Simmons First National Corporation — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. Simmons First is an Arkansas-based bank holding company operating more than 100 financial centers in Arkansas, Missouri and Kansas. It reported $4.64 billion in assets, $2.74 billion in loans and $3.86 billion in deposits at year-end.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $171.1 million | $130.9 million |
| Net interest income, fully taxable equivalent | $177.9 million | $135.8 million |
| Provision for loan losses | $7.2 million | $4.1 million |
| Non-interest income | $62.2 million | $40.6 million |
| Non-interest expense | $175.7 million | $134.8 million |
| Net income / diluted EPS | $35.7 million / $2.11 | $23.2 million / $1.42 |
| Core net income / diluted core EPS (non-GAAP) | $38.7 million / $2.29 | $27.6 million / $1.69 |
| Net interest margin (FTE) | 4.47% | 4.21% |
| Efficiency ratio | 69.88% | 71.28% |
Fourth-quarter 2014 net income was $12.6 million, or $0.72 per diluted share, compared with $3.8 million, or $0.23 per diluted share, in fourth-quarter 2013.
- Growth and balance sheet: Total assets rose 5.9% to $4.64 billion. Loans increased 13.8% to $2.74 billion; legacy loans grew 12.2% excluding balances migrated from acquired portfolios. Deposits grew 4.4% to $3.86 billion.
- Asset quality: Management reported nonperforming loans at 0.63% of loans, nonperforming assets at 1.25% of assets and allowance coverage of nonperforming loans at 223%. Net charge-offs were 0.30% of average loans; credit-card net charge-offs were 1.27%, down from 1.33%.
- Capital: Stockholders’ equity was $494.3 million; equity-to-assets was 10.65%. Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 8.77%, 13.43% and 14.50%, respectively. Management said the company and bank met Basel III requirements on a fully phased-in basis.
- Debt and liquidity: Reported long-term debt and subordinated debentures totaled $135.3 million, down from $137.7 million. Separately, federal funds purchased and repurchase agreements were $110.6 million. Cash and cash equivalents fell to $335.9 million from $539.4 million. Operating cash flow was $11.6 million; investing cash flow was $12.2 million; financing cash flow was negative $227.3 million. Management described liquidity as strong and cited approximately $701 million of available FHLB capacity and about $81 million of correspondent-bank federal-funds lines.
Material changes and unusual items
- Results benefited from the November 2013 Metropolitan acquisition and the August 2014 Delta Trust acquisition. Delta Trust added approximately $417 million of assets at acquisition; its consideration included 1.63 million Simmons shares and $2.4 million cash.
- The company consolidated its remaining subsidiary-bank charters into Simmons Bank during 2014 and completed systems conversions. It also closed overlapping branches after the Metropolitan and Delta Trust transactions.
- Non-interest income included $7.8 million in net gains on sales of former branches and a $1.0 million gain on the sale of the merchant-services business. Non-interest expense included $7.5 million of merger costs, $4.7 million of branch-right-sizing costs, $0.6 million of charter-consolidation costs and $0.9 million of change-in-control payments.
- Updated acquired-loan cash-flow estimates increased 2014 pretax income by about $5.1 million versus 2013: higher interest income was partly offset by lower non-interest income tied to FDIC indemnification assets. Management estimated a further net pretax benefit of about $1.2 million in 2015, subject to revised cash-flow estimates.
- On February 27, 2015, after year-end, the company completed acquisitions of Community First and Liberty. Together they were expected to add approximately $3.0 billion in assets, $1.9 billion in loans and $2.4 billion in deposits, substantially increasing company scale and share count.
Outlook, commentary and risks
Management highlighted record core earnings, organic loan growth and efforts to improve operating efficiency, but did not provide formal earnings or revenue guidance. It expected to continue quarterly dividends and raised the quarterly dividend from $0.22 to $0.23 per share beginning in first-quarter 2015; future dividends remain discretionary and subject to bank dividend restrictions. The company had about $10.0 million available for upstream bank dividends without regulatory approval at year-end.
- Interest-rate modeling estimated next-12-month net interest income changes of +0.60% for a 100-basis-point rate increase, +1.31% for a 200-basis-point increase and -9.03% for a 100-basis-point decrease. These are scenario estimates with significant assumptions, not forecasts.
- Key risks include concentration in regional economies and real estate lending, unsecured credit-card exposure, interest-rate and funding-cost changes, acquisition integration and execution, regulatory/compliance costs, cybersecurity and the sensitivity of allowance and acquired-asset valuations to estimates.
- The company stated that pending legal proceedings, mainly loan foreclosure matters, were not expected in aggregate to materially adversely affect financial position. The independent auditor issued unqualified opinions on the financial statements and internal control; the Delta Trust operation was excluded from the year-end internal-control assessment as a recent acquisition.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s non-GAAP core earnings, including the treatment of branch-sale gains and acquisition, restructuring and consolidation costs.
- Track the performance and integration costs of Metropolitan, Delta Trust, Community First and Liberty, including final purchase accounting and the effect of share issuance and dilution.
- Monitor acquired-loan accretion, FDIC indemnification-asset estimates and whether expected future income adjustments change.
- Assess loan growth against credit trends, particularly increased nonaccrual real-estate loans, provision levels and the concentration of real-estate lending.
- Review liquidity and deposit mix, debt maturities, capital ratios after the 2015 acquisitions, and the capacity to sustain dividends.