Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SFNC > SEC Filings for SFNC > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for SIMMONS FIRST NATIONAL CORP

Form 10-K for SIMMONS FIRST NATIONAL CORP


11-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Overview

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

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

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

Allowance for Loan Losses on Loans Not Covered by Loss Share

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. Any immaterial residual reserves are distributed among the loan portfolio categories based on their percent composition of the entire portfolio.


Acquisition Accounting, Acquired Loans

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

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.

Covered Loans and Related Indemnification Asset

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

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

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding, claim receivable is recorded until cash is received from the FDIC. For further discussion of our acquisition and loan accounting, see Note 5, Loans Acquired, in the accompanying 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 at least annually, or more frequently if certain conditions occur. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses.

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.


2013 Overview


Our net income for the year ended December 31, 2013 was $23.2 million and diluted earnings per share were $1.42, compared to net income of $27.7 million and $1.64 diluted earnings per share in 2012. Net income for both 2013 and 2012 included several significant nonrecurring items that impacted net income, mostly related to our acquisitions. Excluding all nonrecurring items, core earnings for the year ended December 31, 2013 was $27.6 million, or $1.69 diluted core earnings per share, compared to $26.9 million, or $1.59 diluted core earnings per share in 2012. Diluted core earnings per share increased by $0.10, or 6.3%. See Reconciliation of Non-GAAP Measures and Table 21 - Reconciliation of Core Earnings (non-GAAP) for additional discussion of non-GAAP measures.

On September 12, 2013 we announced the U.S. Bankruptcy Court approved a Stock Purchase Agreement between the Company and Rogers Bancshares, Inc., in which we purchased all the stock of Metropolitan National Bank ("Metropolitan" or "MNB") for $53.6 million in cash. We closed the transaction on November 25, 2013, increasing our combined company to $4.4 billion in total assets, $3.7 billion in deposits and $2.4 billion in net loans at year end.

The Metropolitan franchise, headquartered in Little Rock, fits nicely into our footprint by expanding our presence in central and northwest Arkansas, the two leading growth market in our home state. Metropolitan has a rich history of providing exemplary customer service to the communities in which it is located. On March 21, 2014 we will complete the operational system conversion of Metropolitan with our flagship institution, Simmons First National Bank ("SFNB"), which will enable us to provide customers with innovative products, exceptional customer service and convenience throughout the combined service area. As a result of the MNB combination and in concert with the systems conversion, we will close 27 branches with footprints that overlap other branches. Additionally, at the close of business November 1, 2013 we merged Simmons First Bank of Northwest Arkansas into SFNB in anticipation of the Metropolitan acquisition.

As a result of the Metropolitan acquisition, we recognized $4.0 million in after-tax merger related costs. During 2013, we closed six underperforming branches and recorded $0.4 million in after-tax nonrecurring expenses related to those closures. During 2012, we recognized after-tax bargain purchase gains of $2.1 million and after-tax merger related costs of $1.2 million related to our FDIC-assisted acquisitions of Excel Bank of Sedalia, Missouri ("Excel") and Truman Bank of St. Louis, Missouri ("Truman"). For additional information on Metropolitan and these FDIC transactions, see Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.

We are pleased with the core earnings results for the year. As a result of acquisitions and efficiency initiatives in recent reporting periods, we have and will continue to recognize one-time revenue and expense items which may skew our short-term core business results but provide long-term performance benefits. Our focus continues to be improvement in core operating income.

We are also pleased with the positive trends in our balance sheet, as reflected in our organic loan growth of over 7% during the past year, which enabled us to produce a net interest margin of 4.21%. In addition, we completed the acquisition of a $9.8 million credit card portfolio on September 30, 2013 and we continue to evaluate opportunities for additional credit card portfolio acquisitions.

Stockholders' equity as of December 31, 2013 was $403.8 million, book value per share was $24.89 and tangible book value per share was $19.10. Our ratio of stockholders' equity to total assets was 9.2% and the ratio of tangible stockholders' equity to tangible assets was 7.2% at December 31, 2013. The Company's Tier I leverage ratio of 9.2%, as well as our other regulatory capital ratios, remain significantly above the "well capitalized". See Table 18 - Risk-Based Capital for regulatory capital ratios.

During the first 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 markets. We continue to actively pursue the right opportunities to expand our presence in that geographic region through additional FDIC and/or traditional acquisitions going forward.

We believe our stock, even after the recent market increase in our stock value, continues to be an excellent investment. We increased our quarterly dividend from $0.21 to $0.22 per share, beginning with the first quarter of 2014. On an annual basis, the $0.88 per share dividend results in a return in excess of 2.5%, based on our recent stock price. We repurchased approximately 420,000 shares at an average price of $25.89 during 2013. During the third quarter, as a result of the Metropolitan acquisition announcement, we suspended our stock repurchase program.


Total loans, including loans acquired, were $2.4 billion at December 31, 2013, an increase of $483 million, or 25.1%, from the same period in 2012. Acquired loans increased by $369 million, net of discounts, while legacy loans (all loans excluding acquired loans) grew $114 million, or 7.0%. We are encouraged by the continued growth in our legacy loan portfolio throughout 2013. We have had nice legacy loan growth this year, particularly from the new lenders we have attracted in our targeted growth markets. Their production has exceeded our expectations for 2013.

Loans covered by FDIC loss share agreements, which provide 80% Government guaranteed protection against credit risk on those covered assets, were $146.7 million at December 31, 2013, compared to $210.8 million at December 31, 2012 due to expected paydowns.

Despite the continued challenges in the economy, we continue to have good asset quality. The allowance for loan losses as a percent of total loans was 1.57% at December 31, 2013. Non-performing loans equaled 0.53% of total loans. Non-performing assets were 1.69% of total assets. The allowance for loan losses was 298% of non-performing loans. The Company's net charge-offs for 2013 were 0.27% of total loans. Excluding credit cards, net charge-offs for 2013 were 0.15% of total loans.

Total assets were $4.4 billion at December 31, 2013 compared to $3.5 billion at December 31, 2012, an increase of $850 million primarily due to the Metropolitan acquisition.

The Metropolitan acquisition was one of several that we anticipate making over the next few years, and enhances our coverage of central and northwest Arkansas. Our 2012 FDIC acquisitions were strategic in that they complement the footprint we have been building in the Kansas and Missouri markets. We fully expect to pursue other opportunities to expand our footprint in that geographic region through additional FDIC and/or traditional acquisitions going forward.

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 39.225%.

The FRB sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The FRB target for the Federal Funds rate, which is the cost to banks of immediately available overnight funds, has remained unchanged at 0.00% - 0.25% since December 16, 2008. 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, has remained unchanged at 3.25% since December 16, 2008.

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 consistent with our current interest rate sensitivity.

For the year ended December 31, 2013, net interest income on a fully taxable equivalent basis was $135.8 million, an increase of $17.6 million, or 14.9%, from the same period in 2012. The increase in net interest income was the result of a $14.2 million increase in interest income and a $3.4 million decrease in interest expense.

The increase in interest income primarily resulted from a $13.6 million increase in interest income on loans, consisting of a $15.5 million increase in interest income on loans acquired and a $1.8 million decrease in interest income on legacy loans. Although the increase in legacy loan volume during 2013 generated $3.0 million of additional interest income, a 30 basis point decline in yield resulted in a $4.8 million decrease in interest income, netting the $1.8 million decrease from legacy loans.

The $15.5 million increase in interest income from acquired loans resulted from two sources. First, the average balance of acquired loans increased by $119.0 million from December 31, 2012 to 2013 because of the two FDIC-assisted transactions in 2012 and the Metropolitan acquisition in late 2013. Also, we recognized additional yield accretion in conjunction with the fair value of the loan pools acquired in the 2010 and 2012 FDIC-assisted transactions as discussed in Note 5, Loans Acquired, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. Each quarter, we estimate the cash flows expected to be collected from the acquired loan pools. Beginning in the fourth quarter of 2011, the cash flows estimate has increased on the loans acquired in 2010 based on payment histories and reduced loss expectations of the loan pools. Beginning in the third quarter of 2013, the cash flows estimate has also increased on the loans acquired in 2012. This resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduce the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. The estimated adjustments to the indemnification assets are amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected life of the loan pools, whichever is shorter, and are recorded in non-interest expense.


For the year ended December 31, 2013, the adjustments increased interest income by an additional $7.1 million and decreased non-interest income by an additional $7.3 million compared to 2012. The net decrease to 2013 pre-tax income was $197,000 from 2012. 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 $33.0 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $25.6 million. Of the remaining adjustments, we expect to recognize $21.4 million of interest income and a $20.6 million reduction of non-interest income for a net addition to pre-tax income of approximately $811,000 in 2014. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loan pools.

Our net interest margin was 4.21% for the year ended December 31, 2013, up 28 basis points from 2012. Our margin has been strengthened by a higher yield on covered loans, including 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 over 2012. Conversely, while keeping us prepared to benefit from rising interest rates, our high levels of liquidity continue to compress our margin.

Our net interest margin was 3.93% and 3.85% for the years ended December 31, 2012 and 2011, respectively.

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2013, 2012 and 2011, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2013 versus 2012 and 2012 versus 2011.

Table 1: Analysis of Net Interest Income

(FTE =Fully Taxable Equivalent)

                                              Years Ended December 31
(In thousands)                           2013          2012          2011

Interest income                        $ 143,113     $ 129,134     $ 129,056
FTE adjustment                             4,951         4,705         4,970

Interest income - FTE                    148,064       133,839       134,026
Interest expense                          12,263        15,617        20,396

Net interest income - FTE              $ 135,801     $ 118,222     $ 113,630

Yield on earning assets - FTE               4.59 %        4.45 %        4.54 %
Cost of interest bearing liabilities        0.48 %        0.66 %        0.86 %
Net interest spread - FTE                   4.11 %        3.79 %        3.68 %
Net interest margin - FTE                   4.21 %        3.93 %        3.85 %

Table 2: Changes in Fully Taxable Equivalent Net Interest Margin

(In thousands)                                                     2013 vs. 2012         2012 vs. 2011

Increase (decrease) due to change in earning assets                $        24,120      $        (3,414 )
(Decrease) increase due to change in earning asset yields                   (9,895 )              3,227
Increase due to change in interest rates paid on interest
bearing liabilities                                                          3,289                3,968
Increase due to change in interest bearing liabilities                          65                  811

Increase in net interest income                                    $        17,579      $         4,592


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, 2013. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 3: Average Balance Sheets and Net Interest Income Analysis

                                                                                 Years Ended December 31
                                             2013                                          2012                                         2011
                             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                      $    470,651     $   1,127           0.24     $   524,224     $   1,220           0.23     $   486,274     $   1,100            0.23
Federal funds sold                4,186            19           0.45           3,107             7           0.23             886             6            0.68
Investment securities
- taxable                       464,319         5,553           1.20         474,375         5,321           1.12         426,226         6,719            1.58
Investment securities
- non-taxable                   315,445        12,647           4.01         208,056        12,060            5.8         207,929        12,784            6.15
. . .
  Add SFNC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SFNC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.