Simmons First National Corporation — 2016 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts below are in U.S. dollars; “m” and “bn” mean millions and billions.
Business context and reporting period
Simmons is an Arkansas-based financial holding company operating in Arkansas, Kansas, Missouri and Tennessee. It continued integrating acquisitions completed in 2015, growing loans and deposits, and reducing branch costs. Simmons First National Bank converted to an Arkansas state-chartered bank and became Simmons Bank effective April 1, 2016.
Key financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income (GAAP) | $66.6m | $73.2m | $136.8m | $126.2m |
| Non-interest income | $36.9m | $24.9m | $66.4m | $43.3m |
| Non-interest expense | $64.1m | $64.8m | $125.9m | $122.0m |
| Provision for loan losses | $4.6m | $3.0m | $7.4m | $4.2m |
| Net income | $22.9m | $20.1m | $46.4m | $28.8m |
| Diluted EPS | $0.75 | $0.67 | $1.52 | $1.10 |
- Management’s non-GAAP core earnings were $25.1m for Q2 and $48.3m for the first half; diluted core EPS was $0.82 and $1.59, respectively. These exclude specified nonrecurring items and are not GAAP measures.
- Fully taxable-equivalent net interest margin was 4.17% for Q2 and 4.29% for the first half, down from 4.47% and 4.42%. Management cited low rates and lower acquired-loan accretion; core net interest margin, a non-GAAP measure, was 3.88% and 3.90%.
- At June 30, assets were $7.534bn, total loans $5.014bn, deposits $6.028bn and stockholders’ equity $1.091bn. Loans grew $94.5m and deposits declined $57.9m from year-end 2015.
- Allowance for loan losses was $34.5m including $0.954m related to acquired loans; allowance to total loans was 0.90%. First-half net charge-offs were $5.0m, or 0.29% annualized.
- First-half operating cash flow was $54.1m; investing cash flow was $10.7m and financing cash flow was negative $66.5m. Cash and cash equivalents decreased $1.7m to $250.6m.
- Total debt reported in MD&A was $252.0m, up from $222.9m at year-end, primarily reflecting higher FHLB advances. The company reported $90.8m of short-term FHLB advances and approximately $962.7m of additional FHLB borrowing capacity.
- Capital remained above regulatory thresholds: CET1 14.08%, Tier 1 leverage 11.30%, Tier 1 risk-based 15.20% and total risk-based 15.90%. Book value per share was $35.86; tangible book value per share, a non-GAAP measure, was $23.43.
Material changes versus comparable periods
- Q2 GAAP net income rose 14.0% and diluted EPS rose $0.08 year over year; first-half net income increased to $46.4m from $28.8m. First-half 2015 included substantial acquisition-related expenses, so reported growth also reflects differing nonrecurring items.
- Q2 net interest income fell $6.6m year over year as loan interest income declined; loan volume added income, but lower loan yields more than offset it. First-half net interest income increased $10.6m, helped by higher loan volume, including the effect of the 2015 acquisitions.
- Non-interest income increased, partly due to securities-sale gains of $3.8m in Q2 and $4.1m year to date, as well as growth in trust, mortgage and card revenue. The 2015 comparison also included FDIC loss-share-related amounts; those agreements had been terminated in 2015.
- Asset quality weakened in the legacy portfolio: nonaccrual loans rose to $43.3m from $17.7m at year-end; nonperforming loans were 1.17% of total loans versus 0.58%. Nonperforming assets were $74.6m, or 0.99% of assets, versus $63.9m, or 0.85%.
- Nonperforming loans included a $13.5m credit and other loans that deteriorated or migrated from acquired portfolios. TDR balances increased to $15.0m from $5.6m at year-end, primarily in commercial real estate.
Outlook, commentary, risks and unusual items
- Management provided no quantified earnings or margin guidance. It said competitive pressure and persistently low interest rates continue to pressure net interest income, while diversified fee businesses support revenue. Priorities include improving efficiency, growing core operating income and pursuing growth opportunities.
- The company agreed to acquire Citizens National Bank, headquartered in Athens, Tennessee, for a transaction valued at approximately $77m based on the stated reference share price. Regulatory approval was received; closing was expected in Q3 2016, subject to shareholder approval and other customary conditions.
- Branch-right-sizing expense was $3.2m in Q2 and $3.2m year to date; management associated the first-half charge with ten branch closings. Q2 merger costs were $0.4m; first-half 2015 merger costs were $11.7m, mainly related to acquisitions.
- Management cited a potential customer-fraud matter involving an agricultural loan: a $2m charge-off was replenished through provision in Q2, with recovery uncertain. The filing also notes that a $0.307m provision on acquired loans was charged off.
- Management considered investment-security unrealized losses temporary and said it did not intend, and was not likely required, to sell the affected securities before recovery. It identified interest-rate risk, credit quality, acquisition integration, competition and regulatory changes among forward-looking risks. Simulations estimated net interest income changes over 12 months of +0.71% for a 100-basis-point rate increase, +0.84% for a 200-basis-point increase and -2.17% for a 100-basis-point decrease; actual outcomes may differ.
- Legal proceedings, mostly loan-foreclosure matters, were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the rise in nonaccrual loans, nonperforming assets and TDRs stabilizes, and whether reserves adequately reflect the identified credits and potential agricultural-loan fraud.
- Whether loan-yield pressure and declining acquired-loan accretion continue to weigh on net interest income and margin.
- How much of reported fee-income growth is recurring versus attributable to securities-sale gains and other unusual or comparison-period items.
- Whether the Citizens National Bank acquisition closes as expected and what integration costs, purchase accounting and goodwill result.
- That non-GAAP core earnings, core margin and tangible-book measures are assessed alongside their GAAP counterparts and reconciliations.