Simmons First National Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is an Arkansas-based bank holding company operating across Arkansas, Kansas, Missouri, and Tennessee. Figures below are in millions of dollars unless stated otherwise; the interim statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income, GAAP | $78.7 | $41.8 | $204.8 | $123.7 |
| Net interest income, fully taxable equivalent | $80.8 | $43.5 | $211.2 | $128.8 |
| Provision for loan losses | $1.6 | $1.1 | $5.8 | $3.6 |
| Non-interest income | $23.5 | $16.0 | $67.0 | $40.7 |
| Non-interest expense | $67.9 | $44.4 | $190.1 | $128.8 |
| Net income | $21.7 | $8.8 | $50.5 | $23.0 |
| Diluted EPS | $0.72 | $0.52 | $1.83 | $1.39 |
| Fully taxable equivalent net interest margin | 4.82% | 4.36% | 4.58% | 4.41% |
Management reported non-GAAP diluted core EPS of $0.85 for Q3 and $2.32 year to date, versus $0.63 and $1.65, respectively. Core earnings exclude specified items, including acquisition and branch-right-sizing costs and, in 2015, the FDIC loss-share termination charge and gain on a banking-operations sale; these are not GAAP measures.
Net cash provided by operating activities was $75.5 for the first nine months, compared with $12.1 in 2014. Investing activities provided $258.8, including $201.0 net cash received in business combinations, while financing activities used $269.1. Cash and cash equivalents increased $65.1 to $401.0.
Financial position, liquidity, and capital
- Total assets were $7.56 billion, up from $4.64 billion at December 31, 2014; total loans were $4.85 billion versus $2.74 billion. Total deposits were $6.09 billion versus $3.86 billion. Much of the balance-sheet expansion reflects acquisitions.
- At September 30, cash and cash equivalents were $401.0; investment securities totaled $1.48 billion. Core deposits were 88.8% of total deposits. Management cited approximately $1.1 billion of available FHLB borrowing capacity and $225 million in correspondent-bank federal-funds lines.
- Total other borrowings and subordinated debentures were $235.3, compared with $135.3 at year-end 2014. Separately, federal funds purchased and repurchase-agreement liabilities were $110.4. In October, the company borrowed $52.3 from correspondent banks, partly to refinance existing debt.
- Stockholders’ equity was $1.05 billion. Management reported a 10.83% Tier 1 leverage ratio, 15.84% Tier 1 risk-based capital ratio, 16.52% total risk-based capital ratio, and 13.98% CET1 ratio; it stated the subsidiary bank met well-capitalized standards. TCE to tangible assets was 9.1%.
- The company paid common dividends of $0.69 per share in the first nine months, compared with $0.66 in 2014. Future dividends remain subject to board discretion and regulatory and financial considerations.
Material changes and notable items
- On February 27, 2015, Simmons acquired Liberty Bancshares and Community First Bancshares. Their operations contributed $33.3 and $58.2 of revenue, respectively, and $16.3 and $23.3 of net income, respectively, to year-to-date results after acquisition. The company issued substantial common stock and $30.9 of preferred stock in these transactions. Purchase-price allocations remained preliminary.
- The acquisitions expanded the company into southwest Missouri and Tennessee. Liberty’s bank was merged into Simmons Bank in April; Community First’s bank was merged in September. Management cited expected integration savings and business opportunities, but cautioned that integration costs and execution affect results.
- In September, the company terminated its remaining FDIC loss-share agreements, receiving a net $2.4 payment and recording a one-time $7.5 pretax charge. Related indemnification assets and the FDIC true-up liability were removed, and previously covered loans and foreclosed assets became non-covered. This also ends future amortization adjustments relating to the terminated agreements.
- Q3 included a $2.1 gain on sale of banking operations after the sale of three Salina, Kansas branches, including $5.3 of loans and $77.8 of deposits. The filing also reports a $782,000 net loss in interest expense from early extinguishment of FHLB advances.
- Non-interest expense rose substantially, mainly with the acquired businesses; nine-month merger costs were $12.5. The company also incurred branch-right-sizing costs after closing 12 branches. Management said it continued to focus on core operating income and reported record core earnings and core EPS in each of the first three quarters.
- Nonperforming assets were $65.1, or 0.86% of total assets, compared with $58.0 and 1.25% at year-end 2014. Legacy nonaccrual loans were $15.3; acquired nonaccrual loans were $13.6. Management reported legacy allowance coverage of nonperforming loans at 181%, and nine-month annualized net charge-offs of 0.21%. Acquired and legacy credit statistics are presented on different bases in parts of the filing.
- The company completed its acquisition of Ozark Trust & Investment Corporation on October 29, 2015, after quarter-end; the transaction was valued at $23.6 based on the company’s closing share price on that date.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expected no significant change in total deposits and believed its liquidity sources were ample. Its interest-rate simulation projected net interest income changes over the next 12 months of -0.48% with rates up 100 basis points, -0.32% with rates up 200 basis points, and +0.27% with rates down 100 basis points. Management cautioned these are model estimates dependent on assumptions and may differ materially from actual outcomes.
Key risks identified include acquisition integration and costs, interest-rate changes, competition, economic conditions and borrower repayment capacity, real-estate collateral values, and the uncertainty inherent in loan-loss, acquisition-valuation, goodwill, and tax estimates. The filing notes that commercial real estate cycles can be local and prolonged and that unsecured credit-card loans may be more sensitive to economic downturns. The company reported various legal proceedings, primarily loan-foreclosure matters, which it did not expect in aggregate to materially adversely affect its financial position. No material changes to the previously disclosed risk factors were reported.
The independent accountant performed a review, not an audit, and reported no material modifications it believed should be made to the interim financial statements. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth reflects acquired businesses, acquired-loan discount accretion, and the company’s non-GAAP exclusions, rather than recurring organic performance.
- Whether acquisition purchase-price allocations, expected cost savings, and post-merger operating costs change as integration proceeds.
- Credit quality and allowance adequacy across both legacy and acquired portfolios, particularly acquired-loan delinquencies and real-estate exposures; note the different denominator and coverage bases used in the filing.
- The ongoing earnings and balance-sheet effects of ending FDIC loss-share protection, including the one-time charge and the removal of future indemnification-asset amortization.
- Debt maturities, floating-rate exposure, liquidity dependence on deposits and wholesale funding, and the October 2015 borrowing and refinancing.
- The preferred stock’s planned redemption and its dividend rate increase from 1% to 9% after February 18, 2016 if not redeemed, as well as the stated plan to redeem it in Q1 2016.