank received a “satisfactory” CRA rating during its most recent exam.
During recent years, the federal prudential regulatory agencies have been engaged in efforts to revise the regulations implementing the CRA. In December 2019,September 2020, the FRB issued an advance notice of proposed rulemaking (“ANPR”) on an approach to modernize the CRA’s implementing regulations by, among other things, more effectively meeting the needs of the LMI communities, addressing changes in the banking industry; bringing greater clarity, consistency, and transparency to tailored CRA performance evaluations, minimizing data collection and reporting burdens, and clarifying and expanding eligible CRA activities. One of the key changes proposed by the ANPR is to separate “retail test” and “community development test” components within the CRA framework. At this time, it is difficult to predict what changes, if any, will actually be implemented by the FRB or the effect, if any, on our subsidiary bank, or the level of cooperation among the FRB, the FDIC and the Office of the Comptroller of the Currency (“OCC”), the primary federal regulatory of national banks and federal savings associations, and the FDIC issued a joint notice of proposed rulemakingwith respect to modernize the regulations implementing the CRA. Under the rulemaking, the OCC and FDIC intend to (i) clarify which activities qualify for CRA credit, (ii) update where activities count for CRA credit, (iii) create a more transparent and objective method for measuring CRA performance, and (iv) provide for more transparent, consistent, and timely CRA-related data collection, record keeping, and reporting. Importantly, the FRB did not join the OCC and FDIC in connection with the proposed rulemaking. At this time, it remains unclear what impact, if any, the joint proposal of the OCC and FDIC will have on state member banks regulated by the FRB, such as our subsidiary bank.modernization efforts. The Company, though, expects to monitor developments with respect to this rulemakingANPR and assess the impact, if any, of the FRB’s proposed changes to the CRA regulations.
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UDAP and UDAAP
Federal laws, including Section 5 of the Federal Trade Commission Act, prohibit financial institutions from engaging in unfair or deceptive acts or practices (“UDAP”) in or affecting commerce. The Dodd-Frank Act expanded regulation in this space to apply to unfair, deceptive or abusive acts or practices (“UDAAP”) and delegated to the CFPB supervision and enforcement authority for UDAAP with respect to our subsidiary bank and rulemaking authority with respect to UDAAP. These laws have been used to, among other things, address certain problematic practices that may not fall directly within the scope of other banking or consumer protection laws.
Financial Privacy and Data Security
The Company is subject to federal laws, including the Gramm-Leach-Bliley Act of 1999 (“GLBA”), and certain state laws containing consumer privacy protection and data security provisions. These federal and state laws, and the rules and regulations promulgated thereunder impose restrictions on our ability to disclose non-public information concerning consumers to nonaffiliated third parties. These laws, rules and regulations also mandate the distribution of privacy policies to consumers, as well as provide consumers an ability to prevent our disclosure of their information under certain circumstances.
In addition, the GLBA requires that financial institutions, such as our subsidiary bank, implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information and data. Further, pursuant to interpretive guidance issued under the GLBA and certain state laws, financial institutions are also required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.
Although these laws and regulations impose compliance costs and create obligations and, in some cases, reporting obligations, and compliance with all of the laws, regulations, and reporting obligations may require significant resources of the Company and our subsidiary bank, these laws and regulations do not materially affect our products, services or other business activities.
Anti-Money Laundering and Anti-Terrorism
Simmons Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (also known as the “PATRIOT Act”), the Bank Secrecy Act (“BSA”) and rules and regulations of the Office of Foreign Assets Control (“OFAC”).
Under Title III of the PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws.
Among other things, Simmons Bank is required to establish an anti-money laundering (“AML”) program which includes the designation of a BSA officer, the establishment and maintenance of BSA/AML training, the establishment and maintenance of BSA/AML policies and procedures, independent testing of the AML program, and compliance with customer due diligence requirements. Our subsidiary bank must also employ enhanced due diligence under certain conditions. Compliance with BSA/AML requirements is routinely examined by regulators, and failure of a financial institution to meet its requirements in combating AML and anti-terrorism activities could result in severe penalties for the institution, including, among other things, the inability to receive the requisite regulatory approvals for mergers and acquisition.
Further, OFAC administers economic sanctions imposed by the federal government that affect transactions with foreign countries, individuals, and others (as the “OFAC Rules”). The OFAC Rules target many countries as well as specially designated nationals and blocked persons (collectively, “SDNs”) and take many different forms. Blocked assets (property and bank deposits) that are associated with such countries and SDNs cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with the OFAC Rules can result in serious legal and reputational consequences.
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Federal Home Loan Bank of Dallas
Simmons Bank is a member of the Federal Home Loan Bank of Dallas (“FHLB-Dallas”), which is one of 11 regional Federal Home Loan Banks (“FHLBs”) that provide funding to their members for making housing loans as well as for affordable housing and community development loans. Each FHLB serves as a reserve, or central bank, for the members within its assigned region and makes loans to its members in accordance with policies and procedures established by the board of directors of that FHLB. As a member, Simmons Bank must purchase and maintain stock in FHLB-Dallas. At December 31, 2019,2020, Simmons Bank’s total investment in FHLB-Dallas was $66.3$63.5 million.
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Company and our subsidiary bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized as of year-end 2019.2020. When the regulations are adopted - and if they are adopted in the form initially proposed - they will restrict the manner in which executive compensation is structured and may impact the Company’s ability to structure incentive compensation.
The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The Company gives stockholders a non-binding vote on executive compensation annually.
Impacts of Growth
During 2017, through internal growth and through acquisitions, the consolidated assets of the Company exceeded the $10 billion threshold, which resulted in several regulatory changes for the Company and Simmons Bank.
Among other things, the Dodd-Frank Act, through the Durbin Amendment, and associated Federal Reserve regulations cap the interchange rate on debit card transactions that can be charged by banks that, together with their affiliates, have at least $10 billion in assets at $0.21 per transaction plus five basis points multiplied by the value of the transaction. The cap goes into effect July 1st of the year following the year in which a bank reaches the $10 billion asset threshold. Simmons Bank became subject to the interchange rate cap effective July 1, 2018. Because of the cap, Simmons Bank received approximately $6.8 million less in debit card fees on a pre-tax basis in the last six months of 2018 and approximately $6.4 million less on a pre-tax basis during the first six months of 2019.
As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply, and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt is included as total Tier 2 capital.
The Dodd-Frank Act also previously required banks and bank holding companies with more than $10 billion in assets to adhere to certain enhanced prudential standards, including requirements to conduct annual stress tests, report the results to regulators and publicly disclose such results. However, as a result of regulatory reform finalized following passage of the EGRRCPA, the Company and Simmons Bank are no longer required to conduct an annual stress test of capital under the Dodd-Frank Act. Further, as a result of passage of the EGRRCPA, bank holding companies with less than $100 billion in assets, such as the Company, are exempt from the resolution planning, enhanced liquidity standards, and risk management requirements imposed under Section 165 of the Dodd-Frank Act. In anticipation of becoming subject to these requirements, the Company and Simmons Bank had begun the necessary preparations, including undertaking a gap analysis, implementing enhancements to the audit and compliance departments, and investing in various information technology systems. Notwithstanding that federal banking agencies will not take action with respect to these enhanced prudential standards, the Company and its subsidiary bank will continue to review their capital planning and risk management practices in connection with the regular supervisory processes of the FRB.
Additionally, the Dodd-Frank Act established the CFPB and granted it supervisory authority over banks with total assets of more than $10 billion. Simmons Bank is subject to CFPB oversight with respect to its compliance with federal consumer financial laws. Simmons Bank will continuecontinues to be subject to the oversight of its other regulators with respect to matters outside the scope of the CFPB’s jurisdiction. The CFPB has broad rule-making, supervisory and examination authority, as well as expanded data collecting and enforcement powers, all of which impacts the operations of Simmons Bank.
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Pending Legislation
Because of concerns relating to, among other things, competitiveness and the safety and soundness of the banking industry, Congress and state legislatures often consider a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions and of those chartered in a particular state legislature’s jurisdiction. We cannot predict whether or in what form any proposals will be adopted or the extent to which our business may be affected.
The FRB uses monetary policy tools to impact interest rates, credit market conditions and money market conditions and to influence general economic conditions. These policies can have a significant impact on the absolute levels and distribution of deposits, loans and investment securities, as well as on market interest rates charged on loans or paid for deposits and other borrowings. Monetary policies of the FRB have in the past had a significant effect on the operating results of bank holding companies and their subsidiary banks, such as the Company and Simmons Bank, and may have similar effects in the future.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this report, including the information contained in “Cautionary Note Regarding Forward-Looking Statements,” investors in our securities should carefully consider the factors discussed below. An investment in our securities involves risks. The factors below, among others, could materially and adversely affect our business, financial condition, results of operations, liquidity or capital position, or cause our results to differ materially from our historical results or the results expressed or implied in our forward-looking statements.
Risks Related to Our Industrythe COVID-19 Pandemic
Although we have business continuity plans and other government actions. Insafeguards in place, the previous economic downturn, some banksCOVID-19 pandemic and other lenders suffered significant lossesresponses to it have impacted, and became reluctantare likely to lend, even on a secured basis, duecontinue to the increased risk of default and theadversely impact, of declining asset values on the value of collateral. The foregoing can significantly weaken the strength and liquidity of some financial institutions worldwide.
Many responses to the COVID-19 pandemic have adversely impacted the economy and forced temporary closures of nonessential businesses, and as a result the businesses of many of our customers have been adversely impacted. If these responses are ultimately unsuccessful, we will notcould continue to experience anmaterial adverse effect, which may be material, on our abilityimpacts to access capital and on our business, financial condition, and results of operations. Additionally, changes due to COVID-19 may continue to have adverse impacts on the Company’s business due to, among other things, reduced effectiveness of operations, unavailability of personnel (including due to illness), and increased cybersecurity risks related to use of remote technology. We may experience financial losses and declines in our financial condition due to a number of factors associated with the pandemic, including, among other things, deteriorations in credit quality, past due loans, challenges faced by our third-party vendors who provide key services, and charge offs resulting from difficulties faced by our hospitality, retail, restaurant, energy, and other borrowers as a result of the pandemic and responses to it. Loan payment deferral programs and government assistance programs, such as the Paycheck Protection Program (“PPP”), may mask credit deterioration in the Company’s loan portfolio by making less applicable otherwise standard measures of identifying developing financial weakness in a customer or a loan portfolio, which may cause the our credit quality to decline and adversely impact our allowance for credit losses and require additional provisions. We may also incur adverse rulings, judgements, settlements, or other outcomes from litigation or government action arising from our participation in and administration of programs related to the pandemic (including, among other things, the PPP originally authorized by the Coronavirus Aid, Relief, and Economic Security Act) that could have significant effects on the Company, its financial condition and its operations.
The COVID-19 pandemic has contributed to significant volatility in monetary policy, including changesthe financial markets. Depending on the extent and duration of the COVID-19 pandemic, and perceptions regarding national and global recovery from the pandemic, volatility in the financial markets may continue which may adversely impact the price of the Company’s common stock. In response to the COVID-19 pandemic, in March 2020 the Federal Reserve lowered the target range for the federal funds rate to a range from 0%-0.25%. A prolonged period of low interest rates could adversely affect our profitability.
Risks Related to the majority of our real estate loans outstanding, a decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of our borrowers to repay their loans on a timely basis, which could have a negative impact on our results of operations.Company’s Lending Activities
The mismanagement of our credit risks could result in serious harm to our business.
There are a variety of risks inherent in making loans, including, among others, risks inherent with dealing with borrowers and guarantors, risks associated with potential future changes in the value of the collateral supporting the loans, the risk that a loan may not be repaid, and the risks associated with changes in economic or industry conditions. As part of our ongoing efforts to minimize these credit-related risks, we utilize credit policies and procedures, internal credit expertise and several internal layers of review for the loans we make. We also actively monitor our concentrations of loans and carefully evaluate the credit underwriting practices of acquired institutions. However, there can be no assurance that these underwriting and monitoring procedures will reduce these risks, and the inability to properly manage our credit risk could have a material adverse effect on our business, which, in turn, could impact our financial condition and results of operations.
Deteriorating credit quality in our credit card portfolio may adversely impact us.
We have a sizeable consumer credit card portfolio. Although we experienced a decreased amount of net charge-offs in our credit card portfolio in recent years, the amount of net charge-offs could worsen. While we continue to experience a better performance with respect to net charge-offs than the national average in our credit card portfolio, our net charge-offs were 1.86%1.62% and 1.64%1.86% of our average outstanding credit card balances for the years ended December 31, 20192020 and 2018,2019, respectively. Future downturns in the economy could adversely affect consumers in a more delayed fashion compared to commercial businesses in general. Increasing unemployment and diminished asset values may prevent our credit card customers from repaying their credit card balances which could result in an increased amount of our net charge-offs that could have a material adverse effect on our unsecured credit card portfolio.
We may not maintain an appropriate allowance for credit losses.
It is likely that some portion of our loans will become delinquent, and some loans may only be partially repaid or may never be repaid. We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that results from management’s review of the existing portfolio and management’s assessment of the portfolio’s collectability. Our methodology for establishing the appropriateness of the allowance for credit losses inherently involves a high degree of subjectivity and judgment and requires management to make significant estimates and predictions regarding credit risks, future market conditions, and other factors, all of which are subject to material changes and may not necessarily be in our control. If our methodology is flawed, or if we experience changes in market or economic conditions, or in conditions of our borrowers, the allowance may become inadequate, which would result in additional provisions to increase the allowance to an appropriate level. This could negatively impact our business, including through a material decrease in our earnings. In addition, prudential regulators also periodically review our allowance for credit losses and have the ability, based on their perspective, which may be different from ours, to require that we make adjustments to the allowance, which could also have a negative effect on our results of operations or financial condition.
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We rely on the mortgage secondary market from time to time to provide liquidity.
We sell certain mortgage loans we originate to certain agencies and other purchasers. We rely, in part, on the agencies to purchase loans meeting their requirements to reduce our credit risk and to provide funding for additional loans we desire to originate. There is no guarantee that the agencies will not materially limit their purchases of conforming loans due to capital constraints, a change in the criteria for conforming loans or other factors. If we are unable to continue to sell conforming loans to the agencies, our ability to fund, and thus originate, additional mortgage loans may be adversely affected, which would adversely affect our results of operations.
Sales of our loans are subject to a variety of risks.
In relation to any sale of one or more of our loan portfolios, we may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans were originated and serviced. If those representations and warranties prove to be incorrect, we may be required to indemnify the purchaser for any related losses or be required to repurchase certain loans that were sold. In some cases where such obligations are invoked by the purchaser, the loans may be non-performing or in default, leaving us without a remedy available against a solvent counterparty to the loan. Our results of operations may be adversely affected if we are not able to recover our losses resulting from these indemnity payments and repurchases.
Loans made through federal programs are dependent on the federal government’s continuation and support of these programs and on our compliance with program requirements.
We participate in various U.S. government agency loan guarantee programs, including programs operated by the SBA. If we fail to follow any applicable regulations, guidelines or policies associated with a particular guarantee program, any loans we originate as part of that program may lose the associated guarantee, exposing us to credit risk we would not otherwise be exposed to, or result in our inability to continue originating loans under such programs, either of which could have a material adverse effect on our business, financial condition or results of operations.
We participated as a lender in both rounds of the PPP. The PPP loans are fully guaranteed as to payment of principal and interest by the SBA and we believe that the majority of these loans will be forgiven. However, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by us, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency.
Risks Related to Market Interest Rates
Changes in interest rates and monetary policy could adversely affect our profitability.
Our net income and cash flows depend to a significant extent on the difference between interest rates earned on interest-earning assets and the rates paid on interest-bearing liabilities. These rates are highly sensitive to many factors beyond our control, including general economic conditions and credit and monetary policies of governmental authorities. Changes in the credit or monetary policies of governmental authorities, particularly the Federal Reserve, could significantly impact market interest rates and our financial performance. For instance, changes in the nature of open market transactions in U.S. government securities, the discount rate or the federal funds rate on bank borrowings, and reserve requirements against bank deposits, could lead to increases in the costs associated with our business. In addition, such changes could influence the interest we receive on loans and securities and the amount of interest we pay on deposits. If the interest rates we pay on deposits increases at a faster rate than the interest we receive on loans and other investments, then our net interest income could be adversely affected. The impact of these changes may be magnified if we do not effectively manage the relative sensitivity of our assets and liabilities to changes in market interest rates, and our ability to manage such relative sensitivity may be adversely impacted by competitive conditions in the banking industry and in the financial markets. Due to the changing conditions in the national economy, we cannot predict with certainty how future changes in interest rates, deposit levels, and loan demand will impact our business and profitability.
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Changes in the method pursuant to which the London Interbank Offered Rate (“LIBOR”) and other benchmark rates are determined, as well as the discontinuance and replacement of LIBOR as a reference rate, could adversely impact our business and results of operations.
On July 27, 2017, the Chief Executive of the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021, and Intercontinental Exchange, Inc. the company that administers LIBOR, has stated that it intends to cease the publication of one week and two-month LIBOR rates immediately after the LIBOR publication on December 31, 2021, and the remaining LIBOR rates immediately following the LIBOR publication on June 30, 2023, and will consult on such intentions. These announcements indicate that the continuation of LIBOR on the current basis cannot be guaranteed after 2021. Due to LIBOR’s extensive use across financial markets, the transition away from LIBOR may pose risks and challenges to financial markets and financial institutions, including the Company, and liquidity in certain interbank markets on which LIBOR estimates are based has been declining. At this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, at this time, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become the generally accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments.
Certain of our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments, and loans, extend beyond 2021. We are continuing to assess the impact that a cessation or market replacement of LIBOR would have on these various products and contracts and working to transition many LIBOR based products and contracts to other interest rate structures. The discontinuation of LIBOR could result in operational, legal and compliance risks and, if we are unable to adequately manage such risks and transition from LIBOR to new reference rates, our business, financial condition, results of operations and future prospects may be adversely impacted.
Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures.
Our cost of funds may increase as a result of general economic conditions, fluctuations in interest rates and competitive pressures. We have traditionally obtained funds principally through local deposits as we have a base of lower cost transaction deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected if we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs. Also, changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.
Risks Related to Our Business, Industry, and Markets
Our business may be adversely affected by conditions in the financial markets and general economic conditions.
Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
The Great Recession elevated unemployment levels and negatively impacted consumer confidence. It also had a detrimental impact on industry-wide performance nationally as well as the Company’s market areas. While improvement in several economic indicators have been noted since 2013, including increasing consumer confidence levels, increased economic activity and a continued decline in unemployment levels the COVID-19 pandemic led to extensive additional disruptions to the economy generally during 2020.
Past market conditions have also led to the failure or merger of a number of prominent financial institutions. Financial institution failures or near-failures can result in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. Furthermore, declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor confidence, as well as other factors, can all combine to increase credit default swap spreads, to cause rating agencies to lower credit ratings, and to otherwise increase the cost and decrease the availability of liquidity, despite very significant declines in Federal Reserve borrowing rates and other government actions. In the Great Recession, some banks and other lenders suffered significant losses and became reluctant to lend, even on a secured basis, due to the increased risk of default and the impact of declining asset values on the value of collateral. The foregoing can significantly weaken the strength and liquidity of some financial institutions worldwide.
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The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the states where we operate, and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors.
The business environment in the states where we operate could deteriorate and adversely affect the credit quality of our loans and our results of operations and financial condition. There can be no assurance that business and economic conditions will remain stable in the near term. If financial market volatility worsens, or if there are more disruptions in the financial markets, including disruptions to the United States or international banking systems, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Our concentration of banking activities in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas, including our real estate loan portfolio, makes us more vulnerable to adverse conditions in the particular local markets in which we operate.
Our subsidiary bank operates primarily within the states of Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas, where the majority of the buildings and properties securing our loans and the businesses of our customers are located. Our financial condition, results of operations and cash flows are subject to changes in the economic conditions in these seven states, the ability of our borrowers to repay their loans, and the value of the collateral securing such loans. We largely depend on the continued growth and stability of the communities we serve for our continued success. Declines in the economies of these communities or the states in general could adversely affect our ability to generate new loans or to receive repayments of existing loans, and our ability to attract new deposits, thus adversely affecting our net income, profitability and financial condition.
The ability of our borrowers to repay their loans could also be adversely impacted by the significant changes in market conditions in the region or by changes in local real estate markets, including deflationary effects on collateral value caused by property foreclosures. This could result in an increase in our charge-offs and provision for credit losses. Either of these events would have an adverse impact on our results of operations.
A significant decline in general economic conditions caused by inflation, recession, unemployment, acts of terrorism or other factors beyond our control could also have an adverse effect on our financial condition and results of operations. In addition, because multi-family and commercial real estate loans represent the majority of our real estate loans outstanding, a decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of our borrowers to repay their loans on a timely basis, which could have a negative impact on our results of operations.
We face strong competition from other banks, bank holding companies, and financial services companies.
In the markets we serve, the businesses of banking and financial services are fiercely competitive. Many of our competitors offer the same, or similar, products and services within our market areas. Some of our competitors are able to offer a broader range of products and services than we do. These competitors include banks with nationwide presences, regional banks, and community banks (who may have greater flexibility in their operational strategies than we possess). We also face competition from many other types of financial institutions, including, among others, credit unions, finance companies, insurance companies, brokerage and investment banking firms. If we are unable to effectively compete for banking customers, we may lose loan and deposit market share, as well as experience reductions in net interest margin, fee income, and profitability, and our business, financial condition, and results of operations could be adversely affected.
Changes in service delivery channels and emerging technologies pose a competitive risk.
Advancements in technology have created the ability for financial transactions that have historically often involved traditional banks to be conducted through alternative channels. For example, consumers can now hold funds in brokerage accounts and internet-only banks, or indeed with essentially any bank that provides for online account opening and online banking. Consumers can also complete transactions such as the purchase or sale of goods and services, the payment of bills, and the transfer of funds without the direct assistance of banks. Indeed, non-traditional financial services firms, such as financial technology (FinTech) companies, have begun to offer a variety of services traditionally provided by banks and other financial institutions. The resulting increased competition could result in the loss of fee income and customer deposits,which could negatively impact our financial condition, results of operations, and liquidity. It could also require additional, costly investments in technology to remain competitive.
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Our growth and expansion strategy may not be successful, and our market value and profitability may suffer.
We have historically employed, as important parts of our business strategy, growth through acquisitions of banks and, to a lesser extent, through branch acquisitions and de novo branching. Any future acquisitions in which we might engage will be accompanied by the risks commonly encountered in acquisitions. These risks include, among other risks:
•credit risk associated with the acquired bank’s loans and investments;
•difficulty of integrating operations and personnel; and
•potential disruption of our ongoing business.
In addition to pursuing the acquisition of existing viable financial institutions as opportunities arise we may also continue to engage in de novo branching to further our growth strategy. De novo branching and growing through acquisition involve numerous risks, including the following:
•the inability to obtain all required regulatory approvals;
•the significant costs and potential operating losses associated with establishing a de novo branch or a new bank;
•the inability to secure the services of qualified senior management;
•the local market may not accept the services of a new bank owned and managed by a bank holding company headquartered outside of the market area of the new bank;
•the risk of encountering an economic downturn in the new market;
•the inability to obtain attractive locations within a new market at a reasonable cost; and
•the additional strain on management resources and internal systems and controls.
We expect that competition for suitable acquisition candidates will be significant. We may compete with other banks or financial service companies that are seeking to acquire our acquisition candidates, many of which are larger competitors and have greater financial and other resources. We cannot assure you that we will be able to successfully identify and acquire suitable acquisition targets on acceptable terms and conditions. Further, we cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions and de novo branching. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business and growth strategy and maintain or increase our market value and profitability.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2019,2020, we had $1.1 billion of goodwill and $127.3$111.1 million of other intangible assets. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower economic growth or a significant and sustained decline in the price of our common stock, any or all of which could be materially impacted by many of the risk factors discussed herein, may necessitate our taking charges in the future related to the impairment of our goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations.
Identifiable intangible assets other than goodwill consist of core deposit intangibles, books of business, and other intangible assets. Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, significant losses of customer accounts and/or balances, increased competition or adverse changes in the economy. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded, which could have a material adverse effect on our results of operations.
Damage to our reputation could significantly harm our business.
Our ability to attract and retain customers, employees, and acquisition partners is influenced by our reputation. A negative opinion of our business can develop in connection with a variety of circumstances, including issues with our lending practices, regulatory compliance, risk management, corporate governance, customer service, community involvement, integration of acquired institutions, and third-party service providers. Our reputation could also be harmed through regulatory proceedings by governmental authorities, litigation, or cybersecurity events. Reputational damage could also impact our relationships with investors, our credit ratings and our ability to access capital markets.
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If we are unsuccessful in developing new, and adapting our current, products and services so that they respond to changing industry standards and customer preferences, our business may suffer.
We may not maintain an appropriate allowance for loan losses.
Risks Related to the Company’s Operations
We are subject to fraud risk, which could be adversely affected.
Fraud is a major, and increasing, operational risk, particularly for financial institutions. We continue to experience fraud attempts and losses through, for example, deposit fraud (such as wire fraud and check fraud) and loan fraud. Fraud may also arise from the misconduct of fundsour employees. The methods used to perpetrate and our profitability and liquidity are likelycombat fraud continue to evolve, particularly as advances in technology occur. While we seek to be adversely affected if we have to rely upon higher cost borrowings from other institutional lenders or brokersvigilant in the prevention, detection, and remediation of fraud events, some fraud loss is unavoidable, and the risk of major fraud loss cannot be eliminated.
A lack of liquidity could impair our ability to fund loan demand or liquidity needs. Also, changes in our deposit mixbusiness and growth couldthereby adversely affect our profitabilityfinancial condition and results of operations.
Liquidity is a critical component of our business. To ensure adequate liquidity to fund our operations, we rely heavily on our ability to generate deposits and effectively manage both the repayment of loans and the abilitymaturity schedules of our investment securities. Our most important source of funds is deposits, but sources of funds also include, among other things, cash flows from operations, maturities and sales of investment securities, and borrowings from the Federal Reserve and Federal Home Loan Bank. Our access to expandfunding sources in amounts adequate to finance our loan portfolio.activities, or on terms that are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy in general. This could result in a lack of liquidity, which could materially and adversely affect our business.
Our models and estimations may be inadequate, which could lead to significant losses and regulatory scrutiny.
To assist with the management of our credit, liquidity, operations, and compliance functions and risks, we have developed, and currently use, various models and other analytical tools, including certain estimations. The models and estimations often take into account assumptions and historical trends and are, in some case, based on subjective judgments. As such, the models and estimations may not be effective in identifying and managing risks, which could adversely impact our financial condition and results of operations. Inadequate models may also result in compliance failures, which could lead to increased scrutiny by our regulators.
We may not be able to raise the additional capital we need to grow and, as a result, our ability to expand our operations could be materially impaired.
Federal and state regulatory authorities require us and our subsidiary bank to maintain adequate levels of capital to support our operations. Many circumstances could require us to seek additional capital, such as:
•faster than anticipated growth;
•reduced earning levels;
•operating losses;
•changes in economic conditions;
•revisions in regulatory requirements; or
•additional acquisition opportunities.
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Our ability to raise additional capital will largely depend on our financial performance, and on conditions in the capital markets which are outside our control. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would, as a result, have to compete with those institutions for investors which could adversely impact the price at which we are able to offer our securities. If we need additional capital but cannot raise it on terms acceptable to us, our ability to expand our operations or to engage in acquisitions could be materially impaired.
Our business is heavily reliant on information technology systems, facilities, and processes; and a disruption in those systems, facilities, and processes, or a breach, including cyber-attacks, in the security of our systems, could have significant, negative impact on our business, result in the disclosure of confidential information, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third-party service providers to process, record and monitor a large number of transactions. If the financial, accounting, data processing or other operating systems and facilities fail to operate properly, become disabled, experience security breaches or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Certain financial institutions in the United States have also experienced attacks from technically sophisticated and well-resourced third parties that were intended to disrupt normal business activities by making internet banking systems inaccessible to customers for extended periods. These “denial-of-service” attacks have not breached our data security systems, but require substantial resources to defend, and may affect customer satisfaction and behavior.
Despite our efforts and those of our third party service providers to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as we continue to increase our mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications. If our security systems were penetrated or circumvented, it could cause serious negative consequences for us, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage our computers or systems and those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us.
We depend on qualified employees and key personnel to operate and lead our business, and we may not be able to attract or retain them in the future.
A critical component of our success is the ability to attract, develop and retain highly qualified, skilled lending, operations, information technology, and other employees, as well as managers who are experienced and effective at leading their respective departments. We have an experienced group of senior management and other key personnel that our board of directors believes is capable of managing and growing our business. In many areas of the financial services industry, competition for key personnel is fierce, and the departure of those individuals from our business presents risk that we will be unable to attract, develop and retain suitable successors, which could have a material, adverse impact on our competitive position in the marketplace.
Our ability to attract and retain customers, employees, and acquisition partnersbusiness is influenced by our reputation. A negative opinion of our business can develop in connection withheavily reliant on a variety of circumstances, includingthird-party service providers.
We rely on a large number of vendors to provide products and services that we need for our day-to-day operations, particularly in the areas of loan and deposit operations, information technology, and security. This reliance exposes us to the risk that the vendors will not perform in accordance with the applicable contractual arrangements or service level agreements, as well as risks resulting from defective products, poor performance of services, disruption in a product or service, vendor contracts, or loss of a product or service if a vendor ceases doing business because of its own financial or operational difficulties. These risks, if realized, could result in significant disruptions to our business, which could have a material adverse impact on our financial condition and results of operations. While we maintain a vendor management program designed to assist in the oversight and monitoring of our third-party service providers, there can be no assurance that we will not experience service-related issues associated with our lending practices, regulatory compliance, risk management,vendors.
Our controls and procedures may fail, or our employees may not adhere to them.
It is critical that our internal controls, disclosure controls and procedures, and corporate governance customer service, community involvement, integrationpolicies and procedures be effective in order to provide assurance that our financial reports and disclosures are materially accurate. A failure or circumvention of acquired institutions,our controls and third-party service providers. Our reputationprocedures, or a failure to comply with regulations related to controls and procedures, could also be harmed through regulatory proceedings by governmental authorities, litigation, or cybersecurity events. Reputational damagehave a material adverse effect on our business, financial condition, and results of operations, as well as cause reputational harm, which could also impact our relationships with investors, our credit ratings andlimit our ability to access the capital markets.
Accounting standards periodically change and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain.
The regulatory bodies that establish accounting standards, including, among others, FASB and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. For example, in June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, that effective January 1, 2020, substantially changed the accounting for credit losses and other financial assets held by banks, financial institutions and other organizations. The standard removed the existing “probable” threshold in generally accepted accounting principles (“US GAAP”) for recognizing credit losses and instead requires companies to reflect their estimate of credit losses over the life of the financial assets. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. We adopted, an optional three-year phase-in period for the day-one adverse regulatory capital impact upon adoption of the standard with the additional two year delay allowed by the regulators in response to the COVID-19 pandemic.. The adoption of the standard resulted in an overall material increase in the allowance for credit losses. However, the impact at adoption was influenced by the portfolios' composition and quality at the adoption date as well as economic conditions and forecasts at that time.
In addition, our management must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, management may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and may require management to make difficult, subjective or complex judgments about matters that are uncertain.
Risks Related to the Company’s Legal and Regulatory Environment
Financial legislative and regulatory initiatives could adversely affect the results of our operations.
We are subject to extensive governmental regulation, supervision, legislation, and control. For instance, in response to the financial crisis affecting the banking system and financial markets, the Dodd-Frank Act was enacted in 2010, as well as several programs that have been initiated by the U.S. Treasury, the FRB, and the FDIC. See “Item 1. Business - Supervision and Regulation” included herein for more information regarding regulatory burden and supervision.
Some of the provisions of legislation and regulation that have adversely impacted the Company include the “Durbin Amendment” to the Dodd-Frank Act, which mandates a limit to debit card interchange fees, and Regulation E amendments to the EFTA regarding overdraft fees. Future financial legislation and regulatory initiatives can limit the type of products we offer, the methods by which we offer them, and the prices at which they are offered. These provisions can also increase our costs in offering these products.
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The CFPB, Federal Reserve, and Arkansas State Bank Department have broad rulemaking, supervisory and examination authority, as well as data collection and enforcement powers. The scope and impact of the regulators’ actions can significantly impact the operations of the Company and the financial services industry in general.
These laws, regulations, and changes can increase our costs of regulatory compliance. They also can significantly affect the markets in which we do business, the markets for and value of our investments, and our ongoing operations, costs, and profitability. The ultimate impact of the provisions in legislative and regulatory initiatives on the Company’s business and results of operations also depends upon regulatory interpretation and rulemaking. As a result, we are unable to predict the ultimate impact of future legislation or regulation, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations.
Our failure to comply with applicable banking laws and regulations could result in significant monetary penalties, restrict our ability to execute our growth strategy, and have other material adverse impacts on our business.
We are charged with maintaining compliance with all applicable banking laws and regulations, including, among others, fair lending, CRA, consumer compliance, BSA and anti-money laundering, capital, and other regulations described herein under “Item 1. Business - Supervision and Regulation.” Various agencies, including, without limitation, the FRB, CFPB, Arkansas State Bank Department, and the Department of Justice, have the ability to institute proceedings to address compliance failures. Should those agencies be successful in the case of such a proceeding, we could become subject to material sanctions, including, among other things, monetary penalties and restrictions on our ability to engage in mergers and acquisitions and other growth-oriented activities. Compliance failures may also result in litigation instituted by private parties, including consumers, which could result in material adverse impacts on our business.
We are subject to litigation in the ordinary course of our business, and adverse rulings, judgements, settlements, and other outcomes of such litigation, as well as our associated legal expenses may adversely affect our results.
From time to time, we are subject to litigation. Litigation and claims can arise in various contexts, including, among others, our lending activities, employment practices, commercial agreements, fiduciary responsibilities, compliance programs, and other general business matters. These claims and legal actions, including supervisory actions by our regulators, could involve large amounts in controversy, significant fines or penalties, and substantial legal costs necessary for our defense. The outcome of litigation and regulatory matters, as well as the timing associated with resolving these matters, are inherently hard to predict. Substantial legal liability, which may not be insured, and significant regulatory actions against us could materially and adversely impact our business operations, including our ability to engage in mergers and acquisitions, our results of operations, and our financial condition.
The Federal Reserve Board’s source of strength doctrine could require that we divert capital to our subsidiary bank instead of applying available capital towards planned uses, such as engaging in acquisitions or paying dividends to shareholders.
The FRB’s policies and regulations require that a bank holding company, including a financial holding company, serve as a source of financial strength to its subsidiary banks, and further provide that a bank holding company may not conduct operations in an unsafe or unsound manner. It is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity, such as during periods of significant loan losses, and that such holding company should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks if such a need were to arise.
A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered an unsafe and unsound banking practice or a violation of the FRB’s regulations, or both. Accordingly, if the financial condition of our subsidiary bank was to deteriorate, we could be compelled to provide financial support to our subsidiary bank at a time when, absent such FRB policy, we may not deem it advisable to provide such assistance. Under such circumstances, there is a possibility that we may not either have adequate available capital or feel sufficiently confident regarding our financial condition, to enter into acquisitions, pay dividends, or engage in other corporate activities.
26
We may incur environmental liabilities with respect to properties to which we take title.
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own or foreclose and take title to real estate and could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. If we were to become subject to significant environmental liabilities, it could have a material adverse effect on our results of operations and financial condition.
We may be subject to allegations of intellectual property infringement or may fail to effectively protect our own intellectual property rights.
Our management has broad discretion overcompetition, or other third parties, may allege that we have violated their intellectual property rights. For example, we may unintentionally infringe upon the rights of third parties through the use of proceeds from future stock offerings.
Risks Related to Owning Our Stockthe Company’s Securities
The holders of our subordinated notes and subordinated debentures have rights that are senior to those of our common shareholders. If we defer payments of interest on our outstanding subordinated debentures or if certain defaults relating to those debentures occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.
We have subordinated debentures issued in connection with trust preferred securities. Payments of the principal and interest on the trust preferred securities are unconditionally guaranteed by us. The subordinated debentures are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock. In addition, in the event of our bankruptcy, dissolution or liquidation, the holders of both the subordinated debentures and the subordinated notes must be satisfied before any distributions can be made to the holders of our common stock. We have the right to defer distributions on the subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our capital stock. If we elect to defer or if we default with respect to our obligations to make payments on these subordinated debentures, this would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of our common stock, we may issue additional series of subordinated debt securities in the future with terms similar to those of our existing subordinated debt securities or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock.
We may be unable to, or choose not to, pay dividends on our common stock.
We cannot assure you of our ability to continue to pay dividends. Our ability to pay dividends depends on the following factors, among others:
•We may not have sufficient earnings since our primary source of income, the payment of dividends to us by our subsidiary bank, is subject to federal and state laws that limit the ability of those banksthe bank to pay dividends;
•FRB policy requires bank holding companies to pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition; and
•Our Board of Directors may determine that, even though funds are available for dividend payments, retaining the funds for internal uses, such as expansion of our operations, is a better strategy.
27
If we fail to pay dividends, capital appreciation, if any, of our common stock may be the sole opportunity for gains on an investment in our common stock. In addition, in the event our subsidiary bank becomes unable to pay dividends to us, we may not be able to service our debt or pay our other obligations or pay dividends on our common stock. Accordingly, our inability to receive dividends from our subsidiary bank could also have a material adverse effect on our business, financial condition and results of operations and the value of your investment in our common stock. Our subsidiary bank’s ability to pay dividends or make other payments to us, as well as our ability to pay dividends on our common stock, is limited by the bank’s obligation to maintain sufficient capital and by other general regulatory restrictions on its dividends, including restrictions imposed by state laws and regulations.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the value of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Shares of our common stock, as well as our other securities, are not insured deposits and may lose value.
Shares of the Company’s common stock, as well as our other securities, are not savings accounts, deposits, or other obligations of any depository institution, and those shares are not insured by the FDIC or any other governmental agency or instrumentality or private insurer. Investments in shares of the Company’s common stock or other securities, therefore, are subject to investment risk, including the possible loss of principal.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of our articles of incorporation and by-laws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors.
Our management has broad discretion over the use of proceeds from future stock offerings.
Although we generally indicate our intent to use the proceeds from stock offerings for general corporate purposes, including funding internal growth and selected future acquisitions, our Board of Directors retains significant discretion with respect to the use of the proceeds from possible future offerings. If we use the funds to acquire other businesses, there can be no assurance that any business we acquire will be successfully integrated into our operations or otherwise perform as expected.
Our recent results do not indicate our future results and may not provide guidance to assess the risk of an investment in our common stock.
We may not be able to sustain our historical rate of growth or be able to expand our business. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. We may also be unable to identify advantageous acquisition opportunities or, once identified, enter into transactions to make such acquisitions. If we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.
28
Weather-related events or natural or man-made disasters could cause a disruption in our business or have other effects which could adversely impact our financial condition and results of operations.
We have operations in the mid-south and certain great plains states, areas susceptible to tornados and severe weather events. In addition, our operations and a significant number of our branches are located in the New Madrid Seismic Zone. While we have in place a business continuity plan, such events could potentially disrupt our operations or result in physical damage to our branch office locations. Severe weather events or earthquakes could also impact the value of any collateral we hold, or significantly disrupt the local economies in the markets that we serve, manifesting in a decline in loan originations, as well as an increase in the risk of delinquencies, defaults, and foreclosures.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The principal offices of the Company and of its leadsubsidiary bank, Simmons Bank, consist of an eleven-story office building and adjacent office space located in the centraldowntown business district of the city of Pine Bluff, Arkansas. A portion of those offices is subject to a ground lease that expires March 31, 2057. We have additional corporate offices located in Little Rock, Arkansas, including a twelve-story office building in Little Rock’s River Market district.
The Company and its subsidiaries own or lease additional offices in the states of Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. The Company and its subsidiaries conduct financial operations from approximately 251204 financial centers located in communities throughout Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. We generally believe our properties to be suitable and adequate for our present operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or its subsidiaries have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which,information contained in the aggregate, are not expected to have a material adverse effect on the business, financial condition, or results of operationsNote 22, Contingent Liabilities, of the Company and its subsidiaries.Notes to Consolidated Financial Statements in Part II, Item 8 of this report is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Global Select Market under the symbol “SFNC.”
As of February 25, 2020,22, 2021, there were 2,416approximately 2,250 shareholders of record of our common stock. See the Cash Dividends discussion in the Capital section of Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding cash dividends.
Issuer Purchases of Equity Securities
On October 22, 2019, we announced that our Board of Directors authorized a new stock repurchase program (the “Program”(“Program”) under which we may repurchase up to $60,000,000 of our Class A common stock currently issued and outstanding. On March 5, 2020, we announced an amendment to the Program that increased the maximum amount that may be repurchased under the Program from $60,000,000 to $180,000,000. The Program will terminate on October 31, 2021 (unless terminated sooner) and replaces thereplaced our previous stock repurchase program, which was announced on July 23, 2012, that authorized us to repurchase up to 1,700,000 shares of common stock. UnderWe did not repurchase shares under the Program beginning in April of 2020 through September of 2020. On October 22, 2020, we repurchased sharesannounced the resumption of stock repurchases under the Program. The timing, pricing, and amount of any repurchases under the Program will be determined by management at its discretion based on a variety of factors, including but not limited to, trading volume and market price of our common stock, corporate considerations, the Company working capital and investment requirements, general market and economic conditions, and legal requirements.
Information concerning our purchases of common stock during the fourth quarter 2019 on the open market. Information associated with the Programended December 31, 2020 is included in the following table:as follows:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
| October 1 - 31, 2019 | 774 | $ | 24.77 | — | $ | 60,000,000 | |||||||
| November 1 - 30, 2019 | 190,502 | 25.58 | 190,000 | $ | 55,140,000 | ||||||||
| December 1 - 31, 2019 | 201,522 | 26.33 | 200,000 | $ | 49,870,000 | ||||||||
| Total | 392,798 | $ | 25.96 | 390,000 | |||||||||
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| October 1 - 31, 2020 | 180,780 | $ | 17.14 | 180,000 | $ | 73,478,000 | |||||||||||||||||
| November 1 - 30, 2020 | 600,502 | 19.37 | 600,000 | $ | 61,855,000 | ||||||||||||||||||
| December 1 - 31, 2020 | 254,826 | 20.88 | 254,364 | $ | 56,544,000 | ||||||||||||||||||
| Total | 1,036,108 | $ | 19.36 | 1,034,364 | |||||||||||||||||||
_________________________
(1)Total number of shares purchased includes 2,7981,744 shares with an average price of $25.12$19.11 of restricted stock purchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under any publicly announced plan.
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Performance Graph
The performance graph below compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return on the equity securities of companies included in the Nasdaq Composite Index and the SNL U.S. Bank & Thrift Index. The graph assumes an investment of $100 on December 31, 20142015 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered as an indication of future performance.
| Period Ending | ||||||||||||||||||||||||||||||||||||||
| Index | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | ||||||||||||||||||||||||||||||||
| Simmons First National Corporation | 100.00 | 123.33 | 115.39 | 99.53 | 113.35 | 94.95 | ||||||||||||||||||||||||||||||||
| Nasdaq Composite | 100.00 | 108.87 | 141.13 | 137.12 | 187.44 | 271.64 | ||||||||||||||||||||||||||||||||
| SNL U.S. Bank & Thrift | 100.00 | 126.25 | 148.45 | 123.32 | 166.67 | 144.61 | ||||||||||||||||||||||||||||||||
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| Period Ending | ||||||||||||||||||
| Index | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | ||||||||||||
| Simmons First National Corporation | 100.00 | 128.87 | 158.94 | 148.70 | 128.26 | 146.07 | ||||||||||||
| Nasdaq Composite | 100.00 | 106.96 | 116.45 | 150.96 | 146.67 | 200.49 | ||||||||||||
| SNL U.S. Bank & Thrift | 100.00 | 102.02 | 128.80 | 151.45 | 125.81 | 170.04 | ||||||||||||
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated selected financial data concerning the Company and should be read in conjunction with, and is qualified in its entirety by, the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this report. The income statement, balance sheet and per common share data as of and for the years ended December 31, 2020, 2019, 2018, 2017, 2016, and 2015,2016, were derived from consolidated financial statements of the Company, which were audited by BKD, LLP. Results from past periods are not necessarily indicative of results that may be expected for any future period.
Management believes that certain non-GAAP measures, including core diluted earnings per share, tangible book value, the ratio of tangible common equity to tangible assets, tangible stockholders’ equity, core return on average assets, core return on average common equity, return on average tangible equity, core return on average tangible equity, and efficiency ratio, and certain measures exclusive of PPP loans and/or additional liquidity may be useful to analysts and investors in evaluating the performance of our Company. We have included certain of these non-GAAP measures, including cautionary remarks regarding the usefulness of these analytical tools, in this table. The consolidated selected financial data set forth below should be read in conjunction with the financial statements of the Company and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. See the “GAAP Reconciliation of Non-GAAP Financial Measures” for additional discussion of non-GAAP measures.
| Years Ended December 31, | |||||||||||||||||||||||||||||
| (In thousands, except per common share data, ratios & other data) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Income statement data: | |||||||||||||||||||||||||||||
| Interest income | $ | 759,718 | $ | 783,123 | $ | 676,829 | $ | 392,539 | $ | 299,295 | |||||||||||||||||||
| Interest expense | 119,984 | 181,370 | 128,135 | 40,074 | 21,799 | ||||||||||||||||||||||||
| Net interest income | 639,734 | 601,753 | 548,694 | 352,465 | 277,496 | ||||||||||||||||||||||||
| Provision for credit losses | 74,973 | 43,240 | 38,148 | 26,393 | 20,065 | ||||||||||||||||||||||||
| Net interest income after provision for credit losses | 564,761 | 558,513 | 510,546 | 326,072 | 257,431 | ||||||||||||||||||||||||
| Non-interest income | 248,528 | 205,031 | 147,754 | 141,230 | 141,092 | ||||||||||||||||||||||||
| Non-interest expense | 493,495 | 461,112 | 392,229 | 312,379 | 255,085 | ||||||||||||||||||||||||
| Income before taxes | 319,794 | 302,432 | 266,071 | 154,923 | 143,438 | ||||||||||||||||||||||||
| Provision for income taxes | 64,890 | 64,265 | 50,358 | 61,983 | 46,624 | ||||||||||||||||||||||||
| Net income | 254,904 | 238,167 | 215,713 | 92,940 | 96,814 | ||||||||||||||||||||||||
| Preferred stock dividends | 52 | 339 | — | — | 24 | ||||||||||||||||||||||||
| Net income available to common stockholders | $ | 254,852 | $ | 237,828 | $ | 215,713 | $ | 92,940 | $ | 96,790 | |||||||||||||||||||
Per common share data(7): | |||||||||||||||||||||||||||||
| Basic earnings | 2.32 | 2.42 | 2.34 | 1.34 | 1.58 | ||||||||||||||||||||||||
| Diluted earnings | 2.31 | 2.41 | 2.32 | 1.33 | 1.56 | ||||||||||||||||||||||||
Core diluted earnings (non-GAAP) (1) | 2.40 | 2.73 | 2.37 | 1.70 | 1.64 | ||||||||||||||||||||||||
| Book value | 27.53 | 26.30 | 24.33 | 22.65 | 18.40 | ||||||||||||||||||||||||
Tangible book value (non-GAAP) (2) | 16.56 | 15.89 | 14.18 | 12.34 | 11.98 | ||||||||||||||||||||||||
| Dividends | 0.68 | 0.64 | 0.60 | 0.50 | 0.48 | ||||||||||||||||||||||||
| Basic average common shares outstanding | 109,860,321 | 98,350,992 | 92,268,131 | 69,384,500 | 61,291,296 | ||||||||||||||||||||||||
| Diluted average common shares outstanding | 110,173,661 | 98,796,628 | 92,830,485 | 69,852,920 | 61,927,092 | ||||||||||||||||||||||||
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| Years Ended December 31, | |||||||||||||||||||
| (In thousands, except per common share data, ratios & other data) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Income statement data: | |||||||||||||||||||
| Interest income | $ | 786,645 | $ | 680,687 | $ | 395,004 | $ | 301,005 | $ | 300,948 | |||||||||
| Interest expense | 181,370 | 128,135 | 40,074 | 21,799 | 22,353 | ||||||||||||||
| Net interest income | 605,275 | 552,552 | 354,930 | 279,206 | 278,595 | ||||||||||||||
| Provision for loan losses | 43,240 | 38,148 | 26,393 | 20,065 | 9,022 | ||||||||||||||
| Net interest income after provision for loan losses | 562,035 | 514,404 | 328,537 | 259,141 | 269,573 | ||||||||||||||
| Non-interest income | 201,509 | 143,896 | 138,765 | 139,382 | 94,661 | ||||||||||||||
| Non-interest expense | 461,112 | 392,229 | 312,379 | 255,085 | 256,970 | ||||||||||||||
| Income before taxes | 302,432 | 266,071 | 154,923 | 143,438 | 107,264 | ||||||||||||||
| Provision for income taxes | 64,265 | 50,358 | 61,983 | 46,624 | 32,900 | ||||||||||||||
| Net income | 238,167 | 215,713 | 92,940 | 96,814 | 74,364 | ||||||||||||||
| Preferred stock dividends | 339 | — | — | 24 | 257 | ||||||||||||||
| Net income available to common stockholders | $ | 237,828 | $ | 215,713 | $ | 92,940 | $ | 96,790 | $ | 74,107 | |||||||||
Per common share data(9): | |||||||||||||||||||
| Basic earnings | 2.42 | 2.34 | 1.34 | 1.58 | 1.32 | ||||||||||||||
| Diluted earnings | 2.41 | 2.32 | 1.33 | 1.56 | 1.31 | ||||||||||||||
Core diluted earnings (non-GAAP) (1) | 2.73 | 2.37 | 1.70 | 1.64 | 1.59 | ||||||||||||||
| Book value | 26.30 | 24.33 | 22.65 | 18.40 | 17.27 | ||||||||||||||
Tangible book value (non-GAAP) (2) | 15.89 | 14.18 | 12.34 | 11.98 | 10.98 | ||||||||||||||
| Dividends | 0.64 | 0.60 | 0.50 | 0.48 | 0.46 | ||||||||||||||
| Basic average common shares outstanding | 98,350,992 | 92,268,131 | 69,384,500 | 61,291,296 | 56,167,592 | ||||||||||||||
| Diluted average common shares outstanding | 98,796,628 | 92,830,485 | 69,852,920 | 61,927,092 | 56,419,322 | ||||||||||||||
| Years Ended December 31, | |||||||||||||||||||||||||||||
| (In thousands, except per common share data, ratios & other data) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Balance sheet data at period end: | |||||||||||||||||||||||||||||
| Total assets | $ | 22,359,752 | $ | 21,259,143 | $ | 16,543,337 | $ | 15,055,806 | $ | 8,400,056 | |||||||||||||||||||
| Investment securities | 3,806,629 | 3,329,270 | 2,286,220 | 1,838,642 | 1,571,430 | ||||||||||||||||||||||||
| Loans | 12,900,897 | 14,425,704 | 11,723,266 | 10,780,103 | 5,633,843 | ||||||||||||||||||||||||
| Allowance for credit losses on loans | 238,050 | 68,244 | 56,694 | 42,086 | 37,240 | ||||||||||||||||||||||||
| Goodwill and other intangible assets | 1,186,415 | 1,182,860 | 937,021 | 948,722 | 401,464 | ||||||||||||||||||||||||
| Non-interest bearing deposits | 4,482,091 | 3,741,093 | 2,672,405 | 2,665,249 | 1,491,676 | ||||||||||||||||||||||||
| Deposits | 16,987,026 | 16,108,940 | 12,398,752 | 11,092,875 | 6,735,219 | ||||||||||||||||||||||||
| Other borrowings | 1,342,067 | 1,297,599 | 1,345,450 | 1,380,024 | 273,159 | ||||||||||||||||||||||||
| Subordinated debt and trust preferred | 382,874 | 388,260 | 353,950 | 140,565 | 60,397 | ||||||||||||||||||||||||
| Stockholders’ equity | 2,976,656 | 2,988,924 | 2,246,434 | 2,084,564 | 1,151,111 | ||||||||||||||||||||||||
Tangible stockholders’ equity (non-GAAP) (2) | 1,789,474 | 1,805,297 | 1,309,413 | 1,135,842 | 749,647 | ||||||||||||||||||||||||
| Capital ratios at period end: | |||||||||||||||||||||||||||||
| Common stockholders’ equity to total assets | 13.31 | % | 14.06 | % | 13.58 | % | 13.85 | % | 13.70 | % | |||||||||||||||||||
Common stockholders’ equity to total assets excluding PPP loans (non-GAAP) (8) | 13.87 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
Tangible common equity to tangible assets (non-GAAP) (3) | 8.45 | % | 8.99 | % | 8.39 | % | 8.05 | % | 9.37 | % | |||||||||||||||||||
Tangible common equity to tangible assets excluding PPP loans (non-GAAP) (3) (8) | 8.83 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| Tier 1 leverage ratio | 9.08 | % | 9.59 | % | 8.78 | % | 9.21 | % | 10.95 | % | |||||||||||||||||||
Tier 1 leverage ratio excluding average PPP loans (non-GAAP) (8) | 9.50 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| Common equity Tier 1 risk-based ratio | 13.41 | % | 10.92 | % | 10.22 | % | 9.80 | % | 13.45 | % | |||||||||||||||||||
| Tier 1 risk-based ratio | 13.41 | % | 10.92 | % | 10.22 | % | 9.80 | % | 14.45 | % | |||||||||||||||||||
| Total risk-based capital ratio | 16.78 | % | 13.73 | % | 13.35 | % | 11.35 | % | 15.12 | % | |||||||||||||||||||
| Dividend payout to common stockholders | 29.44 | % | 26.56 | % | 25.86 | % | 37.59 | % | 30.67 | % | |||||||||||||||||||
| Annualized performance ratios: | |||||||||||||||||||||||||||||
| Return on average assets | 1.18 | % | 1.33 | % | 1.37 | % | 0.92 | % | 1.25 | % | |||||||||||||||||||
Core return on average assets (non-GAAP) (1) | 1.22 | % | 1.51 | % | 1.40 | % | 1.18 | % | 1.31 | % | |||||||||||||||||||
| Return on average common equity | 8.72 | % | 9.93 | % | 10.00 | % | 6.68 | % | 8.75 | % | |||||||||||||||||||
Core return on average common equity (non-GAAP) (1) | 9.05 | % | 11.25 | % | 10.21 | % | 8.56 | % | 9.17 | % | |||||||||||||||||||
Return on average tangible equity (non- GAAP) (2) (4) | 15.25 | % | 17.99 | % | 18.44 | % | 11.26 | % | 13.92 | % | |||||||||||||||||||
Core return on average tangible equity (non-GAAP) (1) (2) (4) | 15.79 | % | 20.31 | % | 18.81 | % | 14.28 | % | 14.56 | % | |||||||||||||||||||
Net interest margin (5) | 3.38 | % | 3.85 | % | 3.99 | % | 4.08 | % | 4.19 | % | |||||||||||||||||||
Net interest margin adjusted for PPP loans and additional liquidity (non-GAAP) (5) (8) | 3.63 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
Efficiency ratio (non-GAAP) (6) | 54.66 | % | 50.33 | % | 52.85 | % | 55.26 | % | 56.24 | % | |||||||||||||||||||
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| Years Ended December 31, | |||||||||||||||||||
| (In thousands, except per common share data, ratios & other data) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Balance sheet data at period end: | |||||||||||||||||||
| Total assets | $ | 21,259,143 | $ | 16,543,337 | $ | 15,055,806 | $ | 8,400,056 | $ | 7,559,658 | |||||||||
| Investment securities | 3,494,265 | 2,440,946 | 1,957,575 | 1,619,450 | 1,526,780 | ||||||||||||||
| Total loans | 14,425,260 | 11,723,171 | 10,779,685 | 5,632,890 | 4,919,355 | ||||||||||||||
Allowance for loan losses (excluding loans acquired) (3) | 67,800 | 56,599 | 41,668 | 36,286 | 31,351 | ||||||||||||||
| Goodwill and other intangible assets | 1,182,860 | 937,021 | 948,722 | 401,464 | 380,923 | ||||||||||||||
| Non-interest bearing deposits | 3,741,093 | 2,672,405 | 2,665,249 | 1,491,676 | 1,280,234 | ||||||||||||||
| Deposits | 16,108,940 | 12,398,752 | 11,092,875 | 6,735,219 | 6,086,096 | ||||||||||||||
| Other borrowings | 1,297,599 | 1,345,450 | 1,380,024 | 273,159 | 162,289 | ||||||||||||||
| Subordinated debt and trust preferred | 388,260 | 353,950 | 140,565 | 60,397 | 60,570 | ||||||||||||||
| Stockholders’ equity | 2,988,924 | 2,246,434 | 2,084,564 | 1,151,111 | 1,076,855 | ||||||||||||||
Tangible stockholders’ equity (non-GAAP) (2) | 1,805,297 | 1,309,413 | 1,135,842 | 749,647 | 665,080 | ||||||||||||||
| Capital ratios at period end: | |||||||||||||||||||
| Common stockholders’ equity to total assets | 14.06 | % | 13.58 | % | 13.85 | % | 13.70 | % | 13.84 | % | |||||||||
Tangible common equity to tangible assets (non-GAAP) (4) | 8.99 | % | 8.39 | % | 8.05 | % | 9.37 | % | 9.26 | % | |||||||||
| Tier 1 leverage ratio | 9.59 | % | 8.78 | % | 9.21 | % | 10.95 | % | 11.20 | % | |||||||||
| Common equity Tier 1 risk-based ratio | 10.92 | % | 10.22 | % | 9.80 | % | 13.45 | % | 14.21 | % | |||||||||
| Tier 1 risk-based ratio | 10.92 | % | 10.22 | % | 9.80 | % | 14.45 | % | 16.02 | % | |||||||||
| Total risk-based capital ratio | 13.73 | % | 13.35 | % | 11.35 | % | 15.12 | % | 16.72 | % | |||||||||
| Dividend payout to common stockholders | 26.56 | % | 25.86 | % | 37.59 | % | 30.67 | % | 34.98 | % | |||||||||
| Annualized performance ratios: | |||||||||||||||||||
| Return on average assets | 1.33 | % | 1.37 | % | 0.92 | % | 1.25 | % | 1.03 | % | |||||||||
Core return on average assets (non-GAAP) (1) | 1.51 | % | 1.40 | % | 1.18 | % | 1.31 | % | 1.25 | % | |||||||||
| Return on average common equity | 9.93 | % | 10.00 | % | 6.68 | % | 8.75 | % | 7.90 | % | |||||||||
Core return on average common equity (non-GAAP) (1) | 11.25 | % | 10.21 | % | 8.56 | % | 9.17 | % | 9.55 | % | |||||||||
Return on average tangible equity (non-GAAP) (2) (5) | 17.99 | % | 18.44 | % | 11.26 | % | 13.92 | % | 12.53 | % | |||||||||
Core return on average tangible equity (non-GAAP) (1) (2) (5) | 20.31 | % | 18.81 | % | 14.28 | % | 14.56 | % | 15.05 | % | |||||||||
Net interest margin (6) | 3.83 | % | 3.97 | % | 4.07 | % | 4.19 | % | 4.55 | % | |||||||||
Efficiency ratio (non-GAAP) (7) | 50.33 | % | 52.85 | % | 55.27 | % | 56.32 | % | 59.01 | % | |||||||||
Balance sheet ratios: (8) | |||||||||||||||||||
| Nonperforming assets as a percentage of period-end assets | 0.43 | % | 0.37 | % | 0.52 | % | 0.79 | % | 0.85 | % | |||||||||
| Nonperforming loans as a percentage of period-end loans | 0.74 | % | 0.41 | % | 0.81 | % | 0.91 | % | 0.58 | % | |||||||||
| Nonperforming assets as a percentage of period-end loans and OREO | 0.96 | % | 0.72 | % | 1.38 | % | 1.53 | % | 1.94 | % | |||||||||
| Allowance to nonperforming loans | 95.37 | % | 164.41 | % | 90.26 | % | 92.09 | % | 165.83 | % | |||||||||
| Allowance for loan losses as a percentage of period-end loans | 0.70 | % | 0.67 | % | 0.73 | % | 0.84 | % | 0.97 | % | |||||||||
| Net charge-offs (recoveries) as a percentage of average loans | 0.31 | % | 0.29 | % | 0.35 | % | 0.40 | % | 0.24 | % | |||||||||
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except per common share data, ratios & other data) | 2019 | 2018 | 2017 | 2016 | 2015 | (In thousands, except per common share data, ratios & other data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||
| Balance sheet ratios: | Balance sheet ratios: | |||||||||||||||||||||||||||||||||||||||||||||||
| Nonperforming assets as a percentage of period-end assets | Nonperforming assets as a percentage of period-end assets | 0.64 | % | 0.54 | % | 0.50 | % | 0.70 | % | 1.35 | % | |||||||||||||||||||||||||||||||||||||
| Nonperforming loans as a percentage of period-end loans | Nonperforming loans as a percentage of period-end loans | 0.96 | % | 0.65 | % | 0.48 | % | 0.67 | % | 1.53 | % | |||||||||||||||||||||||||||||||||||||
| Nonperforming assets as a percentage of period-end loans and OREO | Nonperforming assets as a percentage of period-end loans and OREO | 1.11 | % | 0.80 | % | 0.70 | % | 0.97 | % | 2.01 | % | |||||||||||||||||||||||||||||||||||||
| Allowance to nonperforming loans | Allowance to nonperforming loans | 192.82 | % | 72.46 | % | 101.12 | % | 57.96 | % | 43.18 | % | |||||||||||||||||||||||||||||||||||||
| Allowance for credit losses as a percentage of period-end loans | Allowance for credit losses as a percentage of period-end loans | 1.85 | % | 0.47 | % | 0.48 | % | 0.39 | % | 0.66 | % | |||||||||||||||||||||||||||||||||||||
| Net charge-offs (recoveries) as a percentage of average loans | Net charge-offs (recoveries) as a percentage of average loans | 0.45 | % | 0.24 | % | 0.21 | % | 0.31 | % | 0.30 | % | |||||||||||||||||||||||||||||||||||||
| Other data: | Other data: | |||||||||||||||||||||||||||||||||||||||||||||||
| Number of financial centers | 251 | 191 | 200 | 150 | 149 | Number of financial centers | 204 | 251 | 191 | 200 | 150 | |||||||||||||||||||||||||||||||||||||
| Number of full time equivalent employees | 3,270 | 2,654 | 2,640 | 1,875 | 1,946 | |||||||||||||||||||||||||||||||||||||||||||
| Number of full time equivalent associates | Number of full time equivalent associates | 2,923 | 3,270 | 2,654 | 2,640 | 1,875 | ||||||||||||||||||||||||||||||||||||||||||
_________________________
(1)Core diluted earnings per share is a non-GAAP financial measure. Core diluted earnings per share excludes from net income certain non-core items and then is divided by average diluted common shares outstanding. See “GAAP Reconciliation of Non-GAAP Financial Measures” below for a GAAP reconciliation of this non-GAAP financial measure.
(2)Because of Simmons’ significant level of intangible assets, total goodwill and core deposit premiums, management of Simmons believes a useful calculation for investors in their analysis of Simmons is tangible book value per share, which is a non-GAAP financial measure. Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total common stockholders’ equity, and dividing the resulting number by the shares of common stock outstanding at period end. See “GAAP Reconciliation of Non-GAAP Financial Measures” below for a GAAP reconciliation of this non-GAAP financial measure.
(3)The allowance for loan losses related to loans acquired (not shown in the table above) was $444,000, $95,000, and $418,000 for the years ended December 31, 2019, 2018, and 2017, respectively, and $954,000 for the years ended December 31, 2016 and 2015. The total allowance for loan losses at December 31, 2019, 2018, 2017, 2016 and 2015 was $68,244,000, $56,694,000, $42,086,000, $37,240,000, and $32,305,000, respectively.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Critical Accounting Policies & Estimates | ||
Overview
We follow accounting and reporting policies that conform, in all material respects, to generally accepted accounting principlesUS GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principlesUS GAAP 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 loancredit losses, (b) acquisition accounting and valuation of loans, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of stock-based compensation plans and (e) income taxes.
Allowance for LoanCredit Losses on Loans Not Acquired
The allowance for loancredit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probablelifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected credit losses and risks inherent in the loan portfolio. LoanOur allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses are charged againstto amortized cost balances over the remaining contractual life of the portfolio, adjusted for prepayments, in accordance with Accounting Standard Codification (“ASC”) Topic 326-20, Financial Instruments - Credit Losses. Accordingly, the methodology is based on our reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments. For further information see the section Allowance for Credit Losses below.
Our evaluation of the allowance when management believesfor credit losses is inherently subjective as it requires material estimates. The actual amounts of credit losses realized in the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are creditednear term could differ from the amounts estimated in arriving at the allowance for credit losses reported in the financial statements. On January 1, 2020, the Company adopted the new Current Expected Credit Losses, or “CECL”, methodology. See Note 20, New Accounting Standards, in the accompanying Notes to Consolidated Financial Statements for additional information.
Prior to the allowance.
Acquisition Accounting, Loans Acquired
We account for our acquisitions under Accounting Standards Codification (“ASC”)ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. Our historical acquisitions all occurred under previous US GAAP prior to our adoption of CECL. No allowance for loan losses related to the acquired loans iswas 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. The fair value estimates associated with the loans includeincluded estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
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 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. A loan acquired is 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.
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 – TTestingesting Goodwill for Impairment and ASU 2017-04 - Intangibles – Goodwill and Other. 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. Intangible assets with finite lives are amortized over the estimated life of the asset, and are reviewed for impairment whenever events or changes in circumstances indicated that the carrying value may not be recoverable. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses.
Stock-Based Compensation 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, restricted stock awards, restricted stock units, and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or bonus shares granted to directors, officers and other key employees.
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 15, Employee Benefit Plans, in the accompanying 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.
The adoption of ASU 2016-09 – Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting decreased the effective tax rate during 2017 and 2018 as the standard impacted how the income tax effects associated with stock-based compensation are recognized.
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 20192020 and 20182019 and results of operations for each of the years then ended. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20182019 Form 10-K filed with the SEC on February 27, 20192020 for a discussion and analysis of the more significant factors that affected periods prior to 2018.2019. Certain reclassifications have been made to make prior periods comparable. This discussion and analysis should be read in conjunction with our financial statements, notes thereto and other financial information appearing elsewhere in this report.report, as well as the cautionary note regarding forward-looking statements and the risks discussed in Item 1A of Part I of this Form 10-K.
Our net income available to common shareholders for the year ended December 31, 20192020 was $237.8$254.9 million, andor $2.31 diluted earnings per share, werecompared to $237.8 million, or $2.41 increases of $22.1 million and $0.09, respectively, compared todiluted earnings per share, for the same period in 2018.2019. Included in both 20192020 and 20182019 results were non-core items related to our acquisitions, early retirement program expenses and branch right sizing initiatives, and with respect to our 20192020 results only, early retirement program expenses.gains associated with the sale of branches. Excluding all non-core items, core earnings for the year ended December 31, 20192020 were $264.3 million, or $2.40 core diluted earnings per share, compared to $269.6 million, or $2.73 core diluted earnings per share, compared to $220.2 million, or $2.37 core diluted earnings per share, in 2018.2019. See “GAAPGAAP Reconciliation of Non-GAAP Financial Measures”Measures for additional discussion and reconciliation of non-GAAP measures.
We completed the acquisition of The Landrum Company (or “Landrum”), including its wholly-owned bank subsidiary, Landmark Bank, in October 2019. The systems conversion of Landmark Bank was completed during February 2020. See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements for additional information related to this acquisition.
On February 28, 2020, we completed the sale of certain assets and assumptions of certain liabilities (“Texas Branch Sale”) associated with five Simmons Bank locations in Austin, San Antonio and Tilden, Texas to Spirit of Texas Bank, SSB, a wholly-owned subsidiary of Spirit of Texas Bancshares, Inc.. Additionally, on May 18, 2020 we completed the sale of certain assets and assumptions of certain liabilities (“Colorado Branch Sale”) associated with four Simmons Bank locations in Denver, Englewood, Highlands Ranch and Lone Tree, Colorado to First Western Trust Bank, a wholly-owned subsidiary of First Western Financial, Inc. We recognized a combined gain on sale of $8.1 million on the Texas Branch Sale and Colorado Branch Sale.
Early in 2020, we offered qualifying associates an early retirement option resulting in $2.9 million of non-core expense during 2020. We expect ongoing net annualized savings of approximately $2.9 million from this program.
We continuously evaluate our branch network as part of our analysis of the profitability of our operations and the efficiency with which we deliver banking services to our markets, including, among other things, changes in customer traffic and preferences. As a result of this ongoing evaluation, we closed 11 branch locations during June 2020, with estimated net annual cost savings of approximately $2.4 million related to these locations. We closed an additional 23 branch locations on October 9, 2020, with an expected net annual cost savings of approximately $6.7 million. Related to these branch closures, we transferred $15.4 million in branch facilities to premises held for sale.
During 2020, our digital banking users grew approximately 30% while the number of digital transactions increased by 38%, indicating not only a continued trend of increasing digital customers but also that customers are executing more of their banking transactions through digital channels. In additionMarch 2020, for the first time, we had more weekly transactions using digital channels than at the branches. Our mobile deposit usage has seen an increase of 170% since the end of 2019. Additionally, we developed a new mobile deposit process to producing remarkable resultsfully automate user enrollment and mitigate our risk. During the last quarter of 2020, 84% of all accounts that had a banking transaction were enrolled in digital banking.
During May 2020, we completed the conversion of all consumer deposit customers to our new online platform. All consumer deposit customers are now on the same online and mobile platforms, including acquired institutions. In September 2020, we completed the development of new credit card functionality which allows our mobile and online banking platform for consumer deposit customers to also display credit card balances, line of credit utilization, recent credit card transactions and minimum credit card payment details, all with real-time information.
On November 30, 2020, we entered into a Branch Purchase and Assumption Agreement with Citizens Equity First Credit Union to sell four Simmons Bank locations in the Metro East area of Southern Illinois, near St. Louis. We expect to close the sale during the first quarter of 2021. See Note 4, Other Assets and Other Liabilities Held for Sale, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report for additional information related to the sale of these locations.
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Also during 2020, we completed our regulatory exam cycle, including our first CFPB exam, and contributed $3.0 million to the Simmons First Foundation to support environmental conservation projects throughout our service area.
During 2019, we completed two acquisitions - Reliance in St. Louis, Missouri and Landrum in Columbia, Missouri - which added a total of $4.9 billion in assets. We had several notable events during 2019 that affected our operating results. First, we recorded $15 million in provision expense primarily related to the charge-off of a participation interest in a shared national credit to White Star Petroleum, LLC (“White Star”) (further discussed below in “ProvisionProvision for Loan Losses”Credit Losses). Second, we sold Visa Inc. class B common stock resulting in a gain of $42.9 million, and in connection with that sale, we contributed $4 million to the Simmons First Foundation so it may continue its work to provide community development grants throughout our footprint. Third, we sold $114 million of primarily commercial real estate (“CRE”) loans resulting in a net loss of $5.1 million.
In April 2019, we completed the acquisition of Reliance.Reliance Bancshares, Inc. (“Reliance”). Contemporaneously with the Reliance acquisition, Reliance’s subsidiary bank, Reliance Bank, was merged with and into Simmons Bank, with Simmons Bank as the surviving entity. We are excited about the Reliance transaction and the opportunities we nowcontinue to have in the St. Louis market resulting from our increased presence. See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report, for additional information related to the Landrum and Reliance acquisitions.
Stockholders’ equity as of December 31, 20192020 was $3.0 billion, book value per share was $26.30$27.53 and tangible book value per share was $15.89.$16.56. Our ratio of common stockholders’ equity to total assets was 14.1%13.3% and the ratio of tangible common stockholders’ equity to tangible assets was 9.0%8.5% at December 31, 2019.2020. See “GAAPGAAP Reconciliation of Non-GAAP Financial Measures”Measures for additional discussion and reconciliation of non-GAAP measures. The Company’s Tier I leverage ratio of 9.6%9.1%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” minimum requirements. See Table 1920 – Risk-Based Capital for regulatory capital ratios.
Total loans, including loans acquired,interest bearing balances due from banks and federal funds sold were $14.4$3.3 billion at December 31, 2019,2020, an increase of $2.7$2.5 billion from the same period in 2019 due to the additional liquidity that has accumulated as a result of the ongoing effects of the COVID-19 pandemic, including economic stimulus legislation, reduced credit card balances, tepid loan demand and fewer overdraft activities.
Total loans were $12.9 billion at December 31, 2020, a decrease of $1.5 billion, or 23.0%10.6%, from the same period in 2018, primarily due to the Landrum and Reliance acquisitions completed during 2019. The increase was partially offset by the reclassification of $260During 2020, we provided $975.6 million in loan balances associated withPPP loans to our customers. See the branches heldCOVID-19 Impact section below for sale in south Texas.additional information.
At December 31, 2019,2020, the allowance for loancredit losses for legacyon loans was $67.8$238.1 million. TheWe adopted the new credit loss methodology, CECL, on January 1, 2020. Upon adoption, we recorded an additional allowance for loancredit losses of approximately $151.4 million, an adjustment to the reserve for loans acquired was $444,000unfunded commitments of $24.0 million, and a related $128.1 million adjustment to retained earning net of taxes.
In our discussion and analysis of our financial condition and results of operation in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide certain financial information determined by methods other than in accordance with US GAAP. We believe the presentation of non-GAAP financial measures provides a meaningful basis for period-to-period and company-to-company comparisons, which we believe will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. See the GAAP Reconciliation of Non-GAAP Measures section below for additional discussion and reconciliations of non-GAAP measures.
Simmons First National Corporation is an Arkansas-based financial holding company that, as of December 31, 2020, has approximately $22.4 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.
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COVID-19 Impact
The coronavirus (“COVID-19”) pandemic has placed significant health, economic and other major pressure on the communities we serve, the United States and the acquired loan discount credit markentire world. In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was $87.3 million. The allowance for loan lossesdesigned to provide comprehensive relief to individuals and discount mark provides a totalbusinesses following the unprecedented impact of $155.5 million of coverage. The ratio of discount mark and related allowance to loans acquired was 1.80%.
•Addressing the safety of the Company’s branch network, following local, state, and federal guidelines;
•Holding regular executive and pandemic task force meetings to act unilaterally and in ouraddress issues that change rapidly;
•Implementing business continuity plans to help ensure that customers have adequate access to timely information. We have learned some valuable lessons from this experience. We have made changesbanking services;
•Providing extensions and deferrals to our credit underwriting and approval processes that are consistent with our conservative credit culture. We will work to exit all purchased syndicated energy credits. We expect to exit at least $120 million of these creditsloan customers affected by the second quarter of 2020.
•Participating in both appropriations of the CARES Act PPP that provides 100% federally guaranteed loans for small businesses to $16.5cover up to 24 weeks of payroll costs and assist with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions during this crisis.
We have experienced meaningful shifts in consumer habits which we believe have impacted, and will continue to impact, our delivery of products and services as well as the retail delivery of everyday amenities. We believe that our investment in digital channels will continue to position our company for these changes.
During the first quarter of 2020, we sold approximately $1.1 billion atin securities to increase liquidity in response to potential customer withdrawals of deposits as well as for anticipated funding of PPP loans. As of December 31, 2018,2020, we have approximately $3.5 billion in cash and cash equivalents and are well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength.
During 2020, we originated 8,208 PPP loans with an increaseaverage balance of $4.7 billion, primarily$119,000 per loan. Approximately 94% of our PPP loans had a balance of less than $350,000 at the end of the year. The following table categorizes our PPP loans by outstanding balance as of December 31, 2020:
| PPP Loans | Number of | % of | Original | Balance at | % of | ||||||||||||||||||||||||
| (Dollars in thousands) | Loans | Loans | Balance | December 31 | Balance | ||||||||||||||||||||||||
| Less than $50,000 | 5,068 | 64 | % | $ | 94,502 | $ | 90,759 | 10 | % | ||||||||||||||||||||
| $50,000 to $350,000 | 2,329 | 30 | % | 305,191 | 285,206 | 32 | % | ||||||||||||||||||||||
| More than $350,000 to less than $2 million | 431 | 5 | % | 357,947 | 315,379 | 35 | % | ||||||||||||||||||||||
| $2 million to $10 million | 61 | 1 | % | 217,930 | 213,329 | 24 | % | ||||||||||||||||||||||
| Total | 7,889 | 100 | % | $ | 975,570 | $ | 904,673 | 100 | % | ||||||||||||||||||||
PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. As a result, excluding PPP loans from total assets, common equity to total assets was 13.9% and tangible common equity to tangible assets was 8.8% as of December 31, 2020.
We are participating in the second round of PPP that passed legislation at the end of December 2020 and opened for funding in mid-January 2021. The new funding is available to both first-time applicants and returning borrowers who meet certain criteria.
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We are dedicated to supporting our customers and communities throughout this period of uncertainty. As a show of this support, since March 2020, we have:
•Donated masks, gloves and hand sanitizers to healthcare facilities, police and a community group delivering meals.
•Sponsored a live streaming concert from Simmons Bank Arena to benefit the Feeding America food banks and the Hunger Relief Alliance, raising over $30,000.
•Donated over $100,000 to various community support groups throughout our footprint to be used for COVID-19 response.
•Delivered food and care packages to support police, firefighters, emergency responders and healthcare workers.
We believe our associates have done a commendable job of adapting to the changes that have occurred over the past year. We continue to operate in an uncertain environment, and we expect to continue to adjust as necessary. We have consolidated various operations to provide capacity for continued service to our customers and communities.
We continue to closely monitor this pandemic and expect to make future changes to respond as this situation continues to evolve. Further economic downturns accompanying this pandemic, a delayed economic recovery from this pandemic, or a delayed recovery from the pandemic due to difficulties with vaccine availability or distribution or new variants of the Landrumnovel coronavirus, could result in increased deterioration in credit quality, past due loans, loans charge offs and Reliance acquisitions.collateral value declines, which could cause our results of operations and financial condition to be negatively impacted.
| Net Interest Income | ||
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 26.135% for periods beginning January 1, 2018 or 39.225% for periods prior to 2018..
The Federal Reserve Bank (“FRB”)FRB sets various benchmark interest rates which influence the general market rates of interest, including the deposit and loan rates offered by financial institutions. Between December 2015 and December 2018, the FRB had been gradually raising benchmark interest rates. The FRB target for the federal funds rate, which is the cost to banks of immediately available overnight funds, increased from 0% - 0.25% to 0.25% - 0.50% in December 2015 and gradually increased to 2.25% - 2.50% over a three year period. The federal funds rate was flat until the FRB began to lower the rate in August 2019 and ultimately reduced it to 1.50% - 1.75% in October 2019. During March 2020, the Federal Open Market Committee (“FOMC”) of the FRB substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic. The federal funds rate was cut to a range of 0.00% - 0.25% and rates have continued to remain low through 2020.
Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, also increased from 3.25% to 5.50% during the years 2015 through 2018. Similarly to the reduction in the federal funds rate, theThe prime interest rate remained flat until it began to decrease in July 2019 and was eventually reduced to 4.75% in October 2019. Similarly to the reduction in the federal funds rate, the prime rate was cut to 3.25% in mid-March of 2020 in response to the COVID-19 pandemic.
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. In the last several years, on average, approximately 40%41% of our loan portfolio and approximately 80%74% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 44%41% of our loans and 66%85% of our time deposits will reprice in the next year.
For the year ended December 31, 2019,2020, net interest income on a fully taxable equivalent basis was $612.6$650.7 million, an increase of $54.7$41.7 million, or 9.8%6.8%, over the same period in 2018.2019. The increase in net interest income was primarily the result of a $108.0$61.4 million increasedecrease in interest incomeexpense partially offset by a $53.2 million increasereduction in interest expense.income of $19.7 million.
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The increasereduction in interest income primarily resulted from an incremental $95.0a decrease of $22.7 million ofin interest income on loans consisting of legacy loans and loans acquired, andpartially offset by an increase of $11.5$4.4 million ofin interest income on investment securities. The increase in average loan volume during 20192020 generated $86.8$68.7 million of additional interest income, primarily due to thefrom our Landrum and Reliance acquisitions completed during the fourth and second quarters, respectively. Furthermore, an increase2019, while a 67 basis point decline in yield of 7 basis points led to an incremental $8.2resulted in a $91.4 million decrease in interest income during the year ended December 31, 2020. The loan yield for 2020 was 4.83% compared to 5.50% for 2019. The PPP loan yield was approximately 2.49% (including accretion of net fees), which decreased the loan yield by 11 basis points. Excluding the PPP loans, loan yield for 2020 was 4.94%.
Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our loans acquired, as discussed in Note 6, Loans Acquired, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.acquired. Each quarter, we estimate the cash flows expected to be collected from the loans acquired, and adjustments may or may not be required. The cash flows estimate has increasedmay increase or decrease based on payment histories and reduced loss expectations of the loans. This resulted in increasedThe resulting adjustment to interest income that is spread on a level-yield basis over the remaining expected lives of the loans. For the years ended December 31, 2020, 2019 2018 and 20172018 interest income included $41.5 million, $41.2 million $35.3 million and $27.8$35.3 million, respectively, for the yield accretion recognized on loans acquired.
The $53.2$61.4 million increasedecrease in interest expense is primarily relatedmostly due to the growthdecline in our deposit accounts from the 2019 mergersaccount rates and higher cost of deposits that continued during 2018 through mid-2019 when the benchmark interest rates began to decrease.our FHLB borrowing rates. Interest expense increased $18.2 million due to deposit growth and $33.6decreased $73.0 million due to the increasedecrease in yield of 3566 basis points.points on interest-bearing deposit accounts and $6.1 million due to the decrease in yield of 47 basis points on FHLB borrowings. These decreases were partially offset by an increase of $13.8 million related to deposit growth primarily due to the Landrum and Reliance acquisitions completed in 2019.
Our net interest margin on a fully tax equivalent basis was 3.83%3.38% for the year ended December 31, 2019,2020, down 1447 basis points from 2018.2019. Normalized for all accretion, our core net interest margin (non-GAAP) at December 31, 2020 and 2019 was 3.16% and 2018 was 3.58% and 3.72%3.59%, respectively. Since the first quarter 2018, both loan yield and core loan yield have increased 5 basis points while cost of interest bearing deposits has risen 48 basis points and the cost of borrowed funds has increased 60 basis points. The decreasedecreases in both the net interest margin and the core net interest margin were primarily driven by the lower interest rate environment, additional liquidity created in response to the COVID-19 pandemic, and the lower yielding PPP loans originated during the second and third quarters of 2020. The impact of these items on net interest margin for the year ended December 31, 2019 is a direct result of the previous rising rate environment. We expect continued pressure on2020 was 25 basis points, bringing the net interest margin because of the late 2019 FRB interest rate reductionsadjusted for PPP loans and additional liquidity (non-GAAP) to continue into the first part of 2020 due to the ability to reprice deposits being outpaced by the immediate downward repricing on the portion of our loans that are variable rate.3.63%. See “GAAPGAAP Reconciliation of Non-GAAP Financial Measures”Measures for additional discussion and reconciliation of non-GAAP measures.
During March 2020, the FOMC substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic and rates have continued to remain low throughout 2020. As such, our variable rate loan portfolio has repriced to a lower yield and we have worked to lower the cost of deposits. In addition, our decreased net interest margin was being driven by the decrease in our non-PPP loan portfolio during 2020.
Over the course of 2021, we expect a slight improvement in our net interest margin. Our non-PPP loan portfolio declined during 2020 as a result of COVID-19 but our loan pipeline is beginning to rebuild and we expect modest organic loan growth during 2021. Additionally, PPP loans are expected to be forgiven or repaid and we also plan on re-investing these proceeds in our securities portfolio during 2021.
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2020 versus 2019 and 2019 versus 2018 and 2018 versus 2017.2018.
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Table 1: Analysis of Net Interest Margin
(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135% for years 2019 and 2018 and 39.225% for 2017))
| Years Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Interest income | $ | 759,718 | $ | 783,123 | $ | 676,829 | |||||||||||
| FTE adjustment | 11,001 | 7,322 | 5,297 | ||||||||||||||
| Interest income - FTE | 770,719 | 790,445 | 682,126 | ||||||||||||||
| Interest expense | 119,984 | 181,370 | 128,135 | ||||||||||||||
| Net interest income - FTE | $ | 650,735 | $ | 609,075 | $ | 553,991 | |||||||||||
| Yield on earning assets - FTE | 4.00 | % | 5.00 | % | 4.91 | % | |||||||||||
| Cost of interest bearing liabilities | 0.84 | % | 1.49 | % | 1.19 | % | |||||||||||
| Net interest spread - FTE | 3.16 | % | 3.51 | % | 3.72 | % | |||||||||||
| Net interest margin - FTE | 3.38 | % | 3.85 | % | 3.99 | % | |||||||||||
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2019 | 2018 | 2017 | |||||||||
| Interest income | $ | 786,645 | $ | 680,687 | $ | 395,004 | ||||||
| FTE adjustment | 7,322 | 5,297 | 7,723 | |||||||||
| Interest income - FTE | 793,967 | 685,984 | 402,727 | |||||||||
| Interest expense | 181,370 | 128,135 | 40,074 | |||||||||
| Net interest income - FTE | $ | 612,597 | $ | 557,849 | $ | 362,653 | ||||||
| Yield on earning assets - FTE | 4.97 | % | 4.89 | % | 4.52 | % | ||||||
| Cost of interest bearing liabilities | 1.49 | % | 1.19 | % | 0.59 | % | ||||||
| Net interest spread - FTE | 3.48 | % | 3.70 | % | 3.93 | % | ||||||
| Net interest margin - FTE | 3.83 | % | 3.97 | % | 4.07 | % | ||||||
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
| (In thousands) | 2020 vs. 2019 | 2019 vs. 2018 | |||||||||
| Increase due to change in earning assets | $ | 96,617 | $ | 97,636 | |||||||
| (Decrease) increase due to change in earning asset yields | (116,343) | 10,683 | |||||||||
| Decrease due to change in interest bearing liabilities | (19,031) | (17,139) | |||||||||
| Increase (decrease) due to change in interest rates paid on interest bearing liabilities | 80,417 | (36,096) | |||||||||
| Increase in net interest income | $ | 41,660 | $ | 55,084 | |||||||
| (In thousands) | 2019 vs. 2018 | 2018 vs. 2017 | ||||||
| Increase due to change in earning assets | $ | 97,849 | $ | 255,326 | ||||
| Increase due to change in earning asset yields | 10,134 | 27,931 | ||||||
| Decrease due to change in interest bearing liabilities | (17,139 | ) | (45,351 | ) | ||||
| Decrease due to change in interest rates paid on interest bearing liabilities | (36,096 | ) | (42,710 | ) | ||||
| Increase in net interest income | $ | 54,748 | $ | 195,196 | ||||
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 each of the years in the three-year period ended December 31, 2019.2020. 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.
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Table 3: Average Balance Sheets and Net Interest Income Analysis
(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135% for years 2019 and 2018 and 39.225% for 2017))
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Balance | Expense | Rate (%) | Balance | Expense | Rate (%) | Balance | Expense | Rate (%) | ||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing balances due from banks and federal funds sold | $ | 1,970,852 | $ | 4,383 | 0.22 | $ | 451,946 | $ | 7,486 | 1.66 | $ | 409,092 | $ | 5,996 | 1.47 | ||||||||||||||||||||||||||||||||||||||
| Investment securities - taxable | 1,813,640 | 35,039 | 1.93 | 1,717,566 | 43,618 | 2.54 | 1,579,716 | 39,225 | 2.48 | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities - non-taxable | 1,113,851 | 39,666 | 3.56 | 681,231 | 26,675 | 3.92 | 516,769 | 19,231 | 3.72 | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans held for sale | 113,854 | 3,031 | 2.66 | 35,815 | 1,326 | 3.70 | 29,550 | 1,336 | 4.52 | ||||||||||||||||||||||||||||||||||||||||||||
| Loans | 14,260,689 | 688,600 | 4.83 | 12,938,013 | 711,340 | 5.50 | 11,356,863 | 616,338 | 5.43 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest earning assets | 19,272,886 | 770,719 | 4.00 | 15,824,571 | 790,445 | 5.00 | 13,891,990 | 682,126 | 4.91 | ||||||||||||||||||||||||||||||||||||||||||||
| Non-earning assets | 2,317,859 | 2,047,177 | 1,879,372 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 21,590,745 | $ | 17,871,748 | $ | 15,771,362 | |||||||||||||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing transaction and savings deposits | $ | 9,128,936 | $ | 38,462 | 0.42 | $ | 7,417,104 | $ | 80,314 | 1.08 | $ | 6,691,030 | $ | 56,903 | 0.85 | ||||||||||||||||||||||||||||||||||||||
| Time deposits | 3,006,768 | 41,398 | 1.38 | 3,094,094 | 58,697 | 1.90 | 2,344,303 | 30,307 | 1.29 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing deposits | 12,135,704 | 79,860 | 0.66 | 10,511,198 | 139,011 | 1.32 | 9,035,333 | 87,210 | 0.97 | ||||||||||||||||||||||||||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 362,629 | 1,715 | 0.47 | 128,547 | 1,010 | 0.79 | 110,986 | 423 | 0.38 | ||||||||||||||||||||||||||||||||||||||||||||
| Other borrowings | 1,353,738 | 19,652 | 1.45 | 1,199,274 | 23,008 | 1.92 | 1,309,430 | 23,654 | 1.81 | ||||||||||||||||||||||||||||||||||||||||||||
| Subordinated debt and debentures | 385,294 | 18,757 | 4.87 | 359,804 | 18,341 | 5.10 | 341,254 | 16,848 | 4.94 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 14,237,365 | 119,984 | 0.84 | 12,198,823 | 181,370 | 1.49 | 10,797,003 | 128,135 | 1.19 | ||||||||||||||||||||||||||||||||||||||||||||
| Non-interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest bearing deposits | 4,225,618 | 3,021,917 | 2,697,235 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 205,956 | 251,631 | 120,027 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 18,668,939 | 15,472,371 | 13,614,265 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 2,921,806 | 2,399,377 | 2,157,097 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 21,590,745 | $ | 17,871,748 | $ | 15,771,362 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 3.16 | 3.51 | 3.72 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin | $ | 650,735 | 3.38 | $ | 609,075 | 3.85 | $ | 553,991 | 3.99 | ||||||||||||||||||||||||||||||||||||||||||||
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| Years Ended December 31, | ||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||
| (In thousands) | Balance | Expense | Rate (%) | Balance | Expense | Rate (%) | Balance | Expense | Rate (%) | |||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||||
| Interest bearing balances due from banks and federal funds sold | $ | 451,946 | $ | 7,486 | 1.66 | $ | 409,092 | $ | 5,996 | 1.47 | $ | 225,466 | $ | 1,933 | 0.86 | |||||||||||||||
| Investment securities - taxable | 1,871,770 | 47,140 | 2.52 | 1,725,313 | 43,083 | 2.50 | 1,307,176 | 28,517 | 2.18 | |||||||||||||||||||||
| Investment securities - non-taxable | 681,231 | 26,675 | 3.92 | 516,769 | 19,231 | 3.72 | 444,378 | 19,045 | 4.29 | |||||||||||||||||||||
| Mortgage loans held for sale | 35,815 | 1,326 | 3.70 | 29,550 | 1,336 | 4.52 | 13,064 | 605 | 4.63 | |||||||||||||||||||||
| Assets held in trading accounts | — | — | — | — | — | — | 41 | — | — | |||||||||||||||||||||
| Loans | 12,937,147 | 711,340 | 5.50 | 11,355,890 | 616,338 | 5.43 | 6,918,293 | 352,627 | 5.10 | |||||||||||||||||||||
| Total interest earning assets | 15,977,909 | 793,967 | 4.97 | 14,036,614 | 685,984 | 4.89 | 8,908,418 | 402,727 | 4.52 | |||||||||||||||||||||
| Non-earning assets | 1,893,839 | 1,734,748 | 1,166,533 | |||||||||||||||||||||||||||
| Total assets | $ | 17,871,748 | $ | 15,771,362 | $ | 10,074,951 | ||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||||||||
| Interest bearing transaction and savings deposits | $ | 7,417,104 | $ | 80,314 | 1.08 | $ | 6,691,030 | $ | 56,903 | 0.85 | $ | 4,594,733 | $ | 18,112 | 0.39 | |||||||||||||||
| Time deposits | 3,094,094 | 58,697 | 1.90 | 2,344,303 | 30,307 | 1.29 | 1,430,701 | 9,644 | 0.67 | |||||||||||||||||||||
| Total interest bearing deposits | 10,511,198 | 139,011 | 1.32 | 9,035,333 | 87,210 | 0.97 | 6,025,434 | 27,756 | 0.46 | |||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 128,547 | 1,010 | 0.79 | 110,986 | 423 | 0.38 | 117,147 | 347 | 0.30 | |||||||||||||||||||||
| Other borrowings | 1,199,274 | 23,008 | 1.92 | 1,309,430 | 23,654 | 1.81 | 567,959 | 8,621 | 1.52 | |||||||||||||||||||||
| Subordinated debt and debentures | 359,804 | 18,341 | 5.10 | 341,254 | 16,848 | 4.94 | 79,880 | 3,350 | 4.19 | |||||||||||||||||||||
| Total interest bearing liabilities | 12,198,823 | 181,370 | 1.49 | 10,797,003 | 128,135 | 1.19 | 6,790,420 | 40,074 | 0.59 | |||||||||||||||||||||
| Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||
| Non-interest bearing deposits | 3,021,917 | 2,697,235 | 1,788,385 | |||||||||||||||||||||||||||
| Other liabilities | 251,631 | 120,027 | 105,331 | |||||||||||||||||||||||||||
| Total liabilities | 15,472,371 | 13,614,265 | 8,684,136 | |||||||||||||||||||||||||||
| Stockholders’ equity | 2,399,377 | 2,157,097 | 1,390,815 | |||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 17,871,748 | $ | 15,771,362 | $ | 10,074,951 | ||||||||||||||||||||||||
| Net interest spread | 3.48 | 3.70 | 3.93 | |||||||||||||||||||||||||||
| Net interest margin | $ | 612,597 | 3.83 | $ | 557,849 | 3.97 | $ | 362,653 | 4.07 | |||||||||||||||||||||
Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the years 2020 versus 2019 and 2019 versus 2018 and 2018 versus 2017.2018. 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
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 vs. 2019 | 2019 vs. 2018 | ||||||||||||||||||||||||||||||||||
| Yield/ | Yield/ | ||||||||||||||||||||||||||||||||||
| (In thousands, on a fully taxable equivalent basis) | Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||||||||||||
| Increase (decrease) in: | |||||||||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||||||
| Interest bearing balances due from banks and federal funds sold | $ | 7,840 | $ | (10,943) | $ | (3,103) | $ | 665 | $ | 825 | $ | 1,490 | |||||||||||||||||||||||
| Investment securities - taxable | 2,329 | (10,908) | (8,579) | 3,485 | 908 | 4,393 | |||||||||||||||||||||||||||||
| Investment securities - non-taxable | 15,597 | (2,606) | 12,991 | 6,395 | 1,049 | 7,444 | |||||||||||||||||||||||||||||
| Mortgage loans held for sale | 2,170 | (465) | 1,705 | 256 | (266) | (10) | |||||||||||||||||||||||||||||
| Loans | 68,681 | (91,421) | (22,740) | 86,835 | 8,167 | 95,002 | |||||||||||||||||||||||||||||
| Total | 96,617 | (116,343) | (19,726) | 97,636 | 10,683 | 108,319 | |||||||||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||||||
| Interest bearing transaction and savings accounts | 15,431 | (57,283) | (41,852) | 6,655 | 16,756 | 23,411 | |||||||||||||||||||||||||||||
| Time deposits | (1,615) | (15,684) | (17,299) | 11,534 | 16,856 | 28,390 | |||||||||||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 1,238 | (533) | 705 | 76 | 511 | 587 | |||||||||||||||||||||||||||||
| Other borrowings | 2,713 | (6,069) | (3,356) | (2,061) | 1,415 | (646) | |||||||||||||||||||||||||||||
| Subordinated notes and debentures | 1,264 | (848) | 416 | 935 | 558 | 1,493 | |||||||||||||||||||||||||||||
| Total | 19,031 | (80,417) | (61,386) | 17,139 | 36,096 | 53,235 | |||||||||||||||||||||||||||||
| Increase (decrease) in net interest income | $ | 77,586 | $ | (35,926) | $ | 41,660 | $ | 80,497 | $ | (25,413) | $ | 55,084 | |||||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||||||
| 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
| Yield/ | Yield/ | |||||||||||||||||||||||
| (In thousands, on a fully taxable equivalent basis) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
| Increase (decrease) in: | ||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Interest bearing balances due from banks and federal funds sold | $ | 665 | $ | 825 | $ | 1,490 | $ | 2,171 | $ | 1,892 | $ | 4,063 | ||||||||||||
| Investment securities - taxable | 3,685 | 372 | 4,057 | 10,030 | 4,536 | 14,566 | ||||||||||||||||||
| Investment securities - non-taxable | 6,395 | 1,049 | 7,444 | 2,877 | (2,691 | ) | 186 | |||||||||||||||||
| Mortgage loans held for sale | 256 | (266 | ) | (10 | ) | 745 | (14 | ) | 731 | |||||||||||||||
| Loans | 86,848 | 8,154 | 95,002 | 239,503 | 24,208 | 263,711 | ||||||||||||||||||
| Total | 97,849 | 10,134 | 107,983 | 255,326 | 27,931 | 283,257 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Interest bearing transaction and savings accounts | 6,655 | 16,756 | 23,411 | 10,967 | 27,824 | 38,791 | ||||||||||||||||||
| Time deposits | 11,534 | 16,856 | 28,390 | 8,477 | 12,186 | 20,663 | ||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 76 | 511 | 587 | (19 | ) | 95 | 76 | |||||||||||||||||
| Other borrowings | (2,061 | ) | 1,415 | (646 | ) | 13,122 | 1,911 | 15,033 | ||||||||||||||||
| Subordinated notes and debentures | 935 | 558 | 1,493 | 12,804 | 694 | 13,498 | ||||||||||||||||||
| Total | 17,139 | 36,096 | 53,235 | 45,351 | 42,710 | 88,061 | ||||||||||||||||||
| Increase (decrease) in net interest income | $ | 80,710 | $ | (25,962 | ) | $ | 54,748 | $ | 209,975 | $ | (14,779 | ) | $ | 195,196 | ||||||||||
| Provision for | ||
The provision for loancredit 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 loancredit losses at a level considered appropriate in relation to the estimated lifetime 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, assessment of current economic conditions, past due and non-performing loans and historical net loancredit 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.
Management updates credit loss forecasts using multiple Moody’s economic scenarios, the most recent of which were published in December 2020. The baseline economic forecast was weighted 68%, while the downside scenario of S-2 was weighted 15% and the upside scenario of S-1 was weighted 17%. The weighting of the forecasts is characterized by, among others, market rates remaining low, the substantial decline of CRE prices, and the current national unemployment rate.
The provision for loancredit losses for 2020, 2019 and 2018 and 2017 was $75.0 million, $43.2 million $38.1 million and $26.4$38.1 million, respectively. The increase during 2020 was primarily driven by the adoption of CECL and the related change in methodology which is based on qualitative adjustments, intended to account for potential problem credits that have not materialized into any identifiable metrics or delinquencies. During 2020, certain industries were more adversely impacted by the current and expected economic scenarios, such as the restaurant, retail, and hotel industries. Additionally, 2020 also included an additional provision related to problem energy credits, ultimately charged-off during the second quarter of 2020 for a total of $32.6 million, that experienced further deterioration beginning in first quarter of 2020 and were negatively impacted by the sharp decline in commodity pricing. The remainder of the increase was related to the economic impact of the COVID-19 pandemic that is incorporated in our allowance for credit losses.
44
The increase in provision expense during 2019 was necessary to maintain an appropriate allowance for loancredit losses for the company’s growing legacy portfolio. Significant loan growth in our markets both from new loans and from loans acquired migrating to legacy, required an allowance to be established for those loans through an increased provision.
The provision on loans acquiredfor credit losses for 2018 included $3.3 million due to decreases in the expected cash flows on certain purchased credit impaired loans as identified by our required ongoing evaluation of credit marks.
| Non-Interest Income | ||
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 income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities.
Total non-interest income was $201.5$248.5 million in 2020, compared to $205.0 million in 2019 compared to $143.9and $147.8 million in 2018 and $138.8 million in 2017.2018. Non-interest income for 20192020 increased $57.6$43.5 million, or 40.0%21.2%, from 2018.2019.
During 2020, we sold approximately $1.7 billion of investment securities resulting in a net gain of $54.8 million. The majority of the investment securities were sold in March 2020, in response to the unfolding events of the COVID-19 pandemic, as we focused on the creation of additional liquidity and strengthening our balance sheet. We used a portion of the liquidity generated by these investment security sales to fund PPP loans originated during the second and third quarters of 2020. We plan to reinvest back into our investment portfolio over the next year as the PPP loans are repaid, subject to economic conditions and other concerns at such time.
Additionally, mortgage lending income increased $19.5 million during 2020 as a result of the current low mortgage interest rate environment and strong housing markets, as well as increased business related to our Landrum and Reliance acquisitions. The gains on sale from the Texas Branch Sale and Colorado Branch Sale of $8.1 million, which we consider a non-core item, contributed to the increase in 2020. These increases were partially offset by the one-time gain on sale of the Visa Inc. class B common stock of $42.9 million during 2019.
The majority of the increase duringin 2019 was related to the gain on sale of the Visa Inc. class B common stock of $42.9 million. Additionally,stock. Also, during 2019, we have beenwere focused on rebalancing our investment portfolio and consequently have recognized additional gains on the sale of securities. During 2019, we sold approximately $558.9 million of securities resulting in a net gain of $13.3 million. Increases in mortgage lending income were due to a strong real estate housing market driven by the interest rate decreases beginning in mid-2019. Conversely, debit and credit card fees decreased $3.0 million compared to 2018 primarily due to the effects of the interchange rate cap as established by the Durbin Amendment to which we became subject as of July 1, 2018. For further discussion regarding the Durbin Amendment, see the “ImpactsImpacts of Growth”Growth section in Part I, Item 1, Business.
Table 5 shows non-interest income for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, as well as changes in 2020 from 2019 and in 2019 from 2018 and in 2018 from 2017.2018.
45
Table 5: Non-Interest Income
| Years Ended December 31, | 2019 Change from | 2018 Change from | Years Ended December 31, | 2020 Change from | 2019 Change from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | 2018 | 2017 | (Dollars in thousands) | 2020 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trust income | $ | 25,040 | $ | 23,128 | $ | 18,570 | $ | 1,912 | 8.3 | % | $ | 4,558 | 24.5 | % | Trust income | $ | 27,705 | $ | 25,040 | $ | 23,128 | $ | 2,665 | 10.6 | % | $ | 1,912 | 8.3 | % | ||||||||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | 44,782 | 42,508 | 36,079 | 2,274 | 5.4 | 6,429 | 17.8 | Service charges on deposit accounts | 43,082 | 44,782 | 42,508 | (1,700) | (3.8) | 2,274 | 5.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other service charges and fees | 5,824 | 7,469 | 9,919 | (1,645 | ) | (22.0 | ) | (2,450 | ) | (24.7 | ) | Other service charges and fees | 6,624 | 5,824 | 7,469 | 800 | 13.7 | (1,645) | (22.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage lending income | 15,017 | 9,230 | 9,708 | 5,787 | 62.7 | (478 | ) | (4.9 | ) | Mortgage lending income | 34,469 | 15,017 | 9,230 | 19,452 | 129.5 | 5,787 | 62.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| SBA lending income | 2,669 | 1,813 | 3,608 | 856 | 47.2 | (1,795 | ) | (49.8 | ) | SBA lending income | 1,329 | 2,669 | 1,813 | (1,340) | (50.2) | 856 | 47.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment banking income | 2,313 | 3,141 | 2,793 | (828 | ) | (26.4 | ) | 348 | 12.5 | Investment banking income | 2,681 | 2,313 | 3,141 | 368 | 15.9 | (828) | (26.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Debit and credit card fees | 29,289 | 32,268 | 34,258 | (2,979 | ) | (9.2 | ) | (1,990 | ) | (5.8 | ) | Debit and credit card fees | 33,470 | 29,289 | 32,268 | 4,181 | 14.3 | (2,979) | (9.2) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Bank owned life insurance income | 4,768 | 4,415 | 3,503 | 353 | 8.0 | 912 | 26.0 | Bank owned life insurance income | 5,815 | 4,768 | 4,415 | 1,047 | 22.0 | 353 | 8.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of securities, net | 13,314 | 61 | 1,059 | 13,253 | * | (998 | ) | (94.2 | ) | Gain on sale of securities, net | 54,806 | 13,314 | 61 | 41,492 | * | 13,253 | * | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of Visa, Inc. class B common stock | 42,860 | — | — | 42,860 | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of premises held for sale, net | — | — | 264 | — | — | (264 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of insurance lines of business, net | — | — | 3,708 | — | — | (3,708 | ) | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of Visa Inc. class B common stock | Gain on sale of Visa Inc. class B common stock | — | 42,860 | — | (42,860) | (100.0) | 42,860 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of branches | Gain on sale of branches | 8,368 | — | — | 8,368 | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 15,633 | 19,863 | 15,296 | (4,230 | ) | (21.3 | ) | 4,567 | 29.9 | Other income | 30,179 | 19,155 | 23,721 | 11,024 | 57.6 | (4,566) | (19.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total non-interest income | $ | 201,509 | $ | 143,896 | $ | 138,765 | $ | 57,613 | 40.0 | % | $ | 5,131 | 3.7 | % | Total non-interest income | $ | 248,528 | $ | 205,031 | $ | 147,754 | $ | 43,497 | 21.2 | % | $ | 57,277 | 38.8 | % | ||||||||||||||||||||||||||||||||||||||
_________________________
*Not meaningful
Recurring fee income (service charges, trust fees, debit and credit card fees and other fees) for 20192020 was $104.9$110.9 million, a decreasean increase of $438,000,$5.9 million, or 0.4%5.7%, when compared with the 20182019 amounts, largely due toprimarily the reduction in debit and credit card fees as previously discussed. The net decrease was partially offset by increases in trust income and total service charges and fees due to additional accounts acquired fromresult of the Landrum and Reliance mergers.acquisitions completed during 2019.
| Non-Interest Expense | ||
Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for our operations. Management remains committed to controlling the level of non-interest expense through the continued use of expense control measures. 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 monthly. 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 each subsidiary to ensure productivity and overhead are in line with existing workload requirements.
Non-interest expense for 2020 was $493.5 million, an increase of $32.4 million, or 7.0%, from 2019. Included in 2020 were $21.5 million of pre-tax non-core items: $4.5 million of merger-related costs due to the Landrum and Reliance acquisitions, $2.9 million of early retirement program expenses and $14.1 million of net branch-right sizing costs. Normalizing for these non-core costs, core non-interest expense for the year ended December 31, 2020 increased $53.8 million, or 12.9%, from the prior year. See the Reconciliation of Non-GAAP Measures section for details of the non-core items.
The increase during 2020 was primarily due to the incremental operating expenses from the Landrum and Reliance acquisitions completed during 2019. Also, our Next Generation Banking (“NGB”) technology initiative has made substantial progress and the incremental software and technology expenditures of $14.6 million were primarily related to this initiative. Marketing costs include a $3 million donation to the Simmons First Foundation for grants to support environmental conservation projects throughout the Simmons Bank footprint.
Non-interest expense for 2019 was $461.1 million, an increase of $68.9 million, or 17.6%, from 2018. Included in 2019 were the following non-core items: $36.4 million of merger-related costs due to the Landrum and Reliance acquisitions, $3.5 million of early retirement program expenses and $3.1 million of branch-right sizing costs. Normalizing for thesethe non-core costs, core non-interest expense for the year ended December 31, 2019 increased $32.0 million, or 8.3%, from the prior year. SeeThe increase during 2019 was largely due to additional operating costs related to the Reconciliation of Non-GAAP Measures section for details of the non-core items.
46
The reduction in deposit insurance expense during 2019 was due to a credit assessment received from the FDIC during the third and fourth quarters of 2019 in the amount of $4.7 million. The FDIC’s Deposit Insurance Fund Reserve Ratio reached 1.35% as of September 30, 2018, and we were notified by the FDIC that Simmons Bank was entitled to $4.0 million in assessment credits. In addition, Landmark Bank had $745,000 in assessment credits at acquisition. We were able to utilize both the Simmons Bank and Landmark Bank credits during the last half of 2019, and, as of December 31, 2019, there are no assessment credits remaining.
Amortization of intangibles recorded for the years ended December 31, 2020, 2019 and 2018, and 2017, was $13.5 million, $11.8 million $11.0 million and $7.7$11.0 million, respectively. The increase during 20192020 was due to the othera full year of amortization of intangibles being recorded as part offor intangibles acquired from the 2019 acquisitions. See Note 8, Goodwill and Other Intangible Assets, in the accompanying Notes to Consolidated Financial Statements for additional information regarding our intangibles.
Table 6 below shows non-interest expense for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, as well as changes in 2020 from 2019 and in 2019 from 2018 and in 2018 from 2017.2018.
Table 6: Non-Interest Expense
| Years Ended December 31, | 2019 Change from | 2018 Change from | Years Ended December 31, | 2020 Change from | 2019 Change from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | 2018 | 2017 | (Dollars in thousands) | 2020 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 224,331 | $ | 216,743 | $ | 154,314 | $ | 7,588 | 3.5 | % | $ | 62,429 | 40.5 | % | Salaries and employee benefits | $ | 239,573 | $ | 224,331 | $ | 216,743 | $ | 15,242 | 6.8 | % | $ | 7,588 | 3.5 | % | ||||||||||||||||||||||||||||||||||||||
| Early retirement program | 3,464 | — | — | 3,464 | * | — | — | Early retirement program | 2,901 | 3,464 | — | (563) | (16.3) | 3,464 | * | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Occupancy expense, net | 32,008 | 29,610 | 21,159 | 2,398 | 8.1 | 8,451 | 39.9 | Occupancy expense, net | 37,556 | 32,008 | 29,610 | 5,548 | 17.3 | 2,398 | 8.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Furniture and equipment expense | 18,220 | 16,323 | 19,366 | 1,897 | 11.6 | (3,043 | ) | (15.7 | ) | Furniture and equipment expense | 24,038 | 18,220 | 16,323 | 5,818 | 31.9 | 1,897 | 11.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other real estate and foreclosure expense | 3,442 | 4,480 | 3,042 | (1,038 | ) | (23.2 | ) | 1,438 | 47.3 | Other real estate and foreclosure expense | 1,752 | 3,442 | 4,480 | (1,690) | (49.1) | (1,038) | (23.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposit insurance | 4,416 | 8,721 | 3,696 | (4,305 | ) | (49.4 | ) | 5,025 | 136.0 | Deposit insurance | 9,184 | 4,416 | 8,721 | 4,768 | 108.0 | (4,305) | (49.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Merger related costs | 36,379 | 4,777 | 21,923 | 31,602 | * | (17,146 | ) | (78.2 | ) | Merger related costs | 4,531 | 36,379 | 4,777 | (31,848) | (87.6) | 31,602 | * | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses: | Other operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Professional services | 16,897 | 16,685 | 19,500 | 212 | 1.3 | (2,815 | ) | (14.4 | ) | Professional services | 18,688 | 16,897 | 16,685 | 1,791 | 10.6 | 212 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Postage | 6,363 | 5,785 | 4,686 | 578 | 10.0 | 1,099 | 23.5 | Postage | 7,538 | 6,363 | 5,785 | 1,175 | 18.5 | 578 | 10.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Telephone | 7,685 | 5,947 | 4,262 | 1,738 | 29.2 | 1,685 | 39.5 | Telephone | 8,833 | 7,685 | 5,947 | 1,148 | 14.9 | 1,738 | 29.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credit card expenses | 16,163 | 14,338 | 12,188 | 1,825 | 12.7 | 2,150 | 17.6 | Credit card expenses | 18,960 | 16,163 | 14,338 | 2,797 | 17.3 | 1,825 | 12.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing | 16,499 | 8,410 | 11,141 | 8,089 | 96.2 | (2,731 | ) | (24.5 | ) | Marketing | 19,396 | 16,499 | 8,410 | 2,897 | 17.6 | 8,089 | 96.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software and technology | 25,146 | 15,558 | 2,204 | 9,588 | 61.6 | 13,354 | * | Software and technology | 39,724 | 25,146 | 15,558 | 14,578 | 58.0 | 9,588 | 61.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating supplies | 2,322 | 2,346 | 1,980 | (24 | ) | (1.0 | ) | 366 | 18.5 | Operating supplies | 3,322 | 2,322 | 2,346 | 1,000 | 43.1 | (24) | (1.0) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | 11,805 | 11,009 | 7,668 | 796 | 7.2 | 3,341 | 43.6 | Amortization of intangibles | 13,495 | 11,805 | 11,009 | 1,690 | 14.3 | 796 | 7.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Branch right sizing expense | 3,129 | 1,341 | 434 | 1,788 | 133.3 | 907 | * | Branch right sizing expense | 14,097 | 3,129 | 1,341 | 10,968 | * | 1,788 | 133.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense | 32,843 | 30,156 | 24,816 | 2,687 | 8.9 | 5,340 | 21.5 | Other expense | 29,907 | 32,843 | 30,156 | (2,936) | (8.9) | 2,687 | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total non-interest expense | $ | 461,112 | $ | 392,229 | $ | 312,379 | $ | 68,883 | 17.6 | % | $ | 79,850 | 25.6 | % | Total non-interest expense | $ | 493,495 | $ | 461,112 | $ | 392,229 | $ | 32,383 | 7.0 | % | $ | 68,883 | 17.6 | % | ||||||||||||||||||||||||||||||||||||||
_________________________
*Not meaningful
47
| Income Taxes | ||
The provision for income taxes for 20192020 was $64.3$64.9 million, compared to $64.3 million in 2019 and $50.4 million in 2018 and $62.0 million in 2017.2018. The effective income tax rates for the years ended 2020, 2019 and 2018 were 20.3%, 21.2% and 2017 were 21.2%, 18.9% and 40.0%, respectively.
The effective income tax rate was lower during 2018 than 2017 largely due to the 2017 Act, as well as the discrete tax benefits related to tax accounting for a cost segregation study, excess tax benefits related to restricted stock and a state tax deferred tax asset adjustment. See Note 10, Income Taxes, for further discussion related to these discrete tax benefits recognized during the year.
| Loan Portfolio | ||
Our legacy loan portfolio excluding loans acquired, averaged $9.526$14.26 billion during 20192020 and $6.915$12.94 billion during 2018.2019. As of December 31, 2019,2020, total loans excluding loans acquired, were $9.630$12.90 billion, compared to $8.430$14.43 billion on December 31, 2018, an increase2019, a decrease of $1.20$1.52 billion, or 14.2%10.6%. This marksThe decline in the eighth consecutive year that we have seen annual growth in our legacyoverall loan portfolio.balance during 2020 reflects the tepid loan demand as a result of the economic uncertainty stemming from the COVID-19 pandemic. 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). The growth in the legacy portfolio is primarily attributable to the larger market areas in which we now operate as a result of our 2019 acquisitions.
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 appropriate allowance for loancredit losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose, industry and 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 loancredit 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.
Consumer loans consist of credit card loans and other consumer loans. Consumer loans were $396.7$391.2 million at December 31, 2019,2020, or 4.1%3.0% of total loans, compared to $405.5$454.5 million, or 4.8%3.2% of total loans at December 31, 2018.2019. The decrease in consumer loans was primarily due to a decrease in our liquidatingthe indirect lending portfolio that we exited fromassociated with our discontinuance of the line of business in early 2017 and the portfolio continues to pay down.
The credit card portfolio balance at December 31, 2019, increased2020, decreased by $629,000$24.4 million when compared to the same period in 2018.2019. Our credit card portfolio has remained a stable source of lending for several years.
Real estate loans consist of construction and development (“C&D”) loans, single family residential loans and other commercialCRE loans. Real estate loans were $6.884$9.22 billion at December 31, 2019,2020, or 71.5% of total loans, compared to $5.966$10.88 billion, or 70.8%75.5% of total loans at December 31, 2018, an increase2019, a decrease of $918.0 million,$1.7 billion, or 15.4%15.3%. Our C&D loans increaseddecreased by $460.2$640.6 million, or 35.4%28.6%, single family residential loans increaseddecreased by $4.2$561.4 million, or 0.3%23.0%, and commercial real estate (“CRE”)CRE loans increaseddecreased by $453.6$458.7 million, or 14.1%7.4%.
Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were $2.073$2.75 billion at December 31, 2019,2020, or 21.5%21.3% of total loans, compared to the $1.939$2.81 billion, or 23.0%19.5% of total loans at December 31, 2018,2019, a decrease of $60.7 million, or 2.2%, that is mostly in our agricultural loan portfolio. Our non-agricultural commercial loan portfolio increased during 2020 due to the $975.6 million in PPP loan originations. As of December 31, 2020, the balance in our PPP loan portfolio was $904.7 million.
48
Our total loan pipeline consisting of all loan opportunities, which was a robust $1.7 billion at December 31, 2019 fell to $374.4 million at September 30, 2020. The pipeline is starting to rebuild and ended 2020 at $673.7 million, including $176.6 million in loans approved and ready to close.
Other loans mainly consists of mortgage warehouse lending. Mortgage volume surged during 2020 due to the low interest rate environment and robust singe family real estate market conditions in many locations within our market area, leading to an increase of $133.8$259.9 million or 6.9%. As previously discussed, wein other loans primarily from mortgage warehouse lines of credit.
The balances of loans outstanding at the indicated dates are working to exit all purchased syndicated energy credits and expect to exit at least $120 million of these credits by end of the second quarter of 2020.
reflected in Table 7, reflects the legacy loan portfolio, excluding loans acquired.according to type of loan.
Table 7: Loan Portfolio
| Years Ended December 31, | |||||||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Credit cards | $ | 180,354 | $ | 204,802 | $ | 204,173 | $ | 185,422 | $ | 184,591 | |||||||||||||||||||
| Other consumer | 210,870 | 249,694 | 215,763 | 336,393 | 363,448 | ||||||||||||||||||||||||
| Total consumer | 391,224 | 454,496 | 419,936 | 521,815 | 548,039 | ||||||||||||||||||||||||
| Real Estate: | |||||||||||||||||||||||||||||
| Construction and development | 1,596,255 | 2,236,861 | 1,736,817 | 1,296,698 | 395,472 | ||||||||||||||||||||||||
| Single family residential | 1,880,673 | 2,442,064 | 1,994,716 | 1,934,167 | 1,318,558 | ||||||||||||||||||||||||
| Other commercial | 5,746,863 | 6,205,599 | 5,073,994 | 4,881,415 | 2,483,047 | ||||||||||||||||||||||||
| Total real estate | 9,223,791 | 10,884,524 | 8,805,527 | 8,112,280 | 4,197,077 | ||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Commercial | 2,574,386 | 2,495,516 | 2,192,497 | 1,809,374 | 724,731 | ||||||||||||||||||||||||
| Agricultural | 175,905 | 315,454 | 166,225 | 156,244 | 153,589 | ||||||||||||||||||||||||
| Total commercial | 2,750,291 | 2,810,970 | 2,358,722 | 1,965,618 | 878,320 | ||||||||||||||||||||||||
| Other | 535,591 | 275,714 | 139,081 | 180,390 | 10,407 | ||||||||||||||||||||||||
| Total loans before allowance for credit losses | $ | 12,900,897 | $ | 14,425,704 | $ | 11,723,266 | $ | 10,780,103 | $ | 5,633,843 | |||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Credit cards | $ | 204,802 | $ | 204,173 | $ | 185,422 | $ | 184,591 | $ | 177,288 | ||||||||||
| Other consumer | 191,946 | 201,297 | 280,094 | 303,972 | 208,380 | |||||||||||||||
| Total consumer | 396,748 | 405,470 | 465,516 | 488,563 | 385,668 | |||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Construction and development | 1,760,894 | 1,300,723 | 614,155 | 336,759 | 279,740 | |||||||||||||||
| Single family residential | 1,444,620 | 1,440,443 | 1,094,633 | 904,245 | 696,180 | |||||||||||||||
| Other commercial | 3,678,908 | 3,225,287 | 2,530,824 | 1,787,075 | 1,229,072 | |||||||||||||||
| Total real estate | 6,884,422 | 5,966,453 | 4,239,612 | 3,028,079 | 2,204,992 | |||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial | 1,909,796 | 1,774,909 | 825,217 | 639,525 | 500,116 | |||||||||||||||
| Agricultural | 163,396 | 164,514 | 148,302 | 150,378 | 148,563 | |||||||||||||||
| Total commercial | 2,073,192 | 1,939,423 | 973,519 | 789,903 | 648,679 | |||||||||||||||
| Other | 275,714 | 119,042 | 26,962 | 20,662 | 7,115 | |||||||||||||||
| Total loans, excluding loans acquired, before allowance for loan losses | $ | 9,630,076 | $ | 8,430,388 | $ | 5,705,609 | $ | 4,327,207 | $ | 3,246,454 | ||||||||||
Table 8:Loans Acquired
| Years Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Other consumer | $ | 57,748 | $ | 15,658 | $ | 51,467 | $ | 49,677 | $ | 75,606 | ||||||||||
| Real Estate: | ||||||||||||||||||||
| Construction and development | 475,967 | 429,605 | 637,032 | 57,587 | 77,119 | |||||||||||||||
| Single family residential | 997,444 | 566,188 | 793,228 | 423,176 | 501,002 | |||||||||||||||
| Other commercial | 2,526,247 | 1,848,679 | 2,387,777 | 690,108 | 854,068 | |||||||||||||||
| Total real estate | 3,999,658 | 2,844,472 | 3,818,037 | 1,170,871 | 1,432,189 | |||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial | 585,720 | 430,914 | 995,587 | 81,837 | 154,533 | |||||||||||||||
| Agricultural | 152,058 | 1,739 | 66,576 | 3,298 | 10,573 | |||||||||||||||
| Total commercial | 737,778 | 432,653 | 1,062,163 | 85,135 | 165,106 | |||||||||||||||
| Other | — | — | 142,409 | — | — | |||||||||||||||
Total loans acquired (1) | $ | 4,795,184 | $ | 3,292,783 | $ | 5,074,076 | $ | 1,305,683 | $ | 1,672,901 | ||||||||||
Table 9:8: Maturity and Interest Rate Sensitivity of Loans
| 1 year | Over 1 year through | Over | |||||||||||||||||||||
| (In thousands) | or less | 5 years | 5 years | Total | |||||||||||||||||||
| Consumer | $ | 283,470 | $ | 92,512 | $ | 15,242 | $ | 391,224 | |||||||||||||||
| Real estate | 3,230,782 | 5,576,668 | 416,341 | 9,223,791 | |||||||||||||||||||
| Commercial | 1,904,394 | 747,966 | 97,931 | 2,750,291 | |||||||||||||||||||
| Other | 535,468 | 123 | — | 535,591 | |||||||||||||||||||
| Total | $ | 5,954,114 | $ | 6,417,269 | $ | 529,514 | $ | 12,900,897 | |||||||||||||||
| Predetermined rate | $ | 3,353,485 | $ | 3,527,234 | $ | 77,430 | $ | 6,958,149 | |||||||||||||||
| Floating rate | 2,600,629 | 2,890,035 | 329,190 | 5,819,854 | |||||||||||||||||||
| Nonaccrual | — | — | 122,894 | 122,894 | |||||||||||||||||||
| Total | $ | 5,954,114 | $ | 6,417,269 | $ | 529,514 | $ | 12,900,897 | |||||||||||||||
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| 1 year | Over 1 year through | Over | ||||||||||||||
| (In thousands) | or less | 5 years | 5 years | Total | ||||||||||||
| Consumer | $ | 224,262 | $ | 150,025 | $ | 80,209 | $ | 454,496 | ||||||||
| Real estate | 3,445,642 | 6,649,651 | 788,787 | 10,884,080 | ||||||||||||
| Commercial | 1,806,367 | 927,304 | 77,299 | 2,810,970 | ||||||||||||
| Other | 261,608 | 14,004 | 102 | 275,714 | ||||||||||||
| Total | $ | 5,737,879 | $ | 7,740,984 | $ | 946,397 | $ | 14,425,260 | ||||||||
| Predetermined rate | $ | 2,916,922 | $ | 4,247,657 | $ | 104,985 | $ | 7,269,564 | ||||||||
| Floating rate | 2,820,957 | 3,493,327 | 841,412 | 7,155,696 | ||||||||||||
| Total | $ | 5,737,879 | $ | 7,740,984 | $ | 946,397 | $ | 14,425,260 | ||||||||
| Asset Quality | ||
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 BankThe subsidiary 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 collectibility 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 loancredit losses.
Total non-performing assets excluding allincreased $28.6 million from December 31, 2019 to December 31, 2020. Nonaccrual loans acquired, increased by $31.6$29.5 million during 2020, partially offset by a decrease in foreclosed assets held for sale of $728,000. The increase in nonaccrual loans during 2020 is primarily related to one energy loan totaling $22.0 million which moved to nonaccrual during the fourth quarter of 2020. The remaining increase was related to various other CRE loans and commercial loan relationships. We continue to actively pursue an exit of our energy lending portfolio, except for our customers who have a diversified relationship with us.
Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.66% at December 31, 2020 compared to 0.57% at December 31, 2019.
Total non-performing assets increased by $33.1 million from December 31, 2018 to December 31, 2019. Nonaccrual loans increased by $36.6$37.5 million during 2019, primarily commercial loans, partially offset by a decrease in foreclosed assets held for sale of $6.4 million. The nonaccrual loan increase was primarily due to two loans that became reportable as non-performing legacy loans during the third quarter. One particular acquired loan migrated from loans acquired to legacy loans during the third quarter, with the entire balance previously being included in the nonaccrual loans acquired total. The decrease in foreclosed assets held for sale was partially offset by foreclosed assets received from the 2019 mergers. Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.45% at December 31, 2019 compared to 0.40% at December 31, 2018.
Total non-performing assets excluding all loans acquired, decreased by $18.4$23.2 million from December 31, 2017 to December 31, 2018. Nonaccrual loans decreased by $11.4$13.3 million during 2018, primarily commercial loans. Foreclosed assets held for sale decreased by $6.6 million.
During 2018, we sold approximately $32 million of substandard rated loans that consisted of both legacy and acquired loans. The loans had adequate reserves, thus no provision expense was required. However, the sale increased net charge-offs by approximately $4.6 million.
Total non-performing assets excluding all loans acquired, increaseddecreased by $12.2$8.2 million from December 31, 2016, to December 31, 2017. Total non-performing loans increaseddecreased by $6.8$13.6 million from December 31, 2016 to December 31, 2017, primarily due to two credit relationships totaling $11.0 million in the Wichita market.2017. Nonaccrual loans increaseddecreased by $6.5$16.8 million during 2017, primarily CRE and other consumer loans.2017.
During 2017, $3.2 million of previously closed branch buildings and land was reclassified to OREO from premises held for sale. There was no deterioration or further write-down of these properties. Also, as part of the First South Bank conversion, 5 branches were closed during the third quarter of 2017. Under ASC Topic 360, there is a one year maximum holding period to classify premises as held for sale. However, under Arkansas state banking laws former branch buildings must be recorded as OREO.
From time to time, including in connection with the COVID-19 pandemic, certain borrowers are experiencing declines in income and cash flow. As a result, these 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 collectibility 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”restructuring,” or “TDR,” 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.
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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. Our TDR balance decreasedincreased slightly to $5.3$7.5 million at December 31, 2020 compared to $7.4 million at December 31, 2019, and decreased when compared to $9.2$10.8 million at December 31, 20182018.
TDRs are individually evaluated for expected credit losses. We assess the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and $12.9 million at December 31, 2017. The majority of our TDR balance remains in the commercial portfolio with the largest balance comprised of six relationships.determine if a specific allowance for credit losses is needed.
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.
The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act and is following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies. In response to the concerns related to the expiration of the applicable period for which the election to not apply the guidance on accounting for TDRs to loan modifications, the CARES Act was amended in late fourth quarter of 2020 to extend COVID-19 relief related to loan modifications from the earlier of (i) January 1, 2022 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration.
During 2020, we processed over 3,700 COVID-19 loan modifications in excess of $3.0 billion. As of mid-February 2021, approximately 85% of these balances have returned to regular payments or are expected to return to regular payments in the first quarter of 2021, with the remainder of the loans still in the modification period. See Note 5, Loans and Allowance for Credit Losses, in the accompanying Notes to Consolidated Financial Statements for additional information related to these loans. Of these COVID-19 loan modifications, approximately $390.0 million, or 13.0%, are commercial loan modifications that are in an internal COVID-19 status category of 4-7 as of mid-February 2021, further discussed below.
Internal COVID-19 status categories are internal status categories that we use in connection with our COVID-19 loan modification program. A description of the general characteristics of the internal COVID-19 status categories 4-7 is as follows:
•Category 4– Borrower is still in the modification period and expected to need an additional modification. Financial projections show return to original terms, but not at the end of six months. The loan remains collateralized and fully supported by the guarantor.
•Category 5– Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative.
•Category 6– Financial projections do not support return to regular payments AND collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative.
•Category 7– Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors lack the capacity and are unwilling or unable to develop a new operating strategy.
We developed these status categories for internal purposes only and they are not a substitute or a replacement for loan risk ratings used by us under US GAAP.
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Table 9: Commercial COVID-19 Loan Modifications Status Category 4-7 by Industry
| (Dollars in thousands) | Loan Balance | % | |||||||||
| Hotels | $ | 274,728 | 70.5 | % | |||||||
| Nursing/Extended Care | 47,511 | 12.2 | |||||||||
| Restaurants | 10,802 | 2.8 | |||||||||
| Transportation and Warehousing | 5,226 | 1.3 | |||||||||
| All Other | 51,696 | 13.3 | |||||||||
| Total | $ | 389,963 | 100.0 | % | |||||||
Table 10: Commercial COVID-19 Loan Modifications Status Category 4-7
| (Dollars in thousands) | Loan Balance | Number of Loans | |||||||||
| Internal Status Category 4 | $ | 229,712 | 30 | ||||||||
| Internal Status Category 5 | 102,101 | 33 | |||||||||
| Internal Status Category 6 | 55,679 | 13 | |||||||||
| Internal Status Category 7 | 2,471 | 6 | |||||||||
| Total | $ | 389,963 | 82 | ||||||||
As previously discussed, the COVID-19 pandemic has had an unprecedented impact on the hotel, restaurant and retail industries, causing our borrowers in those industries to seek loan modifications. We expect most of the commercial COVID-19 loan modifications listed above, as illustrated in Table 10, to return to regular payments with no credit downgrade or long-term restructure. Management has identified certain loans within COVID-19 internal status categories 5-7 as likely to need further payment assistance. Management focus is currently on these perceived higher risk loans, including efforts to assist borrowers in obtaining COVID relief assistance that may be available.
We continue to maintain good asset quality, compared to the industry. Strong asset quality remains a primary focus of our strategy.company. The allowance for loancredit losses as a percent of total legacy loans was 0.70%1.85% as of December 31, 2019.2020. Non-performing loans equaled 0.74%0.96% of total loans. Non-performing assets were 0.43%0.64% of total assets, a 610 basis point increase from December 31, 2018.2019. The allowance for loancredit losses was 95%193% of non-performing loans. Our annualized net charge-offs to total loans for 20192020 was 0.31%0.45%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.28%0.43%. Annualized net credit card charge-offs to total credit card loans were 1.86%1.62%, compared to 1.64%1.86% during 2018,2019, and 163172 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.
We have had substantial growth from acquisitions and from loans migrating from acquired to legacy. When acquired loans renew, they are evaluated and if considered a pass quality credit they will migrate to the legacy portfolio and require less reserves. In addition, new loans also only require the minimum allowance consideration.
Table 1011 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and restructured loans and other real estate owned (excluding all loans acquired).foreclosed assets held for sale.
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Table 10:11: Non-performing Assets
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||
Nonaccrual loans (1) | $ | 70,836 | $ | 34,201 | $ | 45,642 | $ | 39,104 | $ | 17,714 | Nonaccrual loans (1) | $ | 122,879 | $ | 93,330 | $ | 55,841 | $ | 69,127 | $ | 85,936 | ||||||||||||||||||||||||||||
| Loans past due 90 days or more (principal or interest payments) | 259 | 224 | 520 | 299 | 1,191 | Loans past due 90 days or more (principal or interest payments) | 578 | 856 | 226 | 3,488 | 311 | ||||||||||||||||||||||||||||||||||||||
| Total non-performing loans | 71,095 | 34,425 | 46,162 | 39,403 | 18,905 | Total non-performing loans | 123,457 | 94,186 | 56,067 | 72,615 | 86,247 | ||||||||||||||||||||||||||||||||||||||
| Other non-performing assets: | Other non-performing assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreclosed assets held for sale | 19,121 | 25,565 | 32,118 | 26,895 | 44,820 | ||||||||||||||||||||||||||||||||||||||||||||
| Foreclosed assets held for sale and other real estate owned | Foreclosed assets held for sale and other real estate owned | 18,393 | 19,121 | 25,565 | 32,118 | 26,895 | |||||||||||||||||||||||||||||||||||||||||||
| Other non-performing assets | 1,964 | 553 | 675 | 471 | 211 | Other non-performing assets | 2,016 | 1,964 | 553 | 675 | 471 | ||||||||||||||||||||||||||||||||||||||
| Total other non-performing assets | 21,085 | 26,118 | 32,793 | 27,366 | 45,031 | Total other non-performing assets | 20,409 | 21,085 | 26,118 | 32,793 | 27,366 | ||||||||||||||||||||||||||||||||||||||
| Total non-performing assets | $ | 92,180 | $ | 60,543 | $ | 78,955 | $ | 66,769 | $ | 63,936 | Total non-performing assets | $ | 143,866 | $ | 115,271 | $ | 82,185 | $ | 105,408 | $ | 113,613 | ||||||||||||||||||||||||||||
| Performing TDRs | $ | 4,411 | $ | 6,369 | $ | 7,107 | $ | 10,998 | $ | 3,031 | Performing TDRs | $ | 3,138 | $ | 5,887 | $ | 7,436 | $ | 7,925 | $ | 11,488 | ||||||||||||||||||||||||||||
| Allowance for loan losses to non-performing loans | 95 | % | 164 | % | 90 | % | 92 | % | 166 | % | |||||||||||||||||||||||||||||||||||||||
Non-performing loans to total loans (2) | 0.74 | % | 0.41 | % | 0.81 | % | 0.91 | % | 0.58 | % | |||||||||||||||||||||||||||||||||||||||
Non-performing assets (including performing TDRs) to total assets (2) | 0.45 | % | 0.40 | % | 0.57 | % | 0.93 | % | 0.89 | % | |||||||||||||||||||||||||||||||||||||||
Non-performing assets to total assets (2) | 0.43 | % | 0.37 | % | 0.52 | % | 0.79 | % | 0.85 | % | |||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses to non-performing loans | Allowance for credit losses to non-performing loans | 193 | % | 72 | % | 101 | % | 58 | % | 43 | % | ||||||||||||||||||||||||||||||||||||||
| Non-performing loans to total loans | Non-performing loans to total loans | 0.96 | % | 0.65 | % | 0.48 | % | 0.67 | % | 1.53 | % | ||||||||||||||||||||||||||||||||||||||
| Non-performing assets (including performing TDRs) to total assets | Non-performing assets (including performing TDRs) to total assets | 0.66 | % | 0.57 | % | 0.54 | % | 0.75 | % | 1.49 | % | ||||||||||||||||||||||||||||||||||||||
| Non-performing assets to total assets | Non-performing assets to total assets | 0.64 | % | 0.54 | % | 0.50 | % | 0.70 | % | 1.35 | % | ||||||||||||||||||||||||||||||||||||||
_________________________
(1) Includes nonaccrual TDRs of approximately $902,000, $2.8$4.4 million, $5.8$1.6 million, $3.2$6.3 million, $3.4 million and $2.5 million at December 31, 2020, 2019, 2018, 2017 2016 and 2015,2016, respectively.
There was no interest income on the nonaccrual loans recorded for the years ended December 31, 2020, 2019 2018 and 2017.
Allowance for LoanCredit Losses
The allowance for loancredit losses is a reserve established through a provision for loancredit losses charged to expense which represents management’s best estimate of probablelifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations.
Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical correlation with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis.
We also include qualitative adjustments to the allowance based on factors and considerations that have not otherwise been incurred within the existing portfolio of loans. The allowance,fully accounted for. Qualitative adjustments include, but are not limited to:
•Changes in asset quality - Adjustments related to trending credit quality metrics including delinquency, nonperforming loans, charge-offs, and risk ratings that may not be fully accounted for in the judgmentreserve factor.
•Changes in the nature and volume of management, is necessarythe portfolio - Adjustments related to reserve for estimated loan losses and risks inherentcurrent changes in the loan portfolio. The Company’s allowanceportfolio that are not fully represented or accounted 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 quantitativereserve factors.
•Changes in the experience, ability, and depth of lending management and other relevant staff (7) seasoning - Adjustments to measure increasing or decreasing credit risk related to lending and loan monitoring management.
•Changes in the value of new products obtainedunderlying collateral of collateralized loans - Adjustments related to improving or deterioration of the value of underlying collateral that are not fully captured in the reserve factors.
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•Changes in and new markets entered through acquisitionthe existence and (8) other factorseffect of any concentrations of credit - Adjustments related to credit risk of specific industries that are not fully captured in the reserve factors.
•Changes in regional and trendslocal economic and business conditions and developments - Adjustments related to expected and current economic conditions at a regional or local-level that will affect specificare not fully captured within our reasonable and supportable forecast.
•Data imprecisions due to limited historical loss data - Adjustments related to limited historical loss data that is representative of the collective loan portfolio.
Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans and categories of loans. We established general allocations for each major loan category. This category also includes allocations to loans whichwith a deteriorated internal risk rating or that are collectively evaluated for loss suchclassified as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans.
An analysis of the allowance for loancredit losses for the last five yearson loans is shown in Table 11.12.
Table 11:12: Allowance for LoanCredit Losses
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Balance, beginning of year | $68,244 | $56,694 | $42,086 | $37,240 | $32,305 | ||||||||||||||||||||||||
| Impact of CECL adoption | 151,377 | — | — | — | — | ||||||||||||||||||||||||
| Loans charged off: | |||||||||||||||||||||||||||||
| Credit card | 4,113 | 4,585 | 4,051 | 3,905 | 3,195 | ||||||||||||||||||||||||
| Other consumer | 4,022 | 5,007 | 6,675 | 3,880 | 1,975 | ||||||||||||||||||||||||
| Real estate | 13,788 | 3,892 | 7,698 | 10,017 | 8,143 | ||||||||||||||||||||||||
| Commercial | 48,736 | 23,352 | 8,414 | 8,098 | 3,956 | ||||||||||||||||||||||||
| Total loans charged off | 70,659 | 36,836 | 26,838 | 25,900 | 17,269 | ||||||||||||||||||||||||
| Recoveries of loans previously charged off: | |||||||||||||||||||||||||||||
| Credit card | 1,014 | 1,021 | 1,005 | 1,021 | 907 | ||||||||||||||||||||||||
| Other consumer | 1,465 | 2,357 | 557 | 2,239 | 516 | ||||||||||||||||||||||||
| Real estate | 905 | 501 | 991 | 990 | 351 | ||||||||||||||||||||||||
| Commercial | 3,216 | 1,267 | 745 | 103 | 365 | ||||||||||||||||||||||||
| Total recoveries | 6,600 | 5,146 | 3,298 | 4,353 | 2,139 | ||||||||||||||||||||||||
| Net loans charged off | 64,059 | 31,690 | 23,540 | 21,547 | 15,130 | ||||||||||||||||||||||||
| Provision for credit losses | 82,488 | 43,240 | 38,148 | 26,393 | 20,065 | ||||||||||||||||||||||||
| Balance, end of year | $ | 238,050 | $ | 68,244 | $ | 56,694 | $ | 42,086 | $ | 37,240 | |||||||||||||||||||
| Net charge-offs to average loans | 0.45 | % | 0.24 | % | 0.21 | % | 0.31 | % | 0.30 | % | |||||||||||||||||||
| Allowance for credit losses to period-end loans | 1.85 | % | 0.47 | % | 0.48 | % | 0.39 | % | 0.66 | % | |||||||||||||||||||
| Allowance for credit losses to net charge-offs | 371.61 | % | 215.35 | % | 240.84 | % | 195.32 | % | 246.13 | % | |||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Balance, beginning of year | $ | 56,599 | $ | 41,668 | $ | 36,286 | $ | 31,351 | $ | 29,028 | ||||||||||
| Loans charged off: | ||||||||||||||||||||
| Credit card | 4,585 | 4,051 | 3,905 | 3,195 | 3,107 | |||||||||||||||
| Other consumer | 4,894 | 6,637 | 3,767 | 1,975 | 1,672 | |||||||||||||||
| Real estate | 2,319 | 5,905 | 7,989 | 7,517 | 1,580 | |||||||||||||||
| Commercial | 22,023 | 6,623 | 7,837 | 3,956 | 1,415 | |||||||||||||||
| Total loans charged off | 33,821 | 23,216 | 23,498 | 16,643 | 7,774 | |||||||||||||||
| Recoveries of loans previously charged off: | ||||||||||||||||||||
| Credit card | 1,021 | 1,005 | 1,021 | 907 | 890 | |||||||||||||||
| Other consumer | 2,357 | 557 | 2,239 | 516 | 538 | |||||||||||||||
| Real estate | 496 | 991 | 990 | 351 | 203 | |||||||||||||||
| Commercial | 372 | 745 | 103 | 365 | 180 | |||||||||||||||
| Total recoveries | 4,246 | 3,298 | 4,353 | 2,139 | 1,811 | |||||||||||||||
| Net loans charged off | 29,575 | 19,918 | 19,145 | 14,504 | 5,963 | |||||||||||||||
Provision for loan losses (1) | 40,776 | 34,849 | 24,527 | 19,439 | 8,286 | |||||||||||||||
Balance, end of year (2) | $ | 67,800 | $ | 56,599 | $ | 41,668 | $ | 36,286 | $ | 31,351 | ||||||||||
Net charge-offs to average loans (3) | 0.31 | % | 0.29 | % | 0.35 | % | 0.40 | % | 0.24 | % | ||||||||||
Allowance for loan losses to period-end loans (3) | 0.70 | % | 0.67 | % | 0.73 | % | 0.84 | % | 0.97 | % | ||||||||||
Allowance for loan losses to net charge-offs (3) | 229.25 | % | 284.16 | % | 217.64 | % | 250.18 | % | 525.76 | % | ||||||||||
54
Provision for LoanCredit Losses
The amount of provision added to the allowance each year was based on management’s judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and 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.
Allowance for LoanCredit Losses Allocation
As of December 31, 2019,2020, the allowance for loancredit losses reflectsreflected an increase of approximately $11.2$169.8 million from December 31, 2018,2019 while total loans excluding loans acquired, increased by $1.2decreased $1.5 billion over the same period. The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix. During the first quarter of 2020, we recorded an additional allowance for credit losses for loans of approximately $151.4 million due to the adoption of CECL.
The significant impact to the allowance for credit losses at the date of CECL’s adoption was driven by the substantial amount of loans acquired held by the Company. We had approximately one third of total loans categorized as acquired at the adoption date with very little reserve allocated to them due to the previous incurred loss impairment methodology. As such, the amount of the CECL adoption impact was greater on the Company when compared to a non-acquisitive bank.
The remaining increase in the allowance for credit losses during 2020 was predominately related to updated credit loss forecast models using multiple Moody’s economic scenarios previously discussed in Provision for Credit Losses as well as continued economic uncertainty due to the COVID-19 pandemic. Certain industries are being more adversely impacted than others by this pandemic, such as the restaurant, retail and hotel industries, and there remains substantial uncertainty regarding how borrowers in these industries will recover. Our allowance for credit losses at December 31, 2020 was at the high-end of our calculated range, although it was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, future of government assistance in response to the COVID-19 pandemic, and other related factors.
The following table sets forth the sum of the amounts of the allowance for loancredit 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. TheseThe allowance amounts have been computed using the Company’s internal grading system,for credit losses by loan category is determined by i) our estimated reserve factors by category including applicable qualitative adjustments and ii) any specific impairment analysis, qualitative and quantitative factor allocations.allowance allocations that are identified on individually evaluated loans. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories.
Table 12:13: Allocation of Allowance for LoanCredit Losses
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Allowance Amount | % of loans(1) | Allowance Amount | % of loans(1) | Allowance Amount | % of loans(1) | Allowance Amount | % of loans(1) | Allowance Amount | % of loans(1) | (Dollars in thousands) | Allowance Amount | % of loans (1) | Allowance Amount | % of loans (1) | Allowance Amount | % of loans (1) | Allowance Amount | % of loans (1) | Allowance Amount | % of loans (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credit cards | $ | 4,051 | 2.1% | $ | 3,923 | 2.4% | $ | 3,784 | 3.2% | $ | 3,779 | 4.3% | $ | 3,893 | 5.5% | Credit cards | $ | 7,472 | 1.4% | $ | 4,051 | 1.4% | $ | 3,923 | 1.7% | $ | 3,784 | 1.7% | $ | 3,779 | 3.3% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 1,998 | 2.0% | 2,380 | 2.4% | 3,489 | 4.9% | 2,796 | 7.0% | 1,853 | 6.4% | Other consumer | 4,100 | 1.6% | 1,998 | 1.7% | 2,380 | 1.9% | 3,489 | 3.1% | 2,796 | 6.4% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate | 38,717 | 71.5% | 29,743 | 70.8% | 27,281 | 74.3% | 21,817 | 70.0% | 19,522 | 67.9% | Real estate | 182,868 | 71.5% | 39,161 | 75.5% | 29,838 | 75.1% | 27,699 | 75.3% | 22,771 | 74.5% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | 22,863 | 21.5% | 20,514 | 23.0% | 7,007 | 17.1% | 7,739 | 18.2% | 5,985 | 20.0% | Commercial | 42,093 | 21.3% | 22,863 | 19.5% | 20,514 | 20.1% | 7,007 | 18.2% | 7,739 | 15.6% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 171 | 2.9% | 39 | 1.4% | 107 | 0.5% | 155 | 0.5% | 98 | 0.2% | Other | 1,517 | 4.2% | 171 | 1.9% | 39 | 1.2% | 107 | 1.7% | 155 | 0.2% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (2) | $ | 67,800 | 100.0% | $ | 56,599 | 100.0% | $ | 41,668 | 100.0% | $ | 36,286 | 100.0% | $ | 31,351 | 100.0% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | $ | 238,050 | 100.0% | $ | 68,244 | 100.0% | $ | 56,694 | 100.0% | $ | 42,086 | 100.0% | $ | 37,240 | 100.0% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_________________________
(1) Percentage of loans in each category to total loans, excluding loans acquired.loans.
55
| Investments and Securities | ||
Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as either held-to-maturity, available-for-sale or trading.
Held-to-maturity securities, which include any security for which managementthe Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.
Available-for-sale securities, which include any security for which managementthe Company has no immediate plansplan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the specificindividual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.
Our philosophy regarding investments is conservative based on investment type and maturity. Investments in the portfolio primarily include U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities and municipal securities. Our general policy is not to invest in derivative type investments or high-risk securities, except for collateralized mortgage-backed securities for which collection of principal and interest is not subordinated to significant superior rights held by others.
Held-to-maturity (or “HTM”) and available-for-sale (or “AFS”) investment securities were $40.9$333.0 million and $3.5 billion, respectively, at December 31, 2019,2020, compared to the held-to-maturity amount of $289.2$40.9 million and available-for-sale amount of $2.2$3.3 billion at December 31, 2018.2019.
As of December 31, 2019, $644.02020, $477.2 million, or 18.6%13.7%, of the available-for-sale securities were invested in obligations of U.S. Treasury and U.S. Government agency securities, 78.8%government agencies, 0.4% of which will mature in less than five years.one year or less.
We had approximately $1.8$1.4 billion, or 50.2%37.2%, of our total portfolio invested in mortgaged-backed securities at December 31, 2019. Investments with limited marketability, such2020. These mortgage-backed securities were issued by agencies of the U.S. government.
We anticipate our security portfolio to continue to increase during 2021 as stockwe reinvest PPP loan repayments and utilize the additional liquidity currently held in Cash and Cash Equivalents. We will continue to look for opportunities to maximize the value of the investment portfolio.
The adoption of ASU 2016-13 at the beginning of 2020 required us to replace the existing impairment models for financial assets, which includes investment securities. Under this model, an estimate of expected credit losses that represents all contractual cash flows that is deemed uncollectible over the contractual life of the financial asset must be recorded. Our allowance for credit losses related to HTM and AFS securities was $2.9 million and $312,000, respectively, at December 31, 2020.
An allowance for credit losses related to mortgage-backed securities and U.S. government agencies was not recorded as of December 31, 2020 due to those securities being explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. See Note 3, Investment Securities, in the FRB and the Federal Home Loan Bank, are carried at cost and are reported as other availableaccompanying Notes to Consolidated Financial Statements for sale securities.additional information related to our allowance for credit losses on investment securities held.
We had $54.8 million of gross realized gains and $15,000 of gross realized losses from the sale of securities during the year ended December 31, 2020 compared to $13.3 million of gross realized gains and $4,000 of gross realized losses from the sale of securities during the year ended December 31, 2019 compared to $65,000 of gross realized gains and $4,000 of gross realized losses from the sale of securities during the year ended December 31, 2018.2019.
56
Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time we expect to receive full value for the securities. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Furthermore, as of December 31, 2019,2020, management also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2019,2020, management believes the impairmentsdeclines in fair value detailed in the table below are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
Table 1314 presents the carryingamortized cost, fair value and fair value ofallowance for credit losses on investment securities for each of the years indicated.
Table 13:14: Investment Securities
| (In thousands) | Amortized Cost | Allowance for Credit Losses | Net Carrying Amount | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | |||||||||||||||||||||||||||||
| Held-to-maturity | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 22,354 | $ | — | $ | 22,354 | $ | 683 | $ | — | $ | 23,037 | |||||||||||||||||||||||
| State and political subdivisions | 312,416 | (2,307) | 310,109 | 8,148 | (30) | 318,227 | |||||||||||||||||||||||||||||
| Other securities | 1,176 | (608) | 568 | 93 | — | 661 | |||||||||||||||||||||||||||||
| Total HTM | $ | 335,946 | $ | (2,915) | $ | 333,031 | $ | 8,924 | $ | (30) | $ | 341,925 | |||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 10,796 | $ | — | $ | 10,796 | $ | 71 | $ | (59) | $ | 10,808 | |||||||||||||||||||||||
| State and political subdivisions | 27,082 | — | 27,082 | 849 | — | 27,931 | |||||||||||||||||||||||||||||
| Other securities | 3,049 | — | 3,049 | 67 | — | 3,116 | |||||||||||||||||||||||||||||
| Total HTM | $ | 40,927 | $ | — | $ | 40,927 | $ | 987 | $ | (59) | $ | 41,855 | |||||||||||||||||||||||
| (In thousands) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| U.S. Government agencies | $ | 477,693 | $ | — | $ | 844 | $ | (1,300) | $ | 477,237 | |||||||||||||||||||
| Mortgage-backed securities | 1,374,769 | — | 21,261 | (1,094) | 1,394,936 | ||||||||||||||||||||||||
| State and political subdivisions | 1,416,136 | (217) | 55,111 | (307) | 1,470,723 | ||||||||||||||||||||||||
| Other securities | 128,445 | (95) | 2,447 | (95) | 130,702 | ||||||||||||||||||||||||
| Total AFS | $ | 3,397,043 | $ | (312) | $ | 79,663 | $ | (2,796) | $ | 3,473,598 | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| U.S. Treasury | $ | 449,729 | $ | — | $ | 112 | $ | (112) | $ | 449,729 | |||||||||||||||||||
| U.S. Government agencies | 194,207 | — | 1,313 | (1,271) | 194,249 | ||||||||||||||||||||||||
| Mortgage-backed securities | 1,738,584 | — | 8,510 | (4,149) | 1,742,945 | ||||||||||||||||||||||||
| State and political subdivisions | 860,539 | — | 20,983 | (998) | 880,524 | ||||||||||||||||||||||||
| Other securities | 20,092 | — | 822 | (18) | 20,896 | ||||||||||||||||||||||||
| Total AFS | $ | 3,263,151 | $ | — | $ | 31,740 | $ | (6,548) | $ | 3,288,343 | |||||||||||||||||||
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| Years Ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Estimated Fair | Amortized | Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||||||||||||
| (In thousands) | Cost | Gains | (Losses) | Value | Cost | Gains | (Losses) | Value | |||||||||||||||||||||||
| Held-to-Maturity | |||||||||||||||||||||||||||||||
| U.S. Government agencies | $ | — | $ | — | $ | — | $ | — | $ | 16,990 | $ | — | $ | (49 | ) | $ | 16,941 | ||||||||||||||
| Mortgage-backed securities | 10,796 | 71 | (59 | ) | 10,808 | 13,346 | 5 | (412 | ) | 12,939 | |||||||||||||||||||||
| State and political subdivisions | 27,082 | 849 | — | 27,931 | 256,863 | 3,029 | (954 | ) | 258,938 | ||||||||||||||||||||||
| Other securities | 3,049 | 67 | — | 3,116 | 1,995 | 17 | — | 2,012 | |||||||||||||||||||||||
| Total HTM | $ | 40,927 | $ | 987 | $ | (59 | ) | $ | 41,855 | $ | 289,194 | $ | 3,051 | $ | (1,415 | ) | $ | 290,830 | |||||||||||||
| Available-for-Sale | |||||||||||||||||||||||||||||||
| U.S. Treasury | $ | 449,729 | $ | 112 | $ | (112 | ) | $ | 449,729 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| U.S. Government agencies | 194,207 | 1,313 | (1,271 | ) | 194,249 | 157,523 | 518 | (3,740 | ) | 154,301 | |||||||||||||||||||||
| Mortgage-backed securities | 1,738,584 | 8,510 | (4,149 | ) | 1,742,945 | 1,552,487 | 3,097 | (32,684 | ) | 1,522,900 | |||||||||||||||||||||
| State and political subdivisions | 860,539 | 20,983 | (998 | ) | 880,524 | 320,142 | 171 | (5,470 | ) | 314,843 | |||||||||||||||||||||
| Other securities | 185,087 | 822 | (18 | ) | 185,891 | 157,471 | 2,251 | (14 | ) | 159,708 | |||||||||||||||||||||
| Total AFS | $ | 3,428,146 | $ | 31,740 | $ | (6,548 | ) | $ | 3,453,338 | $ | 2,187,623 | $ | 6,037 | $ | (41,908 | ) | $ | 2,151,752 | |||||||||||||
Table 1415 reflects the amortized cost and estimated fair value of securities at December 31, 2019,2020, by contractual maturity and the weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis, assuming a 26.135% tax rate) of such securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Table 14:15: Maturity Distribution of Investment Securities
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Over | Over | |||||||||||||||||||||||||||||||
| 1 year | 5 years | Total | ||||||||||||||||||||||||||||||
| 1 year | through | through | Over | No fixed | Amortized | Par | Fair | |||||||||||||||||||||||||
| (In thousands) | or less | 5 years | 10 years | 10 years | maturity | Cost | Value | Value | ||||||||||||||||||||||||
| Held-to-Maturity | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | — | $ | — | $ | — | $ | — | $ | 10,796 | $ | 10,796 | $ | 10,909 | $ | 10,808 | ||||||||||||||||
| State and political subdivisions | 4,897 | 15,972 | 6,213 | — | — | 27,082 | 26,844 | 27,931 | ||||||||||||||||||||||||
| Other securities | — | — | 1,174 | 1,875 | — | 3,049 | 3,075 | 3,116 | ||||||||||||||||||||||||
| Total | $ | 4,897 | $ | 15,972 | $ | 7,387 | $ | 1,875 | $ | 10,796 | $ | 40,927 | $ | 40,828 | $ | 41,855 | ||||||||||||||||
| Percentage of total | 12.0 | % | 39.0 | % | 18.0 | % | 4.6 | % | 26.4 | % | 100.0 | % | ||||||||||||||||||||
| Weighted average yield | 2.4 | % | 2.6 | % | 5.7 | % | 1.0 | % | 2.3 | % | 3.0 | % | ||||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||||||||||
| U.S. Treasury | $ | 449,729 | $ | — | $ | — | $ | — | $ | — | $ | 449,729 | $ | 450,000 | $ | 449,729 | ||||||||||||||||
| U.S. Government agencies | 33,053 | 24,543 | 25,814 | 110,797 | — | 194,207 | 192,665 | 194,249 | ||||||||||||||||||||||||
| Mortgage-backed securities | — | — | — | — | 1,738,584 | 1,738,584 | 1,699,947 | 1,742,945 | ||||||||||||||||||||||||
| State and political subdivisions | 11,649 | 48,406 | 86,126 | 714,358 | — | 860,539 | 840,880 | 880,524 | ||||||||||||||||||||||||
| Other securities | — | — | 17,149 | — | 167,938 | 185,087 | 185,511 | 185,891 | ||||||||||||||||||||||||
| Total | $ | 494,431 | $ | 72,949 | $ | 129,089 | $ | 825,155 | $ | 1,906,522 | $ | 3,428,146 | $ | 3,369,003 | $ | 3,453,338 | ||||||||||||||||
| Percentage of total | 14.4 | % | 2.1 | % | 3.8 | % | 24.1 | % | 55.6 | % | 100.0 | % | ||||||||||||||||||||
| Weighted average yield | 1.5 | % | 2.4 | % | 3.0 | % | 3.0 | % | 2.3 | % | 2.4 | % | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Over | Over | ||||||||||||||||||||||||||||||||||||||||||||||
| 1 year | 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||
| 1 year | through | through | Over | No fixed | Amortized | Par | Fair | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | or less | 5 years | 10 years | 10 years | maturity | Cost | Value | Value | |||||||||||||||||||||||||||||||||||||||
| Held-to-Maturity | |||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | — | $ | — | $ | — | $ | — | $ | 22,354 | $ | 22,354 | $ | 22,000 | $ | 23,037 | |||||||||||||||||||||||||||||||
| State and political subdivisions | 5,821 | 10,708 | 4,051 | 291,836 | — | 312,416 | 311,301 | 318,227 | |||||||||||||||||||||||||||||||||||||||
| Other securities | — | — | 1,176 | — | — | 1,176 | 1,200 | 661 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 5,821 | $ | 10,708 | $ | 5,227 | $ | 291,836 | $ | 22,354 | $ | 335,946 | $ | 334,501 | $ | 341,925 | |||||||||||||||||||||||||||||||
| Percentage of total | 1.7 | % | 3.2 | % | 1.5 | % | 86.9 | % | 6.7 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||
| Weighted average yield | 2.4 | % | 2.9 | % | 6.3 | % | 2.2 | % | 2.2 | % | 2.3 | % | |||||||||||||||||||||||||||||||||||
| Available-for-Sale | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government agencies | $ | — | $ | 3,768 | $ | 79,309 | $ | 394,616 | $ | — | $ | 477,693 | $ | 475,802 | $ | 477,237 | |||||||||||||||||||||||||||||||
| Mortgage-backed securities | — | — | — | — | 1,374,767 | 1,374,767 | 1,324,452 | 1,394,936 | |||||||||||||||||||||||||||||||||||||||
| State and political subdivisions | 14,017 | 21,683 | 27,404 | 1,353,034 | — | 1,416,138 | 1,396,550 | 1,470,723 | |||||||||||||||||||||||||||||||||||||||
| Other securities | — | 5,183 | 122,329 | — | 933 | 128,445 | 128,183 | 130,702 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 14,017 | $ | 30,634 | $ | 229,042 | $ | 1,747,650 | $ | 1,375,700 | $ | 3,397,043 | $ | 3,324,987 | $ | 3,473,598 | |||||||||||||||||||||||||||||||
| Percentage of total | 0.4 | % | 0.9 | % | 6.7 | % | 51.5 | % | 40.5 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||
| Weighted average yield | 2.4 | % | 3.0 | % | 3.5 | % | 2.4 | % | 1.4 | % | 2.1 | % | |||||||||||||||||||||||||||||||||||
| Deposits | ||
Deposits are our primary source of funding for earning assets and are primarily developed through our network of 251204 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 December 31, 2019,2020, core deposits comprised 80.0%85.0% 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, with oversight by the Asset Liability Committee and the Bank’s Treasury Department, 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.
58
We manage our interest expense through deposit pricing. 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. We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.
Our total deposits as of December 31, 2019,2020, were $16.1$17.0 billion, an increase of $3.71 billion$878.1 million from December 31, 2018. The increase was primarily due to the 2019 acquisitions; however, we also achieved organic core deposit growth during 2019. This core deposit growth was partially offset by a $684.3 million decrease in our brokered and institutional deposits during the year. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $14.2 billion at December 31, 2020, compared to $12.8 billion at December 31, 2019, compared to $9.5 billion at December 31, 2018, a $3.3$1.3 billion increase. Total time deposits increased $380.8decreased $444.6 million to $2.8 billion at December 31, 2020, from $3.3 billion at December 31, 2019, from $2.9 billion at December 31, 2018.2019. We had $1.1 billion$512.3 million and $1.4$1.1 billion of brokered deposits at December 31, 2019,2020, and December 31, 2018,2019, respectively. Both consumer and commercial deposit balances have grown since the economic stimulus legislation, including legislation that established the PPP program, was implemented in mid-2020. We are managing our balance sheet and our net interest margin by continuing to eliminate several high-cost deposits related to public funds and brokered deposits.
Table 1516 reflects the classification of the average deposits and the average rate paid on each deposit category which is in excess of 10 percent of average total deposits for the three years ended December 31, 2019.2020.
Table 15:16: Average Deposit Balances and Rates
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid | (In thousands) | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid | |||||||||||||||||||||||||||||||||||||||||||
| Non-interest bearing transaction accounts | $ | 3,021,917 | — | % | $ | 2,697,235 | — | % | $ | 1,788,385 | — | % | Non-interest bearing transaction accounts | $ | 4,225,618 | — | % | $ | 3,021,917 | — | % | $ | 2,697,235 | — | % | |||||||||||||||||||||||||||||||
| Interest bearing transaction and savings deposits | 7,417,104 | 1.08 | % | 6,691,030 | 0.85 | % | 4,594,733 | 0.39 | % | Interest bearing transaction and savings deposits | 9,128,936 | 0.42 | % | 7,417,104 | 1.08 | % | 6,691,030 | 0.85 | % | |||||||||||||||||||||||||||||||||||||
| Time deposits | Time deposits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $100,000 or more | 1,994,276 | 2.02 | % | 1,366,745 | 1.50 | % | 650,560 | 0.72 | % | $100,000 or more | 1,823,198 | 1.37 | % | 1,994,276 | 2.02 | % | 1,366,745 | 1.50 | % | |||||||||||||||||||||||||||||||||||||
| Other time deposits | 1,099,818 | 1.67 | % | 977,558 | 1.00 | % | 780,141 | 0.64 | % | Other time deposits | 1,183,570 | 1.39 | % | 1,099,818 | 1.67 | % | 977,558 | 1.00 | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 13,533,115 | 1.03 | % | $ | 11,732,568 | 0.74 | % | $ | 7,813,819 | 0.36 | % | Total | $ | 16,361,322 | 0.49 | % | $ | 13,533,115 | 1.03 | % | $ | 11,732,568 | 0.74 | % | |||||||||||||||||||||||||||||||
The Company’s maturities of large denomination time deposits at December 31, 20192020 and 20182019 are presented in Table 16.17.
Table 16:17: Maturities of Large Denomination Time Deposits
| Time Certificates of Deposit ($100,000 or more) December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (In thousands) | Balance | Percent | Balance | Percent | |||||||||||||||||||
| Maturing | |||||||||||||||||||||||
| Three months or less | $ | 431,819 | 21.3 | % | $ | 676,042 | 31.4 | % | |||||||||||||||
| Over 3 months to 6 months | 416,205 | 20.5 | % | 427,426 | 19.9 | % | |||||||||||||||||
| Over 6 months to 12 months | 960,589 | 47.4 | % | 650,906 | 30.2 | % | |||||||||||||||||
| Over 12 months | 219,527 | 10.8 | % | 399,050 | 18.5 | % | |||||||||||||||||
| Total | $ | 2,028,140 | 100.0 | % | $ | 2,153,424 | 100.0 | % | |||||||||||||||
Time Certificates of Deposit ($100,000 or more) December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| (In thousands) | Balance | Percent | Balance | Percent | ||||||||||
| Maturing | ||||||||||||||
| Three months or less | $ | 676,042 | 31.4 | % | $ | 511,414 | 35.5 | % | ||||||
| Over 3 months to 6 months | 427,426 | 19.9 | % | 240,056 | 16.6 | % | ||||||||
| Over 6 months to 12 months | 650,906 | 30.2 | % | 407,989 | 28.3 | % | ||||||||
| Over 12 months | 399,050 | 18.5 | % | 283,070 | 19.6 | % | ||||||||
| Total | $ | 2,153,424 | 100.0 | % | $ | 1,442,529 | 100.0 | % | ||||||
| Fed Funds Purchased and Securities Sold under Agreements to Repurchase | ||
Federal funds purchased and securities sold under agreements to repurchase were $299.1 million at December 31, 2020, as compared to $150.1 million at December 31, 2019, as compared to $95.8 million at December 31, 2018.2019.
We have historically funded our growth in earning assets through the use of core deposits, large certificates of deposits from local markets, reciprocal brokered deposits, FHLB borrowings and Federal funds purchased. Management anticipates that these sources will provide necessary funding in the foreseeable future.
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| Other Borrowings and Subordinated Debentures | ||
Our total debt was $1.69$1.72 billion and $1.70$1.69 billion at December 31, 20192020 and December 31, 2018,2019, respectively. The outstanding balance for December 31, 20192020 includes $1.25$1.31 billion in FHLB short-term advances; $12.7 million in FHLB long-term advances; $330.0 million in subordinated notes; $58.3$52.9 million of trust preferred securities other subordinated debt and unamortized debt issuance costs; and $34.9$33.4 million of other long-term debt.
A summary of information related to our FHLB short-term advances, including FOTO advances in 2019 and 2018, is presented in Table 17.18.
Table 17:18: Short-Term Borrowings
| December 31, | December 31, | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | (Dollars in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||||||
| Amount outstanding at year-end | $ | 1,250,000 | $ | 1,330,000 | $ | 1,112,000 | Amount outstanding at year-end | $ | — | $ | 1,250,000 | $ | 1,330,000 | |||||||||||||||
| Weighted-average interest rate at year-end | 1.44 | % | 2.12 | % | 1.31 | % | Weighted-average interest rate at year-end | — | % | 1.44 | % | 2.12 | % | |||||||||||||||
| Maximum amount outstanding at any month-end during the year | $ | 1,435,000 | $ | 1,435,000 | $ | 1,112,000 | Maximum amount outstanding at any month-end during the year | $ | 1,350,000 | $ | 1,435,000 | $ | 1,435,000 | |||||||||||||||
| Average amount outstanding during the year | $ | 1,183,873 | $ | 1,276,685 | $ | 481,362 | Average amount outstanding during the year | $ | 1,094,808 | $ | 1,183,873 | $ | 1,276,685 | |||||||||||||||
| Weighted-average interest rate for the year | 1.89 | % | 1.75 | % | 1.04 | % | Weighted-average interest rate for the year | 1.69 | % | 1.89 | % | 1.75 | % | |||||||||||||||
We assumed trust preferred securities and other subordinated debt in an aggregate principal amount, net of discounts, of $33.9 million related to the Landrum acquisition during 2019. During the second quarter of 2020, we repaid $5.9 million of other subordinated debt acquired from Landrum.
During 2017, we entered into a Revolving Credit Agreement with U.S. Bank National Association and executed an unsecured Revolving Credit Agreement (the “Credit(“Credit Agreement”) pursuant to which we may borrow, prepay and reborrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. In October 2018, we entered into a First Amendment to the Credit Agreement with U.S. Bank National Association, which primarily extended the expiration date to October 2019 and reduced the $75.0 million to $50.0 million. In December 2018, we entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants of the Credit Agreement are evaluated on a consolidated basis. All amounts borrowed, together with applicable interest, fees, and other amounts owed by us were due and payable on October 4, 2019. The balance due under the Credit Agreement at December 31, 2018 and the expiration date was zero. We did not renew the Credit Agreement upon the expiration date in October 2019.
In March 2018, we issued $330.0 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes (“Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The CompanyWe incurred $3.6 million in debt issuance costs related to the offering. The Notes will mature on April 1, 2028 and will be subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries.
During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Credit Agreement and the unsecured debt from correspondent banks. During 2018, we repaid the $75.0 million outstanding balance on the Credit Agreement, $43.3 million in notes payable, $94.9 million in trust preferred securities and $19.1 million in subordinated debt acquired from First Texas.
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Aggregate annual maturities of debt at December 31, 20192020 are presented in table 18.Table 19.
Table 18:19: Maturities of Debt
| Annual Maturities | |||||
| Year | (In thousands) | ||||
| 2021 | $ | 2,812 | |||
| 2022 | 1,921 | ||||
| 2023 | 1,758 | ||||
| 2024 | 2,399 | ||||
| 2025 | 4,948 | ||||
| Thereafter | 1,711,103 | ||||
| Total | $ | 1,724,941 | |||
| Annual | |||||
| (In thousands) | Year | Maturities | |||
| 2020 | $ | 1,253,299 | |||
| 2021 | 3,016 | ||||
| 2022 | 2,187 | ||||
| 2023 | 2,366 | ||||
| 2024 | 2,446 | ||||
| Thereafter | 422,545 | ||||
| Total | $ | 1,685,859 | |||
| Capital | ||
Overview
At December 31, 2019,2020, total capital reached $2.99was $2.98 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At December 31, 2019,2020, our common equity to asset ratio was 14.06%13.31% compared to 13.58%14.06% at year-end 2018.2019.
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.
On February 12, 2019, the Companywe filed its Amended and Restated Articles of Incorporation (“February Amended Articles”) with the Arkansas Secretary of State. The February Amended Articles classified and designated three series of preferred stock out of the Corporation’sour authorized preferred stock: Series A Preferred Stock, Par Value $0.01 Per Share (having 40,000 authorized shares); Series B Preferred Stock, Par Value $0.01 Per Share (having 2,000.02 authorized shares); and 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C (having 140 authorized shares).
On October 29, 2019, we filed our Amended and Restated Articles of Incorporation (“October Amended Articles”) with the Arkansas Secretary of State. The October Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share, out of our authorized preferred stock. The October Amended Articles also canceled our 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C Preferred Stock, of which no shares were ever issued or outstanding.
On January 18, 2018, our Board of Directors approved a two-for-one stock split of the Company’s outstanding Class A common stock, $0.01 par value (“Common Stock”), in the form of a 100% stock dividend for shareholders of record as of the close of business on January 30, 2018. The new shares were distributed by our transfer agent, Computershare, and our common stock began trading on a split-adjusted basis on the Nasdaq Global Select Market on February 9, 2018. All previously reported share and per share data included in filings subsequent to February 8, 2018 are restated to reflect the retroactive effect of this two-for-one stock split.
On March 19, 2018, we filed a shelf registration with the SEC. The shelf registration statement provides increased flexibility and more efficient access to raise capital from time to time through the sale of common stock, preferred stock, debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, units or a combination thereof, subject to market conditions. Specific terms and prices are determined at the time of any offering under a separate prospectus supplement that we are required to file with the SEC at the time of the specific offering.
On April 19, 2018, shareholders of the Company approved an increase in the number of authorized shares of Common Stock from 120,000,000 to 175,000,000.
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Stock Repurchase
On July 23, 2012, the Companyour Board of Directors approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares (split adjusted) of common stock (“2012 Program”). On October 22, 2019, the Companywe announced a new stock repurchase program (the “Program”), under which we may repurchase up to $60,000,000 of our Class A common stock currently issued and outstanding. The Program replaced the 2012 Program. On March 5, 2020, we announced an amendment to the Program that increased the maximum amount that may be repurchased under the Program from $60,000,000 to $180,000,000. The Program will terminate on October 31, 2021 (unless terminated sooner) and replaced the 2012 Program..
Under the Program, we may repurchase shares of our common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by the Company’s management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of the Company’sour common stock, corporate considerations, the Company’sour working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate the Companyus to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow.
During 2019,2020, we repurchased 5,956,700 shares at an average price of $19.03 per share under the Program. We repurchased 390,000 shares at an average price of $25.97 per share under the Program. We had no stock repurchasesProgram during 2018.2019.
Cash Dividends
We declared cash dividends on our common stock of $0.68 per share for the twelve months ended December 31, 2020, compared to $0.64 per share for the twelve months ended December 31, 2019, compared to $0.60 per share for the twelve months ended December 31, 2018.an increase of $0.04, or 6%. 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. See Item 5, Market for Registrant’s Common Equity and Related Stockholder Matters, for additional information regarding cash dividends.
Parent Company Liquidity
The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and cash needs for acquisitions. 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 Simmons Bank is subject to various regulatory limitations. The Company continually assesses its capital and liquidity needs and the best way to meet them, including, without limitation, through capital raising in the market via stock or debt offerings. See Item 7A, LiquidityQuantitative and Qualitative Disclosures About Market Risk, for additional information regarding the parent company’s liquidity.
Risk-Based Capital
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, Tier 1 and common equity 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 December 31, 2019,2020, we meetmet all capital adequacy requirements to which we are subject.
As of the most recent notification from regulatory agencies, each subsidiarySimmons Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the subsidiary bankSimmons Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity 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’bank’s categories.
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Our risk-based capital ratios at December 31, 20192020 and 20182019 are presented in Table 1920 below:
Table 19:20: Risk-Based Capital
| December 31, | ||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Tier 1 capital: | ||||||||
| Stockholders’ equity | $ | 2,988,924 | $ | 2,246,434 | ||||
| Goodwill and other intangible assets | (1,160,079 | ) | (912,428 | ) | ||||
| Unrealized (gain) loss on available-for-sale securities, net of income taxes | (20,891 | ) | 27,374 | |||||
| Total Tier 1 capital | 1,807,954 | 1,361,380 | ||||||
| Tier 2 capital: | ||||||||
| Trust preferred securities and subordinated debt | 388,260 | 353,950 | ||||||
| Qualifying allowance for loan losses | 76,644 | 63,608 | ||||||
| Total Tier 2 capital | 464,904 | 417,558 | ||||||
| Total risk-based capital | $ | 2,272,858 | $ | 1,778,938 | ||||
| Risk weighted assets | $ | 16,554,081 | $ | 13,326,832 | ||||
| Assets for leverage ratio | $ | 18,852,798 | $ | 15,512,042 | ||||
| Ratios at end of year: | ||||||||
| Common equity Tier 1 ratio (CET1) | 10.92 | % | 10.22 | % | ||||
| Tier 1 leverage ratio | 9.59 | % | 8.78 | % | ||||
| Tier 1 risk-based capital ratio | 10.92 | % | 10.22 | % | ||||
| Total risk-based capital ratio | 13.73 | % | 13.35 | % | ||||
| Minimum guidelines: | ||||||||
| Common equity Tier 1 ratio (CET1) | 4.50 | % | 4.50 | % | ||||
| Tier 1 leverage ratio | 4.00 | % | 4.00 | % | ||||
| Tier 1 risk-based capital ratio | 6.00 | % | 6.00 | % | ||||
| Total risk-based capital ratio | 8.00 | % | 8.00 | % | ||||
| December 31, | |||||||||||
| (Dollars in thousands) | 2020 | 2019 | |||||||||
| Tier 1 capital: | |||||||||||
| Stockholders’ equity | $ | 2,976,656 | $ | 2,988,924 | |||||||
| CECL transition provision | 131,430 | — | |||||||||
| Goodwill and other intangible assets | (1,163,797) | (1,160,079) | |||||||||
| Unrealized gain on available-for-sale securities, net of income taxes | (59,726) | (20,891) | |||||||||
| Total Tier 1 capital | 1,884,563 | 1,807,954 | |||||||||
| Tier 2 capital: | |||||||||||
| Trust preferred securities and subordinated debt | 382,874 | 388,260 | |||||||||
| Qualifying allowance for credit losses and reserve for unfunded commitments | 89,546 | 76,644 | |||||||||
| Total Tier 2 capital | 472,420 | 464,904 | |||||||||
| Total risk-based capital | $ | 2,356,983 | $ | 2,272,858 | |||||||
| Risk weighted assets | $ | 14,048,608 | $ | 16,554,081 | |||||||
| Assets for leverage ratio | $ | 20,765,127 | $ | 18,852,798 | |||||||
| Ratios at end of year: | |||||||||||
| Common equity Tier 1 ratio (CET1) | 13.41 | % | 10.92 | % | |||||||
| Tier 1 leverage ratio | 9.08 | % | 9.59 | % | |||||||
Tier 1 leverage ratio, excluding average PPP loans (non-GAAP) (1) | 9.50 | % | N/A | ||||||||
| Tier 1 risk-based capital ratio | 13.41 | % | 10.92 | % | |||||||
| Total risk-based capital ratio | 16.78 | % | 13.73 | % | |||||||
| Minimum guidelines: | |||||||||||
| Common equity Tier 1 ratio (CET1) | 4.50 | % | 4.50 | % | |||||||
| Tier 1 leverage ratio | 4.00 | % | 4.00 | % | |||||||
| Tier 1 risk-based capital ratio | 6.00 | % | 6.00 | % | |||||||
| Total risk-based capital ratio | 8.00 | % | 8.00 | % | |||||||
_________________________
(1) PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. Tier 1 leverage ratio, excluding average PPP loans is a non-GAAP measurement.
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 introduced substantial revisions to the risk-based capital requirements applicable to bank holding companies and depository institutions.
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 expanded the risk-weighting categories from 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.
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The final rules included 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 raised 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 became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance with all of the final rule’s requirements on January 1, 2019.
Prior to December 31, 2017, Tier 1 capital included common equity Tier 1 capital and certain additional Tier 1 items as provided under the Basel III Capital Rules. The Tier 1 capital for the Company consisted of common equity Tier 1 capital and trust preferred
securities. The Basel III Capital Rules include certain provisions that require trust preferred securities to be phased out of qualifying Tier 1 capital when assets surpass $15 billion. As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt of $388.3$382.9 million is included as Tier 2 and total capital as of December 31, 2019.2020.
| Off-Balance Sheet Arrangements and Aggregate Contractual Obligations | ||
In the normal course of business, the Company enters into a number of financial commitments. Examples of these commitments at December 31, 2019,2020, include but are not limited to long-term debt financing, operating lease obligations, unfunded loan commitments and letters of credit.
Our long-term debt at December 31, 2019,2020, includes subordinated debt, notes payable and FHLB advances, all of which we are contractually obligated to repay in future periods.
Beginning January 1, 2019, the Company recognizes all leases under ASC Topic 842, Leases, that requires lessees to record assets and liabilities on the balance sheet for all leases with a lease term of 12 months or longer. See Note 7,6, Right-of-Use Lease Assets and Lease Liabilities and Note 20, New Accounting Standards, for additional information regarding our operating leases and the impact of adoption of the new lease accounting standard.
Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having fixed expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future funding requirements.
The funding requirements of the Company’s most significant financial commitments at December 31, 20192020 are shown in Table 20.21.
Table 20:21: Funding Requirements of Financial Commitments
| Payments due by period | |||||||||||||||||||||||||||||
| Less than | 1-3 | 3-5 | Greater than | ||||||||||||||||||||||||||
| (In thousands) | 1 Year | Years | Years | 5 Years | Total | ||||||||||||||||||||||||
| Long-term debt | $ | 2,812 | $ | 3,679 | $ | 7,347 | $ | 1,711,103 | $ | 1,724,941 | |||||||||||||||||||
| Undiscounted minimum lease payments | 9,192 | 12,632 | 5,603 | 8,000 | 35,427 | ||||||||||||||||||||||||
| Credit card loan commitments | 671,488 | — | — | — | 671,488 | ||||||||||||||||||||||||
| Other loan commitments | 2,355,953 | — | — | — | 2,355,953 | ||||||||||||||||||||||||
| Letters of credit | 49,029 | — | — | — | 49,029 | ||||||||||||||||||||||||