Simmons First National Corporation — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, with balance-sheet comparisons to December 31, 2010. Simmons is an Arkansas-based financial holding company operating eight community banks through 88 offices in Arkansas, Kansas and Missouri. The interim statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q3 2011 / September 30, 2011 | Comparable period / prior date |
|---|---|---|
| Net interest income | $27.3 million; $28.5 million fully taxable-equivalent | Q3 2010: $26.1 million; $27.3 million FTE |
| Provision for loan losses | $2.8 million | Q3 2010: $3.4 million |
| Non-interest income | $13.7 million | Q3 2010: $14.8 million |
| Non-interest expense | $27.6 million | Q3 2010: $26.8 million |
| Net income | $7.3 million; diluted EPS $0.42 | Q3 2010: $7.6 million; diluted EPS $0.44 |
| Net interest margin, FTE | 3.86% | Q3 2010: 4.02% |
| Nine-month net income and diluted EPS | $19.1 million; $1.10 | 2010: $20.6 million; $1.19 |
| Nine-month net interest income, FTE | $85.1 million | 2010: $79.5 million |
| Nine-month net interest margin, FTE | 3.87% | 2010: 3.85% |
| Total assets | $3.29 billion | December 31, 2010: $3.32 billion |
| Loans, excluding FDIC-covered loans | $1.63 billion | December 31, 2010: $1.68 billion |
| Deposits | $2.63 billion | December 31, 2010: $2.61 billion |
| Cash and cash equivalents | $523.7 million | December 31, 2010: $452.1 million |
| Long-term debt | $122.5 million | December 31, 2010: $164.3 million |
| Stockholders’ equity | $407.7 million; 12.4% of assets | December 31, 2010: $397.4 million; 12.0% of assets |
Cash flow, nine months. Operating activities provided $24.1 million and investing activities provided $84.5 million; financing activities used $37.0 million. Cash and cash equivalents increased $71.6 million.
Asset quality and capital. The allowance for loan losses was $29.2 million, or 1.79% of non-covered loans, versus $26.4 million at year-end. Non-performing loans were $18.6 million, or 1.14% of loans (0.99% excluding government-guaranteed student loans); non-performing assets were $41.0 million, or 1.24% of assets. Classified loans increased to $72.5 million from $67.6 million. The total risk-based capital ratio was 22.15%, and the Tier 1 leverage ratio was 12.11%; all eight subsidiary banks met well-capitalized standards.
Material changes and management commentary
- Q3 net income and diluted EPS declined year over year. Management attributed the principal earnings pressure to the absence of student-loan sale premiums recorded in 2010. For the first nine months, lower non-interest income also reflected the prior-year $3.0 million FDIC-assisted acquisition gain. 2011 results included a $1.1 million pre-tax gain from selling MasterCard shares.
- Lower deposit and borrowing costs supported net interest income, but the Q3 margin fell 16 basis points year over year. Management cited high liquidity and reduced legacy loan balances as factors; higher-yielding FDIC-covered loans supported the nine-month margin.
- Management reported that normalized non-interest expense was down approximately 2.5% for Q3 and flat for the nine-month period, excluding incremental Kansas acquisition expenses and specified nonrecurring items. Reported expense nevertheless rose 3.3% and 6.8%, respectively.
- Loans declined overall, including a $40.5 million decrease in construction and development loans; agricultural lending increased, partly offsetting weaker other commercial demand. Nonaccrual loans rose to $15.3 million from $11.2 million at year-end, while impaired loans fell to $46.8 million from $50.6 million.
- FDIC-covered assets at September 30 totaled $237.5 million, including $172.4 million of covered loans and a $51.2 million FDIC indemnification asset. The FDIC generally shares 80% of covered-asset losses; agreements also include potential clawback provisions. The estimated true-up liability was $3.3 million.
Outlook, risks and contingencies
- No formal earnings forecast is provided. Management described the economy as unsettled, cited continuing weakness and uncertainty in housing and commercial real estate, and flagged elevated unemployment, local industry conditions and uncertainty related to federal debt, spending and taxes.
- Management did not anticipate significant deposit changes, expected no student-loan sales for the remainder of 2011, and said it continued to pursue FDIC-assisted acquisitions selectively. It estimated a potential annual negative impact of approximately $600,000 from debit-card fee changes, while noting the rule directly applies to larger banks.
- Liquidity was described as strong: cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 21.0% of assets, compared with 18.6% at year-end. Approximately $332 million of FHLB capacity and about $91 million of federal-funds lines were available.
- Deposits were the primary funding source; core deposits represented 83.4% of total deposits. Non-interest-bearing transaction accounts rose $102.2 million, while time deposits declined $51.0 million. Long-term debt fell $41.8 million, mainly through scheduled FHLB repayments.
- The company reinstated its stock repurchase program in September; 19,000 shares were repurchased during the quarter at an average $21.60 per share. Nine-month dividends were $0.57 per share. Management anticipated continued quarterly dividends but gave no assurance of future amounts.
- Outstanding commitments to extend credit were approximately $637.2 million, including $344.2 million of credit-card commitments and $293.1 million of other loan commitments; letters of credit totaled $8.7 million. Various legal proceedings, mainly loan foreclosures, were not expected to have a material adverse effect. Management reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether rising nonaccrual loans, classified credits and real-estate-related exposures lead to higher provisions or charge-offs; review the allowance’s adequacy and the sizeable unallocated reserve.
- How much of earnings and net interest income depends on FDIC-covered loan accretion and reimbursements, and the remaining loss-share, servicing and clawback exposure.
- Whether margin pressure from low rates, high liquidity and shrinking legacy loans offsets lower funding costs and covered-loan income.
- The sustainability of fee income and expense trends, including the missing student-loan premiums, the MasterCard gain, acquisition-related expenses and estimated debit-card fee impact.
- Liquidity and capital after any further share repurchases, dividends or acquisitions, including regulatory limits on subsidiary-bank dividends and reliance on available funding facilities.