Simmons First National Corporation — Q1 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2016, for the Arkansas-based financial holding company operating in Arkansas, Kansas, Missouri and Tennessee. Comparisons are with Q1 2015 unless otherwise noted. Recent acquisitions, particularly Liberty and Community First (both acquired in February 2015), materially affect year-over-year comparisons.
Key financial results
| Metric | Q1 2016 | Comparison |
|---|---|---|
| Interest income | $75.6 million | $57.3 million |
| Net interest income | $70.2 million GAAP; $72.3 million fully taxable equivalent (FTE) | $53.0 million GAAP; $54.8 million FTE |
| Net interest margin | 4.41% FTE | 4.34%; 3.92% versus 3.86% excluding acquired-loan accretion |
| Non-interest income | $29.5 million | $18.3 million |
| Non-interest expense | $61.8 million | $57.2 million; merger-related costs were $0.1 million versus $10.4 million |
| Provision for loan losses | $2.8 million | $1.2 million |
| Net income / diluted EPS | $23.5 million / $0.77 | $8.7 million / $0.39 |
| Core net income / diluted core EPS (non-GAAP) | $23.2 million / $0.76 | $15.7 million / $0.70; core EPS rose 8.6% |
Management attributed higher net interest income principally to acquired and organic loan volume, partly offset by lower loan yields. Non-interest income growth reflected acquired businesses and higher trust, mortgage, deposit-service and card fees. GAAP earnings growth was strongly affected by the prior-year quarter’s acquisition-related costs; core results provide a less distorted comparison. Core measures are non-GAAP and should be considered alongside GAAP results.
Financial position, liquidity and capital
- At March 31, total assets were $7.537 billion, total loans $4.930 billion, deposits $6.080 billion and stockholders’ equity $1.072 billion. Assets were slightly below year-end 2015; total loans increased $10.7 million and deposits declined $6.3 million.
- Cash and cash equivalents were $223.1 million, down $29.2 million during the quarter. Cash flows were negative $5.2 million from operations and negative $29.7 million from financing; investing activities provided $5.7 million. The filing’s cash-flow line caption for the $5.7 million amount appears inconsistent with its placement under investing activities.
- Deposits were primarily the funding source; core deposits represented 90.0% of total deposits. Transaction and savings balances increased $33.5 million from year-end while time deposits fell $40.0 million.
- Management reported total debt of $236.9 million, up from $222.9 million at year-end, including $125.6 million of FHLB advances, $51.2 million of notes payable and $60.1 million of subordinated debentures. The company reported approximately $985.9 million of additional FHLB borrowing capacity.
- Book value per share was $35.35 and tangible book value per share $22.84. The company’s CET1 ratio was 13.85%, Tier 1 leverage ratio 11.07% and total risk-based capital ratio 15.67%; management said the company and bank met capital requirements and remained well capitalized.
Material changes, risks and outlook
- Credit quality: Legacy nonaccrual loans rose to $34.2 million from $17.7 million at year-end, primarily reflecting a $13.5 million commercial real estate credit. Legacy non-performing loans were 1.01% of loans; the table’s non-performing-assets ratio was 1.02% of assets, excluding acquired loans other than in total assets. Management also cited a broader 1.16% ratio using a different measure and said it was 0.98% excluding the single large credit. Verify the definitions when comparing ratios.
- Total troubled debt restructurings increased to $14.3 million from $5.6 million. The allowance for loan losses was $33.6 million, or 0.94% of total loans; coverage was 93% of non-performing loans. Annualized net charge-offs were 0.18% of loans, or 0.11% excluding credit cards. Management considered reserves adequate, but loan-loss estimates are inherently judgmental.
- Management said acquisition integration and efficiency efforts supported long-term performance, while recognizing that acquired franchises increased ongoing operating expenses. On February 19, 2016, the company combined its trust companies; effective April 1, its bank converted to an Arkansas state charter and changed its name to Simmons Bank.
- The FDIC loss-share agreements had been terminated in September 2015, resolving associated rights and obligations and resulting in a one-time pre-tax charge of $7.5 million in 2015. Acquired-loan accretion remains subject to revised expected cash flows; management reported a $1.1 million pre-tax net benefit from related adjustments in Q1 2016.
- The company redeemed $30.9 million of preferred stock in January 2016. It declared a $0.24 per-share common dividend for the quarter, up from $0.23 a year earlier; future dividends remain discretionary and subject to financial, regulatory and other factors. No common shares were repurchased in the quarter.
- No numerical earnings guidance was provided. Management said it would continue pursuing growth opportunities, improving core operating income and managing expenses; it did not anticipate a significant change in total deposits. Interest-rate simulations projected lower net interest income under each modeled scenario: down 1.45% for a 100-basis-point decline, down 0.67% for a 100-basis-point increase and down 1.25% for a 200-basis-point increase over 12 months. Management cautioned that these are assumption-dependent estimates, not forecasts.
- Risks include interest-rate and economic changes, credit losses and collateral values, acquisition integration, competition, regulatory requirements and the uncertainty of allowance and acquired-loan estimates. Management reported no material change to the 2015 Form 10-K risk factors. The interim statements received an independent accountant’s review, not an audit; management reported disclosure controls were effective.
Important facts for investors to verify
- Whether the increase in nonaccrual loans, TDRs and the single $13.5 million CRE exposure results in additional credit costs or reserve needs.
- How much of earnings and margin depends on acquired-loan accretion, and how that accretion changes as expected cash flows are reassessed.
- Whether acquired-business revenue and cost synergies continue to improve underlying profitability, given the growth in normalized expenses.
- Liquidity and funding conditions, including deposit mix, FHLB capacity, debt maturities and the parent company’s limited bank-dividend availability without regulatory approval.
- The assumptions underlying the reported capital ratios, asset-quality measures and interest-rate sensitivity scenarios, and the sustainability of dividends.