Business Context and Reporting Period
Company: Simmons First National Corp (Arkansas-based financial holding company with eight community banks).
Reporting Period: Quarter and six months ended June 30, 2009.
Overview: The Company operates 88 offices across 47 communities in Arkansas. Total assets decreased slightly to $2.898 billion from $2.923 billion at year-end 2008. The Company decided not to participate in the U.S. Treasury's Capital Purchase Program (CPP) in July 2009, citing improved economic indicators and strong internal capital.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income | $10.7 million | $14.8 million |
| Diluted EPS | $0.76 | $1.05 |
| Net Interest Income | $47.1 million | $45.9 million |
| Non-Interest Income | $24.8 million | $26.7 million |
| Non-Interest Expense | $52.6 million | $47.3 million |
| Provision for Loan Losses | $4.8 million | $3.7 million |
| Net Interest Margin (FTE) | 3.70% | 3.74% |
| Total Loans | $1.943 billion | $1.933 billion |
| Total Deposits | $2.319 billion | $2.336 billion |
| Allowance for Loan Losses | $25.0 million | $25.8 million |
| Non-Performing Assets | 0.86% of Total Assets | 0.64% of Total Assets |
| Cash and Cash Equivalents | $114.6 million | $200.3 million |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 27.4% year-over-year. The decline is primarily attributed to a $2.4 million increase in deposit insurance expense (due to FDIC special assessments) and a $1.2 million nonrecurring gain in 2008 related to Visa litigation liability reversal.
- Interest Rate Environment: Net interest income increased despite a 107 basis point decrease in yield on earning assets, driven by a larger 119 basis point decrease in the cost of funds. Lower rates on time deposits and transaction accounts significantly reduced interest expense.
- Asset Quality: Non-performing loans increased to 1.02% of total loans (up from 0.81% in 2008), largely due to $2.4 million in government-guaranteed student loans becoming past due. Excluding these student loans, non-performing loans were 0.90%.
- Loan Portfolio Composition: Student loans increased by $28.3 million (25.4%) due to the inability to sell loans into the secondary market. Construction loans decreased by $27.6 million.
- Non-Interest Expense: Increased 11.1% year-over-year, driven almost entirely by the surge in deposit insurance costs. Normalized expense increased only 2.4%.
Guidance, Outlook, and Risks
- Margin Outlook: Management anticipates flat to slight margin compression for the remainder of 2009 based on current pricing models and investment portfolio maturities.
- Student Loan Outlook: The Company expects to sell approximately $60 million of student loans to the Government in the third quarter of 2009, anticipating a recording of approximately $1.8 million in premiums on sale.
- Deposit Insurance Risk: The FDIC may impose additional special assessments in the third and fourth quarters of 2009 if the Deposit Insurance Fund reserve ratio falls below certain levels. The timing and amount of these assessments are uncertain.
- Legal Contingencies: A lawsuit filed in 2003 regarding wrongful conduct in loan collection remains pending. A jury trial is set for November 2009. The Company believes no material liability exists at this time.
- Capital Strategy: The Company suspended stock repurchases in July 2008 to preserve capital. It has decided not to participate in the Treasury's CPP, maintaining its current capital levels which exceed "well-capitalized" regulatory standards.
Investor Verification Checklist
- Deposit Insurance Assessments: Verify the final impact of the FDIC special assessment and the potential for additional assessments in Q3/Q4 2009.
- Student Loan Sales: Confirm the timing and premium realization of the expected $60 million student loan sale to the Government in Q3 2009.
- Credit Card Charge-offs: Monitor the trend of annualized net credit card charge-offs, which rose to 2.83% in Q2 2009, though still below industry averages.
- Northwest Arkansas Real Estate: Review specific loan performance in the Northwest Arkansas region, where the Company noted continued deterioration in the real estate market.
- Visa Litigation: Track the outcome of the pending jury trial regarding the 2003 wrongful conduct lawsuit.