Simmons First National Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY2010. This is an annual filing, not a standalone fourth-quarter report. Simmons is an Arkansas-based bank holding company operating eight community banks and 84 financial centers in Arkansas, Missouri, and Kansas.
Financial performance and position
| Metric | FY2011 / year-end 2011 | FY2010 / year-end 2010 |
|---|---|---|
| Net interest income | $108.7 million | $101.9 million |
| Non-interest income | $53.5 million | $77.9 million |
| Net income | $25.4 million | $37.1 million |
| Diluted EPS | $1.47 | $2.15 |
| Diluted core EPS (non-GAAP) | $1.45 | $1.51 |
| Net interest margin (FTE) | 3.85% | 3.78% |
| Total assets | $3.320 billion | $3.316 billion |
| Total loans, including FDIC-covered loans | $1.738 billion | $1.915 billion |
| Deposits | $2.650 billion | $2.609 billion |
| Stockholders’ equity | $407.9 million | $397.4 million |
| Long-term debt | $120.8 million | $164.3 million |
The company reported operating cash flow of $29.6 million, investing cash inflow of $101.6 million, and financing cash outflow of $13.0 million. Cash and cash equivalents ended the year at $570.2 million, up from $452.1 million. The filing reports no standalone quarterly cash-flow figures in the supplied text.
Net interest income rose 6.6% on a GAAP basis; fully taxable equivalent net interest income increased 6.2% to $113.6 million. The efficiency ratio was 67.86%, versus 65.28% in 2010. Return on average assets was 0.77% and return on average equity was 6.25%, compared with 1.19% and 9.69%, respectively, in 2010.
At year-end, cash and cash equivalents were $570.2 million, and management said cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 23.1% of assets. Core deposits were 86.5% of deposits. Regulatory capital remained strong: Tier 1 leverage was 11.86%, Tier 1 risk-based capital 21.58%, and total risk-based capital 22.83%; subsidiary banks were reported as well capitalized.
Material changes versus FY2010
- Net income fell 31.6%, while core earnings declined to $25.0 million from $26.0 million. The main comparison effect was the $21.3 million pre-tax bargain-purchase gain from 2010 FDIC-assisted acquisitions; 2010 also included related securities gains and merger costs.
- Net interest income improved as funding costs fell: interest expense declined $6.6 million, including lower deposit costs. NIM increased seven basis points, partly due to higher yields on acquired covered loans.
- Non-interest income declined $24.4 million, principally because the 2010 FDIC acquisition gain did not recur. Excluding identified nonrecurring items, core non-interest income was down 6.9%.
- Total loans declined $177 million, or 9.3%; legacy loans fell $104 million. Deposits grew 1.6%, with non-interest-bearing transaction accounts up $103.5 million and time deposits down $81.3 million.
- Long-term debt decreased $43.5 million, mainly through scheduled repayment of FHLB advances. The allowance for loan losses increased to $30.1 million from $26.4 million, while net charge-offs fell to $8.0 million from $12.7 million.
Outlook, management commentary, and risks
- Management expected loan demand to remain soft through Q1 2012 but said it was more optimistic about improvement in the second half of 2012. It anticipated slight NIM expansion in 2012, partly reflecting FDIC-assisted acquisitions; these are expectations, not formal earnings guidance.
- The company expected to complete its efficiency initiative in 2012 and estimated approximately $5 million of annual pre-tax benefit once fully implemented, from expense savings and revenue enhancements. Branch and staffing reductions were being achieved through attrition.
- Management continued to pursue disciplined acquisitions, particularly FDIC-assisted transactions and community banks within roughly 325 miles of central Arkansas. The stock repurchase program was reinstated in September 2011; 137,144 shares were repurchased during the year. The quarterly dividend remained $0.19 per share.
- Credit metrics require attention: nonperforming loans were 1.02% of loans, nonperforming assets 1.18% of assets, and the allowance was 186.14% of nonperforming loans. Nonperforming loans and criticized credit measures worsened in some respects year over year; Northwest Arkansas remained a challenged market. Credit-card net charge-offs improved to 2.06% from 2.37%.
- The 2010 FDIC-assisted acquisitions’ covered loans had 80% loss-share protection. Revised expected cash flows on these pools produced $1.1 million of additional interest income and a $1.0 million reduction in non-interest income during 2011, a net pre-tax benefit of $146,000. Management estimated remaining related adjustments would add $11.0 million to interest income and reduce non-interest income by $9.7 million in 2012; estimates may change.
- Other risks include weak regional economies and real estate values, concentration in regional lending and commercial real estate, unsecured credit-card losses, low-rate pressure on yields, regulatory changes (including debit interchange and consumer-protection rules), and acquisition integration and FDIC reimbursement/clawback assumptions. Management estimated a potential annual $600,000 interchange-related earnings impact.
- The company disclosed an ongoing appeal relating to a long-running loan-collection lawsuit; it stated that no basis for material liability had been identified. Other legal proceedings, mainly foreclosure-related, were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether core earnings, rather than reported EPS alone, stabilize; reported FY2011 earnings were affected by nonrecurring items and FY2010 included substantial acquisition gains.
- Whether loan demand recovers as management expected, and whether loan balances and margins improve without weakening underwriting standards.
- Trends in nonperforming loans, foreclosed assets, criticized credits, the allowance, and commercial-real-estate exposure—particularly in Northwest Arkansas.
- Actual cash realization and income recognition from FDIC-covered loan pools, including the remaining accretable-yield and indemnification-asset adjustments.
- Whether planned efficiency benefits are realized, and the impact of regulatory changes, acquisition activity, debt repayment, repurchases, and dividends on capital and liquidity.