Business Context and Reporting Period
Company: Simmons First National Corp (Arkansas-based financial holding company with operations in Arkansas, Kansas, and Missouri).
Reporting Period: Quarter and six months ended June 30, 2011.
Overview: The Company operates eight community banks with 88 offices. The period was characterized by the integration of two FDIC-assisted acquisitions completed in 2010 (Southwest Community Bank and Security Savings Bank), which provided higher-yielding covered loans and FDIC loss share protection. Management reported "good asset quality" relative to the industry despite a unsettled national economy.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|
| Net Income | $6.7 million | $11.8 million | $12.9 million |
| Diluted EPS | $0.39 | $0.68 | $0.75 |
| Net Interest Income | $27.3 million | $54.1 million | $49.6 million |
| Net Interest Margin (FTE) | 3.90% | 3.88% | 3.77% |
| Non-Interest Income | $14.4 million | $27.0 million | $29.4 million |
| Non-Interest Expense | $28.7 million | $58.7 million | $54.1 million |
| Provision for Loan Losses | $3.3 million | $6.0 million | $7.0 million |
| Total Assets | $3.26 billion | $3.26 billion | $3.32 billion (Dec 31, 2010) |
| Total Loans (excl. covered) | $1.63 billion | $1.63 billion | $1.68 billion (Dec 31, 2010) |
| Cash and Cash Equivalents | $541.9 million | $541.9 million | $452.1 million (Dec 31, 2010) |
| Stockholders' Equity | $403.9 million | $403.9 million | $397.4 million (Dec 31, 2010) |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 15.5% year-over-year for the quarter and 8.7% for the six-month period. This was primarily due to the absence of a $3.0 million bargain purchase gain from an FDIC-assisted transaction recorded in Q2 2010.
- Non-Interest Income: Total non-interest income decreased 16.7% for the quarter and 8.3% year-to-date. The decline is largely attributed to the non-recurring gain in 2010. However, a $1.1 million gain from the sale of MasterCard stock in Q2 2011 partially offset the decline.
- Net Interest Income Growth: Net interest income increased 8.1% for the quarter and 9.0% year-to-date, driven by lower interest expense (cost of funds decreased 26-28 basis points) and higher yields on acquired covered loans.
- Expense Increase: Non-interest expense increased 5.2% for the quarter and 8.5% year-to-date, primarily due to incremental operating expenses from the 2010 acquisitions. Normalized expenses decreased slightly.
- Loan Portfolio: Total loans (excluding covered loans) decreased $49.8 million from year-end 2010, driven by a decline in the legacy portfolio and the runoff of student loans (which are no longer originated by the private sector).
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Q2 2011: Included a $1.1 million pre-tax gain from the sale of MasterCard stock.
- Q2 2010: Included a $3.0 million pre-tax gain on the FDIC-assisted acquisition of Southwest Community Bank.
- Core Earnings: Management reported "core earnings" (excluding non-recurring items) of $6.2 million ($0.36 EPS) for Q2 2011, compared to $6.5 million ($0.38 EPS) for Q2 2010.
- Asset Quality Risks: Non-performing assets increased to $41.3 million (1.27% of total assets) from $37.2 million at year-end 2010. Non-performing loans were 1.14% of total loans. The increase was largely due to reclassifying two credits to nonaccrual status.
- Allowance for Loan Losses: The allowance increased to $27.8 million (1.70% of total loans). Management added a special $500,000 provision in Q2 2011 to address economic uncertainties, including the national debt and budget crisis.
- Regulatory Capital: The Company remains "well-capitalized" with a Tier 1 leverage ratio of 11.97% and a total risk-based capital ratio of 22.37%, significantly above regulatory minimums.
- Outlook: Management anticipates continued moderate economic recovery but notes uncertainty regarding the durability of growth and the impact of federal fiscal stimulus fading. They remain focused on disciplined acquisition opportunities.
Key Facts for Investor Verification
- Non-Recurring Gains: Verify the impact of the $1.1 million MasterCard stock sale gain in 2011 versus the $3.0 million FDIC acquisition gain in 2010 when comparing year-over-year profitability.
- Student Loan Runoff: Confirm the trajectory of the $53.6 million student loan portfolio, which is no longer being originated and is being serviced until payoff or sale.
- Covered Assets: Review the $192.9 million in covered loans and the $54.4 million FDIC indemnification asset, noting that 80% of losses on these assets are reimbursed by the FDIC.
- Non-Performing Assets: Monitor the trend of non-performing assets, which rose to 1.27% of total assets, and the specific reclassification of troubled debt restructurings (TDRs) to nonaccrual status.
- Dividend Policy: Note the consistent dividend of $0.38 per share for the first six months of 2011, with future payments subject to regulatory limitations on subsidiary bank dividends.