Simmons First National Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts below are in U.S. dollars; financial statements are unaudited. The independent accountant performed an interim review, not an audit.
Business context and reporting period
Simmons is an Arkansas-based bank holding company operating in Arkansas, Kansas and Missouri. Results reflect the November 2013 Metropolitan acquisition and, from August 31, 2014, Delta Trust. The company completed Delta Trust’s systems conversion on October 24, 2014 and consolidated its subsidiary banks into Simmons Bank during 2014.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income, GAAP | $41.8 million | $31.6 million | $123.7 million | $91.2 million |
| Non-interest income | $16.0 million | $10.3 million | $40.7 million | $32.9 million |
| Non-interest expense | $44.4 million | $30.9 million | $128.8 million | $93.1 million |
| Net income | $8.8 million | $6.9 million | $23.0 million | $19.4 million |
| Diluted EPS | $0.52 | $0.43 | $1.39 | $1.19 |
| Net interest margin, FTE | 4.36% | 4.27% | 4.41% | 4.08% |
Management-reported core earnings, a non-GAAP measure excluding specified nonrecurring items, were $10.7 million, or $0.63 per diluted share, in Q3, versus $7.4 million, or $0.45, a year earlier. Nine-month core earnings were $27.3 million, or $1.65 per diluted share, versus $19.9 million, or $1.21. These measures are not substitutes for GAAP results.
- Balance sheet: Total assets were $4.69 billion, up from $4.38 billion at December 31, 2013. Loans before allowance were $2.76 billion, versus $2.40 billion; deposits were $3.91 billion, versus $3.70 billion.
- Credit and provision: The nine-month loan-loss provision was $3.6 million, compared with $3.0 million. Allowance was $27.1 million, or 1.38% of total loans; annualized net charge-offs were 0.29%.
- Cash flow: Nine-month operating cash flow was $12.1 million, investing cash flow was negative $92.5 million, and financing cash flow was negative $164.6 million. Cash and cash equivalents decreased $245.1 million to $294.3 million.
- Debt and liquidity: Debt, including subordinated debentures, was $144.0 million, compared with $137.7 million at year-end. Management reported approximately $564 million of additional FHLB borrowing capacity and described overall liquidity as strong. Cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 16.7% of assets.
- Capital: Stockholders’ equity was $484.0 million; book value per share was $26.90 and tangible book value per share $19.61. Tier 1 leverage was 9.12% and total risk-based capital was 13.84%. Simmons Bank was reported well capitalized.
Material changes versus comparable periods
- Net income and diluted EPS increased year over year in both the quarter and year-to-date periods. Higher net interest income and fee income contributed; results also include acquisition-related activity and other unusual items.
- Higher acquired-loan balances, largely from Metropolitan and Delta Trust, drove much of the increase in interest income. Legacy loan yields declined: management cited a 34-basis-point decline for Q3 and 45 basis points for the year-to-date period.
- Non-interest expense rose 43.5% in Q3 and 38.3% year to date, reflecting acquired operations, merger expenses, branch right-sizing, bank-charter consolidation and higher operating costs.
- Nonperforming assets were $62.8 million, down from $74.1 million at year-end; nonperforming loans rose to $11.9 million from $9.2 million. Nonaccrual loans increased to $11.2 million from $6.3 million, primarily in commercial real estate, while foreclosed assets declined.
- Core deposits were 87.6% of deposits. Transaction and savings deposits grew while time deposits declined; the cash-flow statement also reports a net decrease in deposits during the nine-month period.
Outlook, management commentary, risks and unusual items
- Management said the company produced record core earnings and core EPS and focused on improving core operating income. No specific full-year earnings or revenue guidance was provided.
- Two pending acquisitions were expected to close in Q4 2014 or early Q1 2015, subject to shareholder and regulatory approvals: Community First, valued at approximately $275.9 million, and Liberty Bancshares, approximately $208.8 million. Management expected both to be immediately accretive to diluted core EPS and projected approximately $8.0 billion of pro forma assets if completed.
- Q3 included $3.6 million of merger-related costs; the first nine months included $6.3 million. Other notable items included gains from sales of former branches, a $1.0 million gain on the merchant-services sale year to date, and elevated FDIC loss-share-related income adjustments. Acquired-loan cash-flow estimates and related FDIC indemnification accounting affect future income; management estimated a net pretax reduction of about $0.7 million for the remainder of 2014 from specified remaining adjustments.
- Management said securities’ unrealized losses were primarily rate-related and considered temporary. Acquired Delta Trust purchase accounting remained preliminary and could be adjusted within one year of acquisition.
- Key risks include acquisition execution and integration, credit quality and collateral values, uncertainty in loan-loss estimates, interest-rate movements, competition, and regulatory requirements. Modelled net interest income sensitivity over 12 months was negative 9.49% for a 100-basis-point rate decline, negative 0.02% for a 100-basis-point increase, and positive 0.42% for a 200-basis-point increase; management cautioned that estimates depend on assumptions.
- Legal proceedings, mostly loan-foreclosure matters, were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the pending Community First and Liberty acquisitions closed on expected terms and delivered the anticipated accretion, integration savings and capital impact.
- Whether growth in core earnings persists after removing acquisition effects, merger and restructuring costs, branch-sale gains, and FDIC-related loan-yield and indemnification adjustments.
- Trends in nonaccrual loans, commercial real estate credit quality, net charge-offs, foreclosed assets and allowance adequacy as the loan portfolio expands.
- How liquidity, deposit composition and funding costs evolve, particularly given the reported cash decline and planned acquisitions.
- Whether the preliminary Delta Trust fair-value allocation, goodwill and acquired-loan cash-flow estimates change materially, and how interest-rate changes affect margin and earnings.