Simmons First National Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Figures are in millions of dollars unless stated otherwise. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Business context and reporting period
Simmons is an Arkansas-based financial holding company operating across Arkansas, Kansas, Missouri and Tennessee. The quarter’s results and substantial balance-sheet expansion reflect the February 27 acquisitions of Liberty Bancshares and Community First Bancshares. Their results are included only from the acquisition date, so reported year-over-year comparisons are not on a like-for-like basis.
Key financial metrics
| Metric | Q1 2015 | Comparable / prior-period value |
|---|---|---|
| Interest income | $57.3 | $45.0 in Q1 2014 |
| Net interest income (GAAP) | $53.0 | $41.5 in Q1 2014 |
| Net interest income (fully taxable equivalent) | $54.8 | $43.2 in Q1 2014 |
| Non-interest income | $18.5 | $9.2 in Q1 2014 |
| Non-interest expense | $57.4 | $44.6 in Q1 2014 |
| Net income | $8.7; $0.39 diluted EPS | $4.4; $0.27 diluted EPS in Q1 2014 |
| Management-defined core earnings (non-GAAP) | $15.7; $0.70 diluted core EPS | $7.5; $0.46 diluted core EPS in Q1 2014 |
| Net interest margin (fully taxable equivalent) | 4.34% | 4.54% in Q1 2014; excluding acquired-loan yield adjustments, 3.86% versus 3.76% |
| Operating cash flow | $17.0 | $1.9 in Q1 2014 |
Balance sheet at March 31: Total assets were $7.82 billion, versus $4.64 billion at year-end; total loans were $4.64 billion versus $2.74 billion; deposits were $6.27 billion versus $3.86 billion. Cash and cash equivalents were $685.8 million. Stockholders’ equity was $1.014 billion, or 13.0% of assets; tangible equity to tangible assets was 8.3%. Book value per share was $32.93 and tangible book value per share was $20.78.
Cash flows: Investing activities provided $369.8 million, including $201.0 million of net cash received in business combinations. Financing activities used $36.8 million. Cash and cash equivalents increased $349.9 million from year-end.
Debt and liquidity: Total debt, including subordinated debentures, was $348.1 million, up from $135.3 million at year-end. Deposits were the primary funding source; management reported core deposits at 92.2% of total deposits. The company cited approximately $821.7 million of additional FHLB borrowing capacity and $81 million in correspondent-bank federal funds lines.
Credit and capital: Allowance for loan losses was $29.2 million; annualized net charge-offs were 0.20% of loans. Nonperforming loans were $15.0 million, or 0.71% of loans, and the allowance was 194% of nonperforming loans. The company reported a 13.57% CET1 ratio and a 16.25% total risk-based capital ratio; subsidiary banks were described as well capitalized.
Material changes versus comparable periods
- Reported net income and revenue increased, but acquisitions materially changed the scale and mix of the business. Q1 2015 included approximately $4.7 million of Liberty revenue and $8.2 million of Community First revenue.
- Net interest income (fully taxable equivalent) rose 21.1%; management attributed the increase mainly to loan volume, including acquisitions and legacy loan growth. Loan yields declined, and the net interest margin fell 20 basis points year over year.
- Non-interest income more than doubled, supported by acquired trust, mortgage, investment banking and other fee businesses, as well as a smaller FDIC-related loss. Non-interest expense rose 28.8%, chiefly due to acquisition integration and merger costs.
- Merger-related costs were $10.4 million, compared with $1.3 million a year earlier. Branch-right-sizing costs were $0.04 million, versus $3.9 million in Q1 2014. Management’s non-GAAP core earnings exclude these items; they are not GAAP results.
- Nonperforming assets were $65.9 million, versus $58.0 million at year-end. Management said the increase included $6.1 million of former branch properties reclassified as foreclosed assets, with no deterioration or further write-down. Nonaccrual loans also increased, primarily commercial real estate.
Outlook, commentary, risks and unusual items
- Management called core earnings and core earnings per share records and said its focus remains improving core operating income. It expects cost savings from integrating acquired operations, but provided no formal earnings or revenue guidance.
- Liberty Bank was merged into Simmons Bank, with systems conversion completed April 24, 2015. Community First’s bank integration was expected by September 4, 2015. Integration execution, costs and realization of anticipated synergies remain important uncertainties.
- On April 28, 2015, Simmons agreed to acquire Ozark Trust & Investment Corporation, including Trust Company of the Ozarks, for an indicated transaction value of $20.7 million. Closing was expected in Q3 2015, subject to regulatory review and customary conditions.
- Acquisition purchase-price allocations and fair values remained preliminary and could be adjusted. The acquired businesses added substantial goodwill, which management said is not tax deductible.
- Acquired-loan and FDIC indemnification accounting materially affects earnings. Management estimated that remaining adjustments would increase interest income by $6.2 million and reduce non-interest income by $5.6 million during the remainder of 2015, a net pretax reduction of approximately $0.6 million; future estimates may change.
- Community First preferred stock held by the U.S. Treasury pays 1% through February 18, 2016, then converts to 9%. Simmons said it planned to redeem it in Q1 2016.
- Risks include acquisition integration, credit losses and collateral values, interest-rate changes, deposit competition and liquidity, regulatory constraints, and the uncertainty of estimates for acquired loans, goodwill and taxes. Management reported no material change to the risk factors in its 2014 Form 10-K. Legal proceedings were not expected to have a material adverse effect.
- Management’s interest-rate model estimated net interest income increases of 0.42% and 2.21% under immediate, sustained 100- and 200-basis-point rate increases, respectively, and 0.53% under a 100-basis-point decrease. The filing cautions that assumptions are uncertain and actual results may differ materially.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s non-GAAP core earnings, including the treatment of merger and branch-right-sizing costs and acquired-loan/FDIC adjustments.
- Track acquired-loan performance, credit migration, allowance adequacy, nonperforming assets and the final purchase-price allocations for Liberty and Community First.
- Assess whether planned integration savings materialize and whether remaining conversion and merger costs affect profitability.
- Monitor the Ozark transaction’s regulatory approval, closing, consideration and integration plans, as well as the preferred-stock redemption plan before its rate increases to 9%.
- Review liquidity and capital after acquisitions. The MD&A overview cites a Tier 1 leverage ratio of 8.2%, while its capital table reports 13.34%; verify the applicable entity and ratio, as the filing text does not clearly reconcile these figures.
- Evaluate the sustainability of reported margin and earnings given acquisition effects, lower loan yields, deposit costs and the scheduled runoff of acquired-loan accounting adjustments.