Simmons First National Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The Arkansas-based financial holding company reported the three months ended March 31, 2012, with comparative results for Q1 2011. It operated eight community banks through 88 offices in Arkansas, Kansas and Missouri. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Interest income | $32.0 million | $32.5 million |
| Net interest income (GAAP) | $27.7 million | $26.8 million |
| Net interest income (fully taxable equivalent) | $28.9 million | $28.1 million |
| Net interest margin (fully taxable equivalent) | 3.93% | 3.87% |
| Provision for loan losses | $0.8 million | $2.7 million |
| Non-interest income | $10.7 million | $12.6 million |
| Non-interest expense | $28.6 million | $29.9 million |
| Income before income taxes | $9.0 million | $6.8 million |
| Net income | $6.4 million | $5.1 million |
| Diluted earnings per share | $0.37 | $0.29 |
| Operating cash flow | $10.2 million | $20.8 million |
Balance sheet and funding at March 31, 2012: Total assets were $3.32 billion, broadly unchanged from year-end 2011. Deposits were $2.65 billion, up $4.2 million; total loans, including FDIC-covered loans, were $1.67 billion, down $64.5 million from year-end. Cash and cash equivalents were $678.0 million, up $107.8 million since year-end. Stockholders’ equity was $409.3 million; book value per share was $23.82 and tangible book value per share was $20.21.
Long-term debt was $121.2 million, including $90.3 million of FHLB advances and $30.9 million of trust preferred securities. The company reported $318.3 million of additional FHLB borrowing capacity. Total deposits represented the principal funding source. Core deposits were 87.0% of deposits; brokered deposits were $19.6 million.
Cash flow for the quarter included $107.1 million provided by investing activities and $9.5 million used in financing activities, including $3.4 million of dividends and $2.1 million of share repurchases. Cash and cash equivalents increased by $107.8 million.
Material changes versus the prior comparable period
- Net income rose 25.4% and diluted EPS increased from $0.29 to $0.37. Management attributed the improvement principally to lower loan-loss provision and expense control.
- Net interest income increased despite lower interest income, as interest expense fell $1.4 million amid deposit repricing. The FTE margin increased six basis points, helped by higher accretion yield on FDIC-covered loans; high liquidity continued to weigh on margin.
- Non-interest income fell 14.9%, chiefly because a $2.8 million reduction in the FDIC indemnification asset was recorded as a reduction of income. Excluding this adjustment, management said non-interest income increased $899,000, or 7.1%.
- Non-interest expense declined 4.4%, reflecting lower deposit insurance costs, no merger costs in Q1 2012, and ongoing efficiency initiatives.
- Nonaccrual loans fell to $9.1 million from $12.9 million at year-end. Total non-performing assets were $37.7 million, down from $39.1 million; non-performing loans were 0.85% of total loans. Net charge-offs, however, increased to $2.6 million from $1.2 million in Q1 2011.
- Loan balances declined from year-end, partly due to seasonal credit-card and agricultural paydowns and continued student-loan runoff. Management said the seasonally adjusted decline, also accounting for student-loan runoff, was $1.7 million.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said it expects to continue quarterly dividends, subject to board discretion and financial, liquidity, capital and regulatory considerations. It was actively pursuing disciplined FDIC-assisted acquisition opportunities and reported excess capital to support potential opportunities.
- Covered-loan accounting: Improved expected cash flows on acquired FDIC-covered loan pools increased Q1 interest income by $3.2 million and reduced non-interest income by $2.8 million, for a net pre-tax benefit of $407,000. Management estimated the remaining adjustments would add approximately $0.8 million to pre-tax income during the rest of 2012; future estimates may change. The FDIC reimburses 80% of covered-asset losses, subject to agreement terms and possible clawbacks.
- Credit and economic risks: Management cited continuing uncertainty in the national economy, unemployment, real estate markets and Arkansas industries including poultry, timber and catfish, as well as challenges in Northwest Arkansas. Commercial real estate represented a significant part of lending; management stated it had no significant real-estate concentrations. The allowance for loan losses was $28.3 million, or 1.83% of loans, and included a $9.5 million unallocated component.
- Capital and liquidity: The company reported a 12.11% Tier 1 leverage ratio and a 23.49% total risk-based capital ratio; all eight subsidiary banks met well-capitalized standards. Liquid assets identified by management—cash and cash equivalents, trading and available-for-sale securities, and mortgage loans held for sale—were 26.7% of total assets, versus 23.1% at year-end. High liquidity supports funding flexibility but compresses margin.
- Other notable matters: The company repurchased 78,839 shares at a weighted-average $26.08 per share; 429,689 shares remained authorized for repurchase. A longstanding lawsuit was dismissed by the Arkansas Supreme Court in March 2012, and plaintiffs’ counsel advised that the matter was considered concluded. Management reported no material changes to the risk factors in its 2011 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether improving covered-loan cash-flow assumptions and related FDIC indemnification adjustments persist, and how much of the estimated remaining $0.8 million 2012 pre-tax benefit is realized.
- Whether credit performance remains favorable as net charge-offs rose year over year, and whether non-performing loans, classified loans and the allowance—particularly the unallocated reserve—remain adequate.
- How loan growth, deposit mix and high liquidity affect future net interest income and margin in changing interest-rate conditions.
- The terms, availability and potential costs of FHLB funding, trust preferred debt, and regulatory limits on subsidiary-bank dividends to the parent company.
- Whether repurchases, dividends or potential acquisitions change capital and liquidity levels; future dividends and repurchases are not assured.
- Potential effects of economic, real-estate, interest-rate, regulatory and FDIC loss-share risks. The filing cautions that actual results may differ from forward-looking statements.