Simmons First National Corporation — Q2 2015 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and six months ended June 30, 2015. Simmons is an Arkansas-based bank holding company operating in Arkansas, Kansas, Missouri, and Tennessee. Results reflect the February 27 acquisitions of Liberty Bancshares and Community First Bancshares; Liberty Bank was merged into Simmons Bank in April, while First State Bank remained separate pending conversion.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $73.2 million | $40.4 million | $126.2 million | $82.0 million |
| Non-interest income | $25.3 million | $15.4 million | $43.8 million | $24.6 million |
| Net income | $20.1 million | $9.9 million | $28.8 million | $14.3 million |
| Net income available to common shareholders | $20.0 million | $9.9 million | $28.7 million | $14.3 million |
| Diluted EPS, financial statements | $0.67 | $0.60 | $1.10 | $0.87 |
| Net interest margin, FTE | 4.47% | 4.34% | 4.42% | 4.44% |
Reported revenue, calculated as net interest income plus non-interest income, was $98.5 million for Q2 and $170.0 million for the first half. Management reported non-GAAP core earnings of $22.4 million, or $0.75 diluted core EPS, for Q2; first-half core earnings were $38.1 million, or $1.46 per diluted share. These measures exclude specified nonrecurring items and are not GAAP results.
Q2 non-interest expense was $65.2 million, up 63.6% year over year; first-half expense was $122.5 million, up 45.2%. Increases largely reflect the acquired businesses, alongside merger and branch-closing costs. Provision for loan losses was $3.0 million in Q2 and $4.2 million for the first half.
Financial position, liquidity, and asset quality
- At June 30, total assets were $7.61 billion, versus $4.64 billion at year-end 2014; total loans were $4.81 billion versus $2.74 billion. The large increases primarily reflect the acquisitions.
- Deposits totaled $6.17 billion, up $2.31 billion from year-end. Cash and cash equivalents were $292.5 million, down $43.4 million from the beginning of the year.
- Six-month cash flows were $18.1 million provided by operations, $199.5 million provided by investing activities, and $261.0 million used in financing activities. Investing cash flow included $201.0 million of net cash received in business combinations.
- Other borrowings and subordinated debentures totaled $233.1 million, up from $135.3 million at year-end. Total liabilities were $6.59 billion and stockholders’ equity was $1.03 billion.
- Management reported a 10.00% Tier 1 leverage ratio, 15.60% Tier 1 risk-based capital ratio, 16.32% total risk-based capital ratio, and 13.63% CET1 ratio. Subsidiary banks met regulatory well-capitalized standards.
- Total allowance for loan losses was $31.5 million; management reported allowance coverage of 180% of non-performing loans. Non-performing loans were $16.9 million (0.65% of total loans); non-performing assets were $59.8 million (0.79% of total assets). Classified loans, excluding specified FDIC-assisted acquired loans, rose to $102.1 million from $82.1 million at year-end.
Material changes and management commentary
- Liberty brought approximately $1.1 billion of assets, $780.7 million of loans, and $874.7 million of deposits; Community First brought approximately $1.9 billion of assets, $1.1 billion of loans, and $1.5 billion of deposits. The company recorded $95.6 million and $111.3 million of goodwill, respectively. Purchase price allocations remained preliminary and could change.
- Management attributed higher interest income and fee revenue principally to balance-sheet growth and acquisitions. Legacy loan balances grew $557.5 million from year-end, including approximately $160 million of acquired balances migrating to legacy loans.
- First-half merger-related costs were $11.7 million. Simmons closed 12 underperforming branches and recorded $2.8 million of branch right-sizing expense in the first half. Management said integration and efficiency initiatives are intended to support longer-term performance, while emphasizing continued improvement in core operating income.
- Management described asset quality as good, but nonaccrual loans and classified loans increased. It cited loan growth, new-market lending, and a $604,000 provision related to acquired purchased-impaired loans among the reasons for higher provisioning.
Outlook, risks, and contingencies
- No quantified full-year earnings or revenue guidance is provided. Management expected to complete the First State systems conversion and merger by September 4, 2015. It expected the pending $20.7 million Ozark Trust & Investment Corporation transaction to close in Q3 2015, subject to regulatory review and customary conditions.
- The company was discussing possible termination of one or more FDIC loss-share agreements. Any termination could result in a gain or loss; the timing and terms were not established in the filing.
- Acquired-loan cash-flow estimates affect both interest income and FDIC indemnification-related income. Management estimated remaining adjustments would increase pre-tax income by approximately $0.4 million during the remainder of 2015, but future estimates may change.
- Management considered investment-security unrealized losses temporary and said it had the ability and intent to hold the securities; it attributed the declines mainly to market-rate increases. Q2 other comprehensive income included a $3.3 million after-tax loss.
- Interest-rate simulations estimated net interest income would decline 0.95% with a 100-basis-point rate increase and 1.04% with a 200-basis-point increase over 12 months; a 100-basis-point decrease was estimated to increase it 0.70%. The filing cautions that assumptions make these estimates uncertain.
- Outstanding commitments included approximately $495.6 million of credit-card commitments, $783.7 million of other loan commitments, and $26.7 million of letters of credit. Management said various legal proceedings, mostly foreclosure-related, were not expected to have a material adverse effect.
- Community First’s preferred stock carries a 1% dividend rate through February 2016, then converts to 9%; management planned to redeem it in Q1 2016. The redemption plan is forward-looking and not assured.
Important facts for investors to verify
- Reconcile EPS disclosures: the income statement reports Q2 diluted EPS of $0.67, while the MD&A overview states $0.71; the filing’s EPS note discusses a $0.71 calculated amount but identifies $0.67 as actual Q2 diluted EPS.
- Track integration progress, realized cost savings, remaining merger and branch-right-sizing costs, and completion of the First State conversion.
- Review acquired-loan delinquency, nonaccrual, credit-mark, and cash-flow assumptions, as well as movement in classified and non-performing loans.
- Assess deposit mix, liquidity, debt maturities, and the ability to maintain capital and dividends following acquisitions; verify the planned preferred-stock redemption.
- Monitor the pending Ozark transaction and any FDIC loss-share agreement termination, including resulting accounting and financial effects.