Simmons First National Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparative figures are for 2014 unless noted. Simmons is a regional financial holding company operating 149 financial centers in Arkansas, Kansas, Missouri and Tennessee. This is an annual filing, not a quarterly-only report.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $278.6 million | $171.1 million |
| Non-interest income | $95.8 million | $62.2 million |
| Provision for loan losses | $9.0 million | $7.2 million |
| Non-interest expense | $258.1 million | $175.7 million |
| Net income | $74.4 million; $74.1 million available to common shareholders | $35.7 million |
| Diluted EPS | $2.63 | $2.11 |
| Diluted core EPS (non-GAAP) | $3.18 | $2.29 |
| Net interest margin (FTE) | 4.55% | 4.47% |
| Efficiency ratio (non-GAAP) | 59.08% | 69.88% |
2015 fourth-quarter net income available to common shareholders was $23.8 million and diluted EPS was $0.78. Core earnings and core EPS are management-defined non-GAAP measures; the filing cautions they should not replace GAAP results.
- Balance sheet at year-end: assets $7.56 billion, loans $4.92 billion, deposits $6.09 billion, and stockholders’ equity $1.08 billion. Assets, loans and deposits rose substantially, principally reflecting acquisitions.
- Cash flow: operating activities provided $88.7 million; investing activities provided $130.4 million; financing activities used $302.7 million. Cash and cash equivalents ended at $252.3 million, down $83.6 million from year-end 2014.
- Liquidity: management described liquidity as strong. Available sources included approximately $965 million of additional FHLB capacity and $230 million in correspondent-bank federal funds lines. Core deposits were 89.7% of deposits.
- Debt: total debt was $222.9 million, versus $135.3 million in 2014. The company reported $65.9 million of scheduled debt maturities in 2016 and $36.4 million in 2020; the latter includes a five-year balloon on $52.3 million of correspondent-bank borrowing due October 2020.
- Capital: common equity to assets was 13.8%; tangible common equity to tangible assets was 9.26%. Regulatory ratios included CET1 of 14.21%, Tier 1 risk-based capital of 16.02%, total risk-based capital of 16.72%, and Tier 1 leverage of 11.20%. Management said the company and bank exceeded applicable well-capitalized thresholds.
- Credit quality: legacy-portfolio nonperforming loans were 0.58% of loans and nonperforming assets were 0.85% of assets, compared with 0.63% and 1.25% in 2014. However, nonperforming loans rose in dollars to $18.9 million from $13.0 million, and nonperforming assets to $63.9 million from $58.0 million. These ratios exclude acquired loans and certain acquired foreclosed assets.
- The legacy loan-loss allowance was $31.4 million, with a further $1.0 million allowance on acquired loans. Management cited a $55.7 million acquired-loan credit mark and total coverage of $88.1 million, or 1.8% of gross loans. Legacy net charge-offs were 0.24% of average loans; credit-card net charge-offs were 1.28%, versus 1.27% in 2014.
Material changes versus 2014
- Completed acquisitions of Liberty Bancshares and Community First on February 27, 2015, and Ozark Trust on October 29, 2015. The bank acquisitions expanded operations in Missouri and Tennessee; Ozark Trust added wealth-management capabilities and more than $1 billion in assets under management.
- Acquisitions helped lift year-end assets 62.8% and total loans 80.5%. Legacy loans grew 58.1%, or 41.0% excluding $391 million of acquired balances that migrated into the legacy portfolio.
- Revenue and earnings increased sharply, while non-interest expense also rose 46.9%, reflecting the larger organization, $13.8 million of merger costs, branch closures and other costs. Common shares outstanding increased to 30.3 million from 18.1 million, primarily due to acquisition stock issuances.
- Goodwill and other intangible assets increased to $380.9 million from $130.6 million, including $219.6 million of goodwill recorded for 2015 acquisitions. Goodwill impairment was not recorded in 2015.
- Legacy asset-quality ratios improved, but nonperforming loans, TDRs and nonperforming assets increased in dollar terms. TDR balances rose to $5.6 million from $3.2 million.
- The company terminated its remaining FDIC loss-share agreements in September 2015. The FDIC paid $2.368 million, all related rights and obligations were settled, and the company recorded a $7.476 million pretax charge. Previously covered loans and foreclosed assets were reclassified as not covered.
Outlook, commentary, and risks
- Management reported record core earnings and core EPS, citing acquisition contributions, organic loan growth, and efficiency initiatives. It emphasized continued improvement in core operating income and said it expected one-time acquisition and efficiency-related items to continue affecting short-term results. No specific earnings or revenue guidance was provided.
- Management intends to pursue traditional bank acquisitions within its existing footprint and selected expansion markets, as well as specialty financial-services and branch acquisitions. Success depends on integration, cost savings, customer retention, and disciplined credit underwriting.
- Interest-rate simulation estimated net interest income could be 0.52% lower with rates up 100 basis points, 0.98% lower up 200 basis points, or 0.44% lower down 100 basis points over the next 12 months. The filing stresses that assumptions are uncertain and actual results may differ materially.
- Principal risks include concentration in four regional markets and real estate lending; acquired-loan performance and valuation; consumer and credit-card losses; acquisition integration and goodwill; competition, funding costs, interest-rate movements, regulatory and compliance costs, and cybersecurity. The company reported no significant oil-and-gas lending concentration.
- The filing reports unrelated legal proceedings, mainly loan foreclosures, that management did not expect in aggregate to materially adversely affect financial position. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- After year-end, the company redeemed all $30.9 million of Series A preferred stock on January 29, 2016. The bank’s board also approved pursuing conversion from a national to a state charter, with completion expected in March 2016.
Important facts for investors to verify
- How much of the earnings and margin improvement is sustainable after separating acquisition effects, purchase-accounting accretion, and non-GAAP adjustments from recurring performance.
- Whether Liberty and Community First integration delivers expected cost savings and growth, and how acquisition-related dilution affects per-share returns.
- Trends in acquired-loan delinquencies, classified credits, credit marks, nonperforming assets, TDRs, and the adequacy of the allowance after FDIC loss protection ended.
- Debt maturities, borrowing costs, deposit mix, available liquidity, and the parent company’s reliance on regulated bank dividends; only about $8.2 million was available for bank dividends without regulatory approval at year-end.
- Whether the 2015 nonrecurring charges and gains, including FDIC termination and branch-related items, reconcile as presented in the filing’s core-earnings disclosures.