Simmons First National Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited quarterly results for the three and nine months ended September 30, 2016, compared with the same 2015 periods; balance-sheet comparisons are to December 31, 2015. Simmons is a financial holding company operating in Arkansas, Kansas, Missouri and Tennessee. The September 9 acquisition of Citizens National Bank expanded its East Tennessee presence; Citizens was merged into Simmons Bank on October 21, after quarter-end.
Key financial metrics
| Metric | Q3 2016 / September 30 | Comparison |
|---|---|---|
| Net income | $23.4 million; diluted EPS $0.76 | Q3 2015: $21.7 million; $0.72 |
| Net income available to common shareholders, nine months | $69.8 million; diluted EPS $2.28 | 2015: $50.3 million; $1.83 |
| Core earnings (non-GAAP), nine months | $72.7 million; diluted core EPS $2.37 | 2015: $63.7 million; $2.32 |
| Net interest income, fully taxable equivalent (FTE) | Q3: $70.2 million; nine months: $211.2 million | Q3 2015: $80.8 million; nine months: $211.2 million |
| FTE net interest margin | Q3: 4.09%; nine months: 4.22% | 2015: 4.82% and 4.58%, respectively |
| Total assets / total loans | $8.227 billion / $5.401 billion | December 31, 2015: $7.560 billion / $4.919 billion |
| Total deposits | $6.617 billion | December 31, 2015: $6.086 billion |
| Cash and cash equivalents | $454.5 million | December 31, 2015: $252.3 million |
| Total debt | $275.6 million | December 31, 2015: $222.9 million |
| Stockholders’ equity | $1.147 billion; book value per share $36.69 | Tangible book value per share: $23.80 |
For the nine months, operating cash flow was $76.6 million, investing cash flow was $92.5 million and financing cash flow was $33.2 million; cash increased $202.3 million. The allowance for loan losses was $35.0 million, or 0.86% of total loans. Capital ratios included a 13.81% common equity Tier 1 ratio and an 11.57% Tier 1 leverage ratio; management said the company and bank met applicable capital requirements.
Material changes versus the prior comparable period
- Q3 GAAP net income rose 8.1% and diluted EPS increased 5.6%. However, management’s non-GAAP core earnings were $24.4 million versus $25.6 million in Q3 2015, and diluted core EPS declined 7.1% to $0.79.
- Nine-month GAAP net income increased 38.3%; diluted EPS rose 24.6%. Core earnings increased 14.1%, while diluted core EPS increased 2.2%.
- Q3 FTE net interest income fell 13.1%, with margin down 73 basis points. Management attributed the pressure principally to lower loan yields; greater loan volume partly offset the decline. Nine-month FTE net interest income was essentially unchanged.
- Noninterest income rose 59.8% in Q3 and 56.4% year to date. Comparisons reflect the absence of 2015 FDIC loss-share-related losses and growth in trust, mortgage, investment-banking and card-fee income; 2016 also included $4.4 million of securities-sale gains year to date.
- Q3 noninterest expense declined 7.5%; nine-month expense was down 0.4%. Lower merger costs versus 2015 helped the year-to-date comparison, while underlying expenses excluding merger and branch-right-sizing items increased 5.49%, largely due to acquired franchises.
- Total loans grew $482 million from year-end, including acquired Citizens loans and organic growth; deposits increased $531 million, primarily reflecting Citizens. Total debt increased $52.7 million, mainly from higher short-term FHLB advances.
Outlook, management commentary, risks and unusual items
- Management cited competitive pressures and artificially low interest rates as continuing constraints on net interest income. It said it would pursue efficiency improvements, grow core operating income and consider strategic acquisition opportunities. No quantitative earnings or revenue guidance is provided.
- Credit costs increased materially: provision for loan losses was $8.3 million in Q3 versus $1.6 million, and $15.7 million for nine months versus $5.8 million. Q3 included a $5.4 million replenishment associated with a charge-off on an acquired nonaccrual loan; year-to-date provision also reflected a $2 million charge-off related to potential customer fraud on an agricultural loan. Recovery on that exposure was unknown.
- Nonaccrual legacy loans rose to $37.1 million from $17.7 million at year-end; nonperforming assets were $68.6 million, or 0.83% of assets. Total TDRs rose to $16.5 million from $5.6 million. Management said reserves were adequate, but the allowance covered 91% of nonperforming loans, down from 166% at year-end.
- Citizens’ preliminary purchase-price allocation included $21.8 million of goodwill; management said fair-value estimates and tax positions remained under review and could be adjusted. Goodwill totaled $348.8 million; no impairment was indicated or recorded.
- Management described liquidity sources as ample, including deposits, approximately $830.2 million of available FHLB capacity and correspondent-bank lines. The bank had approximately $2.7 million available for dividends to the parent without regulatory approval. Interest-rate simulations estimated net interest income changes of +0.81% for a 100-basis-point rise, +1.19% for a 200-basis-point rise and -2.84% for a 100-basis-point decline over 12 months; management cautioned that assumptions limit predictive reliability.
- Legal proceedings, mostly loan-foreclosure matters, were not expected to have a material adverse effect. Credit commitments included $616.2 million in credit-card commitments, $1.063 billion in other loan commitments and $30.1 million in letters of credit; stated commitment totals do not necessarily represent future cash needs. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether rising nonaccrual loans, TDRs and net charge-offs require additional provisions, particularly for commercial real estate, acquired loans and the agricultural fraud exposure.
- How much earnings and margin depend on acquired-loan accretion, and whether core results excluding nonrecurring items are sustainable; core measures are non-GAAP.
- Citizens integration progress, final purchase accounting, realized cost savings and the effect of acquisition-related goodwill and expenses.
- Whether loan yields and net interest margin stabilize as interest rates and competitive conditions change, and how actual results compare with interest-rate sensitivity estimates.
- Liquidity and funding trends, including short-term FHLB borrowing, deposit mix, regulatory limits on subsidiary-bank dividends and capital ratios.