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SFNC > SEC Filings for SFNC > Form 10-Q on 10-May-2013All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


Our net income for the three months ended March 31, 2013, was $5.9 million and diluted earnings per share were $0.36, compared to net income of $6.4 million and $0.37 diluted earnings per share for the same period of 2012. During the quarter we incurred $146,000 in after-tax merger related expenses associated with our 2012 FDIC-assisted acquisitions. Excluding this nonrecurring item, core net income for the three months ended March 31, 2013, was $6.1 million and diluted core earnings per share were $0.37, flat when compared to the same period of 2012.

Considering interest rates continue at historical lows and due to the seasonality that we experience in the first quarter each year, we are pleased with our overall earnings performance. More so, we are pleased with the positive trends in our balance sheet, as reflected in our normalized organic loan growth of approximately 4%, which enabled us to produce a net interest margin of 4.01%. The organic loan growth, coupled with strong asset quality, position us favorably for the balance of the year.

Stockholders' equity as of March 31, 2013, was $406.5 million, book value per share was $24.62 and tangible book value per share was $20.73. Our ratio of stockholders' equity to total assets was 11.5% and the ratio of tangible stockholders' equity to tangible assets was 9.8% at March 31, 2013. The Company's Tier I leverage ratio of 10.8%, as well as our other regulatory capital ratios, remain significantly above the "well capitalized" levels (see Table 12 in the Capital section of this Item).

During the quarter we fully integrated the acquired locations, including system conversions, on our 2012 FDIC-assisted acquisitions. Those acquisitions were strategic in that they complement the footprint we have been building in the Kansas and Missouri market. Our exceptional level of capital positions us to continue to take advantage of additional acquisition opportunities to expand our presence in that geographic region through additional FDIC and/or traditional acquisitions going forward. We continue to actively pursue the right opportunities that meet our strategic plan regarding mergers and acquisitions.

We continue to allocate our earnings, less dividends, to our stock repurchase program. We believe our stock, at its recent market price, continues to be an excellent investment. We increased our quarterly dividend from $0.20 to $0.21 per share, beginning with the first quarter. On an annual basis, the $0.84 per share dividend results in a 3.4% return based on our recent stock price.

Total assets were $3.54 billion at March 31, 2013, compared to $3.53 billion at December 31, 2012. Total loans, including loans acquired, were $1.85 billion at March 31, 2013, compared to $1.92 billion at December 31, 2012. We continue to have good asset quality.

Simmons First National Corporation is an Arkansas based financial holding company with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and Hot Springs, Arkansas. Our eight banks conduct financial operations from 96 offices, of which 92 are financial centers, located in 55 communities in Arkansas, Kansas and Missouri.



We follow accounting and reporting policies that conform, in all material respects, to generally accepted accounting principles and to general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.

The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for loan losses, (b) acquisition accounting and valuation of covered loans and related indemnification asset, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of employee benefit plans and (e) income taxes.

Allowance for Loan Losses on Loans Not Acquired

The allowance for loan losses is management's estimate of probable losses in the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Prior to the fourth quarter of 2012, we measured the appropriateness of the allowance for loan losses in its entirety using (a)ASC 450-20 which includes quantitative (historical loss rates) and qualitative factors (management adjustment factors) such as (1) lending policies and procedures, (2) economic outlook and business conditions, (3) level and trend in delinquencies, (4) concentrations of credit and (5) external factors and competition; which are combined with the historical loss rates to create the baseline factors that are allocated to the various loan categories; (b) specific allocations on impaired loans in accordance with ASC 310-10; and (c) the unallocated amount.

The unallocated amount was evaluated on the loan portfolio in its entirety and was based on additional factors, such as (1) trends in volume, maturity and composition, (2) national, state and local economic trends and conditions, (3) the experience, ability and depth of lending management and staff and (4) other factors and trends that will affect specific loans and categories of loans, such as a heightened risk in agriculture, credit card and commercial real estate loan portfolios.

As of December 31, 2012, we refined our allowance calculation. As part of the refinement process, we evaluated the criteria previously applied to the entire loan portfolio, and used to calculate the unallocated portion of the allowance, and applied those criteria to each specific loan category. For example, the impact of national, state and local economic trends and conditions was evaluated by and allocated to specific loan categories.

After this refinement, the allowance is calculated monthly based on management's assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) concentrations of credit within the loan portfolio, (6) the experience, ability and depth of lending management and staff and (7) other factors and trends that will affect specific loans and categories of loans. We establish general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued for probable losses on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral.

Acquisition Accounting, Covered Loans and Related Indemnification Asset

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

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

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

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

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding, claim receivable is recorded until cash is received from the FDIC. For further discussion of our acquisition and loan accounting, see Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report.

Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles - Goodwill and Other, as amended by ASU 2011-08 - Testing Goodwill for Impairment. ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually, or more frequently if certain conditions occur. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses.

Employee Benefit Plans

We have adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights and bonus stock awards. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of bonus shares granted to directors, officers and other key employees.

In accordance with ASC Topic 718, Compensation - Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. For additional information, see Note 13, Stock Based Compensation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report.

Income Taxes

We are subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company's income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management's analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities.



Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 39.225%.

Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. Historically, approximately 70% of our loan portfolio and approximately 80% of our time deposits have repriced in one year or less. These historical percentages are fairly consistent with our current interest rate sensitivity.

Net Interest Income

For the three month period ended March 31, 2013, net interest income on a fully taxable equivalent basis was $31.1 million, an increase of $2.2 million, or 7.7%, over the same period in 2012. The increase in net interest income was the result of a $1.1 million increase in interest income and a $1.1 million decrease in interest expense.

The increase in interest income of $1.1 million can be attributed to our FDIC-assisted acquisitions and legacy loans. The increased yield in our loan portfolio, excluding acquired covered loans, caused a $1.4 million increase in interest income. The acquired covered loans generated an additional $0.2 million in interest income. The offsetting $0.5 million decrease in interest income is primarily due to a 35 basis point decline in the yield on investment securities.

Regarding the $0.2 million increase in interest income from covered loans, a $1.8 million interest income decrease from covered loan yields was more than offset by a $2.0 million increase in interest income due to the increased balances in the portfolio associated with our 2012 FDIC-assisted acquisitions. The $1.8 million decrease resulted from lower average yields on the covered loans, decreasing to 12.76% in 2013 from 16.97% in 2012. The newly acquired covered loans carried a lower yield due to the additional income accretion being recognized on the existing covered loans in conjunction with the fair value of the loan pools acquired in the 2010 FDIC-assisted transactions as discussed in Note 5, Loans Acquired, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Each quarter, we estimate the cash flows expected to be collected from the acquired loan pools. Beginning in the fourth quarter of 2011, this cash flows estimate increased based on the payment histories and reduced loss expectations of the loan pools. This resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduce the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. The estimated adjustments to the indemnification assets will be amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected life of the loan pools, whichever is shorter, and are recorded in non-interest expense.

For the three months ended March 31, 2013, the adjustments increased interest income by $2.9 million and decreased non-interest income by $2.8 million. The net increase to pre-tax income was $119,000 for the three months ended March 31, 2013. Because these adjustments will be recognized over the estimated remaining lives of the loan pools and the remainder of the loss sharing agreements, respectively, they will impact future periods as well. The current estimate of the remaining accretable yield adjustment that will positively impact interest income is $22.1 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $19.1 million. Of the remaining adjustments, we expect to recognize $8.5 million of interest income and a $8.2 million reduction of non-interest income during the remainder of 2013. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loan pools.

The $1.1 million decrease in interest expense is the result of a 25 basis point decrease in cost of funds due to competitive repricing during a low interest rate environment. The lower interest rates accounted for a $1.0 million decrease in interest expense, while declining volume caused a $0.1 million decrease in interest expense. The most significant component of this decrease was the $0.7 million decrease associated with the repricing of the Company's time deposits that resulted from time deposits that matured during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate paid on time deposits decreased 31 basis points from 1.06% to 0.75%. Lower rates on interest bearing transaction and savings accounts resulted in an additional $0.2 million decrease in interest expense, with the average rate decreasing by 5 basis points from 0.22% to 0.17%.

Net Interest Margin

Our net interest margin increased 8 basis points to 4.01% for the three month period ended March 31, 2013, when compared to 3.93% for the same period in 2012. The margin has been strengthened from the impact of the accretable yield adjustments discussed above. Also, the acquisition of loans, along with our ability to stabilize the size of our legacy loan portfolio, has allowed us to increase our level of higher yielding assets. Conversely, while keeping us prepared to benefit from rising interest rates, our high levels of liquidity continue to compress our margin.

Net Interest Income Tables

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable
equivalent basis for the three months ended March 31, 2013 and 2012,
respectively, as well as changes in fully taxable equivalent net interest margin
for the three months ended March 31, 2013, versus March 31, 2012.

Table 1: Analysis of Net Interest Margin
(FTE =Fully Taxable Equivalent)

                                         Three Months Ended
                                              March 31,
(In thousands)                            2013          2012

Interest income                        $   33,232     $ 31,988
FTE adjustment                              1,073        1,203
Interest income - FTE                      34,305       33,191
Interest expense                            3,157        4,270
Net interest income - FTE              $   31,148     $ 28,921

Yield on earning assets - FTE                4.41 %       4.51 %
Cost of interest bearing liabilities         0.51 %       0.73 %
Net interest spread - FTE                    3.90 %       3.78 %
Net interest margin - FTE                    4.01 %       3.93 %

Table 2: Changes in Fully Taxable Equivalent Net Interest Margin

                                                                                 Three Months Ended
                                                                                     March 31,
(In thousands)                                                                     2013 vs. 2012

Increase due to change in earning assets                                        $              3,620
Decrease due to change in earning asset yields                                                (2,507 )
Increase due to change in interest bearing liabilities                                            69
Increase due to change in interest rates paid on interest bearing liabilities                  1,044
Increase in net interest income                                                 $              2,226

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three months ended March 31, 2013 and 2012. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 3: Average Balance Sheets and Net Interest Income Analysis

                                                              Three Months Ended March 31,
                                                    2013                                        2012
                                     Average       Income/        Yield/         Average       Income/        Yield/
($ in thousands)                     Balance       Expense       Rate (%)        Balance       Expense       Rate (%)

Earning assets:
Interest bearing balances due
from banks                         $   560,759     $    290           0.21     $   576,416     $    303           0.21
Federal funds sold                       8,487            3           0.14             281           --           0.00
Investment securities - taxable        488,148        1,222           1.02         459,164        1,378           1.21
Investment securities -
non-taxable                            200,985        2,742           5.53         209,361        3,089           5.93
Mortgage loans held for sale            19,442          155           3.23          17,076          153           3.60
Assets held in trading accounts          8,525           11           0.52           6,845           12           0.71
Loans, not covered by loss share     1,669,054       23,707           5.76       1,550,341       22,283           5.78
Loans acquired, covered by loss
share                                  196,190        6,175          12.76         141,563        5,973          16.97
Total interest earning assets        3,151,590       34,305           4.41       2,961,047       33,191           4.51
Non-earning assets                     387,226                                     318,638
Total assets                       $ 3,538,816                                 $ 3,279,685

Interest bearing liabilities
Interest bearing transaction and
savings accounts                   $ 1,446,533     $    611           0.17     $ 1,252,972     $    696           0.22
Time deposits                          858,692        1,588           0.75         863,522        2,269           1.06
Total interest bearing deposits      2,305,225        2,199           0.39       2,116,494        2,965           0.56
Federal funds purchased and
securities sold under agreement
to repurchase                          118,131           65           0.22         108,841           99           0.37
Other borrowings                        83,872          734           3.55          89,920          815           3.65
Subordinated debentures                 20,620          159           3.13          30,930          391           5.08
Total interest bearing
liabilities                          2,527,848        3,157           0.51       2,346,185        4,270           0.73
Non-interest bearing
Non-interest bearing deposits          567,588                                     494,366
Other liabilities                       34,486                                      27,417
Total liabilities                    3,129,922                                   2,867,968
Stockholders' equity                   408,894                                     411,717
Total liabilities and
stockholders' equity               $ 3,538,816                                 $ 3,279,685
Net interest spread                                                   3.90                                        3.78
Net interest margin                                $ 31,148           4.01                     $ 28,921           3.93

Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three month period ended March 31, 2013, as compared to the same period of the prior year. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 4: Volume/Rate Analysis

                                                                   Three Months Ended
                                                                        March 31,
. . .
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