Simmons First National Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are primarily with FY 2011. The filing also reports fourth-quarter results. Simmons First is a bank holding company operating eight community banks in Arkansas, Missouri and Kansas.
Financial performance and position
| Metric | FY 2012 / Dec. 31, 2012 | FY 2011 / Dec. 31, 2011 |
|---|---|---|
| Net interest income | $113.5 million | $108.7 million |
| Net interest margin, fully taxable equivalent | 3.93% | 3.85% |
| Provision for loan losses | $4.1 million | $11.7 million |
| Non-interest income | $48.4 million | $53.5 million |
| Non-interest expense | $117.7 million | $114.7 million |
| Net income | $27.7 million; diluted EPS $1.64 | $25.4 million; diluted EPS $1.47 |
| Core earnings and diluted core EPS (non-GAAP) | $26.9 million; $1.59 | $25.0 million; $1.45 |
| Total assets | $3.53 billion | $3.32 billion |
| Total loans | $1.92 billion | $1.74 billion |
| Total deposits | $2.87 billion | $2.65 billion |
| Stockholders’ equity | $406.1 million | $407.9 million |
- Net income rose 9.1% and diluted EPS rose 11.6%. Management attributed improvement chiefly to lower loan-loss provisions and higher net interest income. Core diluted EPS, a non-GAAP measure, increased 9.7%.
- FY 2012 net cash provided by operating activities was $36.1 million; investing activities provided $187.0 million and financing activities used $255.5 million. Cash and cash equivalents fell $32.4 million to $537.8 million.
- Net interest income on a fully taxable-equivalent basis was $118.2 million, up 4.0%. Lower funding costs helped; income from FDIC-covered loans and related purchase-accounting adjustments also contributed. The reported margin benefited from higher covered-loan yields, while excess liquidity restrained it.
- Loan-loss provision declined $7.5 million year over year. Net charge-offs were 0.40% of average loans; nonperforming loans were 0.74% of period-end loans; and the allowance was 1.71% of period-end loans. Nonperforming assets were $45.6 million under the filing’s stated scope; reported nonperforming assets to assets were 1.29%, with acquired covered assets excluded from the ratio calculation.
- Core deposits were 86.5% of deposits. Cash and cash equivalents, trading and available-for-sale securities, and mortgage loans held for sale equaled 21.6% of total assets, compared with 23.1% a year earlier. Management described corporate liquidity as strong.
- Debt was $110.1 million, including $89.4 million of FHLB advances and $20.6 million of subordinated debentures. Separately, federal funds purchased and repurchase-agreement balances were $104.1 million. The company retired $10.3 million of fixed-rate trust preferred securities during 2012.
- Capital remained above regulatory well-capitalized thresholds: Tier 1 leverage was 10.81%, Tier 1 risk-based capital 19.08%, and total risk-based capital 20.34%. Equity to assets was 11.51%, down from 12.29%.
Material changes and unusual items
- Two FDIC-assisted Missouri acquisitions were completed: Truman Bank in September and Excel Bank in October. They added assets and deposits, expanded the footprint and generated $3.4 million of pretax bargain-purchase gains; merger-related costs were $1.9 million. Covered assets generally have 80% FDIC loss protection, subject to agreement terms.
- Total loans grew 10.6%, including $135.6 million of acquired-loan growth and 3.1% growth in legacy loans. Deposits grew 8.4%; non-interest-bearing deposits increased to $576.7 million.
- Non-interest income fell 9.5%, principally reflecting a $9.8 million year-over-year reduction in FDIC indemnification-asset income. Excluding that adjustment and identified nonrecurring items, management said non-interest income increased 4.6%.
- The efficiency ratio worsened to 70.17% from 67.86%. Management reported approximately $5 million of annual pretax benefits from efficiency initiatives completed in 2012; acquisition costs and added overhead affected reported expenses.
- FY 2012 included a $0.05 diluted-EPS contribution from specified nonrecurring items, according to the company’s non-GAAP reconciliation. Quarterly net income was $8.0 million and diluted EPS was $0.48 in Q4, versus $6.3 million and $0.37 in Q4 2011.
- The company repurchased 725,887 shares during 2012 at a weighted-average $24.24 per share. It declared $0.80 per share in dividends, up from $0.76 in 2011. A new authorization allowed repurchases of up to 850,000 shares; 573,700 remained available at year-end.
Outlook, risks and controls
- No specific earnings or revenue guidance is provided. Management said it intended to pursue further acquisitions, especially in Arkansas and neighboring states, and expected to recognize approximately $540,000 of net pretax income in 2013 from remaining covered-loan cash-flow and FDIC indemnification adjustments. Those estimates may change with revised cash-flow expectations.
- Key risks include economic and real-estate conditions in Arkansas, Missouri and Kansas; borrower credit deterioration, including unsecured credit-card exposure; interest-rate and deposit-pricing changes; acquisition integration and FDIC loss-share/clawback terms; and evolving regulatory requirements and compliance costs.
- Management identified Northwest Arkansas as a comparatively weaker loan market. The company also cited potential pressure from consumer-protection rules and debit-card interchange regulation, and noted that student-loan originations had ended under federal program changes.
- The allowance methodology was refined at year-end by allocating previously unallocated reserves to loan categories; management cautioned that category allocations may not be comparable with prior periods. Acquired-loan valuations, FDIC indemnification assets, collateral values and allowance estimates rely on significant judgments.
- Management and the independent auditor reported effective internal control over financial reporting and the auditor issued unqualified opinions on the financial statements and controls. The control assessment excluded Truman and Excel, acquired in 2012. The auditor’s financial-statement opinion covered the consolidated statements.
- Management said pending legal matters were not expected to have a material adverse effect; a previously disclosed lawsuit was dismissed and plaintiffs’ counsel considered it concluded. The filing provides no specific quantified estimate for possible losses on other proceedings.
Important facts for investors to verify
- Reconcile reported earnings with core earnings, particularly the bargain-purchase gains, merger costs and FDIC-covered-loan accounting adjustments.
- Review the acquired-loan cash-flow assumptions, FDIC indemnification-asset valuation, loss-share coverage and potential clawback exposure.
- Assess credit quality using consistent definitions and exclusions; examine commercial real estate exposure, troubled debt restructurings, foreclosed assets and credit-card charge-offs.
- Confirm capital and liquidity trends after acquisitions, share repurchases and dividends, including the parent company’s reliance on subsidiary-bank distributions.
- Track net interest margin sensitivity, deposit mix and repricing, and the effect of persistently low or changing interest rates.
- Monitor acquisition integration, realized efficiency savings, regulatory changes and the incorporation of Truman and Excel into control procedures.