Simmons First National Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The interim financial statements are unaudited and were reviewed by BKD, LLP; the review is not an audit. Simmons is an Arkansas-based bank holding company operating in Arkansas, Kansas and Missouri.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $43.8 million | $32.6 million | $88.9 million | $65.8 million |
| Net interest income, GAAP | $40.4 million | $29.6 million | $82.0 million | $59.7 million |
| Provision for loan losses | $1.6 million | $1.0 million | $2.5 million | $2.0 million |
| Non-interest income | $15.4 million | $11.3 million | $24.6 million | $22.6 million |
| Non-interest expense | $39.8 million | $30.3 million | $84.4 million | $62.2 million |
| Net income | $9.9 million | $6.6 million | $14.3 million | $12.5 million |
| Diluted EPS | $0.60 | $0.40 | $0.87 | $0.76 |
| Diluted core EPS (non-GAAP) | $0.56 | $0.39 | $1.02 | $0.76 |
Net interest margin on a fully taxable equivalent basis was 4.34% in Q2, up from 3.96%; the six-month margin was 4.44%, up from 3.98%. Management attributed improvement to acquired loans, accretion on acquired-loan discounts and a higher-yielding asset mix, while noting that excess liquidity and declining acquired-loan accretion constrain margin. The filing does not present a conventional operating margin measure.
Q2 core earnings were $9.2 million, up from $6.4 million; six-month core earnings were $16.6 million, versus $12.5 million. These are management-defined non-GAAP measures excluding specified items, and should be considered alongside GAAP results.
Financial position, liquidity and credit
- At June 30, total assets were $4.326 billion, down from $4.383 billion at year-end 2013. Gross loans were $2.389 billion, versus $2.405 billion; net loans were $2.362 billion. Deposits were $3.642 billion, down $55.8 million. Non-interest transaction accounts and interest-bearing transaction and savings accounts rose by $41.5 million, while time deposits fell by $97.4 million.
- Cash and cash equivalents were $422.7 million. Cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 16.7% of assets, compared with 17.6% at year-end. Management described liquidity as strong; approximately $534 million of additional FHLB borrowing capacity was available.
- Six-month cash flows were $0.5 million provided by operations, $44.1 million used in investing and $73.2 million used in financing. Cash and cash equivalents declined by $116.7 million to $422.7 million.
- Total other borrowings and subordinated debentures were $136.2 million, including $69.6 million of FHLB advances, $46.0 million of unsecured acquisition-related notes at a 3.25% floating rate, and $20.6 million of trust-preferred securities. Separately, federal funds purchased and repurchase-agreement liabilities were $98.2 million.
- Stockholders’ equity was $414.1 million; book value per share was $25.36 and tangible book value per share $19.69. The Tier 1 leverage ratio was 8.41% and total risk-based capital ratio 14.75%; management said the company and subsidiary banks met applicable well-capitalized standards.
- The allowance for loan losses was $27.5 million, or 1.47% of total loans; it covered 245% of non-performing loans. Six-month annualized net charge-offs were 0.28% of loans. Non-performing loans were 0.60% of loans, up from 0.53% at year-end; non-performing assets were 1.49% of assets, down from 1.69%. Nonaccrual loans increased to $10.2 million from $6.3 million, primarily in commercial real estate.
Material changes and unusual items
- The November 2013 Metropolitan National Bank acquisition materially expanded the business and drove much of the year-over-year growth in interest income, deposits, fee income and operating costs. System integration and initial branch consolidation were completed in Q1 2014.
- Three acquisitions were pending at quarter-end: Delta Trust, valued at approximately $63.2 million and expected to close in Q3; Community First, approximately $275.9 million; and Liberty Bancshares, approximately $208.8 million. The latter two were expected to close in Q4, subject to shareholder, regulatory and other closing conditions. Community First and Liberty were expected to be immediately accretive to diluted core EPS. Management projected pro forma assets of approximately $8.1 billion including pending acquisitions.
- Q2 non-interest income included a $2.3 million gain from sales of former branches and a $1.0 million gain on the sale of the merchant-services business. The company said it expected to sell most remaining former branch locations by year-end. Recurring service-charge and card-fee growth also reflected Metropolitan accounts.
- Non-interest expense included merger, branch-right-sizing and bank-charter consolidation costs. Six-month expense also included $4.2 million of branch-right-sizing expense. Management said normalized expense growth largely reflected Metropolitan’s incremental operating costs. The company was consolidating its seven subsidiary banks into one organization, with phases completed in May and the final phase planned for August.
- FDIC-related acquired-loan cash-flow adjustments increased interest income but reduced non-interest income. Management estimated a net pre-tax reduction of approximately $1.0 million from remaining adjustments during the rest of 2014; these estimates may change as expected cash flows are reassessed.
- The company sold substantially all of its student-loan portfolio at par during Q2. It declared $0.44 per share in dividends for the first half, compared with $0.42 a year earlier, and made no common-stock repurchases during Q2. A shelf registration, once effective, would permit up to $300 million of securities issuance.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided. Management emphasized core operating-income improvement, acquisition integration and efficiency initiatives. The filing identifies risks from acquisition execution and integration, economic conditions, interest-rate changes, competition, credit quality and the judgments used in loan-loss reserves and acquired-asset valuations. Its modeled 12-month net-interest-income sensitivity was +0.05% for a 100-basis-point rate increase, +0.63% for a 200-basis-point increase, and -12.09% for a 100-basis-point decrease; management cautioned that assumptions limit the predictive value of these estimates. Legal proceedings, principally loan foreclosures, were not expected to have a material adverse effect. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Key facts investors should verify
- Closing status, regulatory and shareholder approvals, funding and integration costs for the three pending acquisitions, and whether expected accretion is achieved.
- How much earnings growth is recurring versus driven by acquisition accounting, FDIC-related adjustments, asset sales and other non-GAAP exclusions.
- Trends in nonaccrual loans, commercial-real-estate credit quality, foreclosed assets and the adequacy of the loan-loss allowance.
- Cash depletion, deposit mix, available borrowing capacity and any capital issuance required to support acquisitions.
- Realized results versus the disclosed interest-rate sensitivity model, especially its projected downside under falling rates.