Business context and reporting period
Simmons First National Corporation is an Arkansas-based bank holding company operating eight community banks across Arkansas, Kansas and Missouri. This unaudited Form 10-Q reports the quarter ended March 31, 2013; income and cash-flow comparisons are against the three months ended March 31, 2012, and balance-sheet comparisons are against December 31, 2012. The interim statements received an independent accountant’s review, not an audit.
Financial performance and condition
- Earnings: Net income was $5.94 million versus $6.36 million, down about 6.6%. Diluted EPS was $0.36 versus $0.37. Management’s non-GAAP core net income was $6.08 million and diluted core EPS was $0.37, excluding $240,000 of pre-tax merger costs ($146,000 after tax).
- Revenue and margin: Interest income was $33.23 million; interest expense was $3.16 million; GAAP net interest income was $30.08 million, up from $27.72 million. Fully taxable-equivalent net interest income was $31.15 million, up 7.7%. Net interest margin on that basis rose to 4.01% from 3.93%. Non-interest income increased 5.5% to $11.31 million.
- Expenses and credit costs: Non-interest expense increased 11.4% to $31.91 million, including $2.9 million of ordinary operating expense from 2012 acquisitions and $240,000 in merger costs. Management said expense growth was 0.4% after excluding acquisition-related operating costs and merger costs. Loan-loss provision was $919,000 versus $771,000.
- Cash flow: Operating activities provided $14.45 million, investing activities provided $81.57 million and financing activities provided $9.19 million. Cash and cash equivalents increased $105.20 million to $643.00 million. Investing cash inflows included loan collections and security maturities; the company also purchased $7.00 million of bank-owned life insurance.
- Balance sheet and funding: Total assets were $3.54 billion, up from $3.53 billion at year-end. Deposits were $2.89 billion, up $18.5 million; time deposits declined $32.2 million while interest-bearing transaction and savings balances increased $34.9 million. Total loans, including acquired loans, fell to $1.85 billion from $1.92 billion; management cited approximately 4% normalized organic loan growth. Shareholders’ equity was $406.5 million.
- Debt and liquidity: Other borrowings and subordinated debentures totaled $102.3 million, down from $110.1 million, comprising $81.6 million of FHLB advances and $20.6 million of trust preferred securities. Federal funds purchased and repurchase agreements were an additional $108.2 million. Management reported approximately $576 million of additional FHLB capacity and described liquidity as strong; cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 24.3% of assets.
- Capital: The company reported a 10.83% Tier 1 leverage ratio, 19.63% Tier 1 risk-based ratio and 20.88% total risk-based ratio. Each subsidiary bank met the well-capitalized standards. Book value per share was $24.62 and tangible book value per share was $20.73.
Material changes versus the prior comparable period
- Net income and GAAP diluted EPS declined, while fully taxable-equivalent net interest income and margin increased. Lower funding costs more than offset lower yields on securities and acquired covered loans.
- Non-interest income improved, led by higher deposit service charges and trust income; investment banking and mortgage lending income declined.
- Reported operating expenses rose substantially, mainly reflecting acquired-bank operations and merger costs. Management said underlying expense growth was limited after those items were removed.
- Net charge-offs were $1.07 million, down from $2.55 million. Nonaccrual loans declined to $8.77 million from $9.12 million, while classified loans increased to $43.4 million from $39.0 million.
- Shares repurchased totaled 94,015 at a weighted average $25.59 per share. The quarterly dividend increased to $0.21 per share from $0.20.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management said organic loan growth and asset quality positioned the company favorably for the balance of the year, and it continued to pursue acquisition opportunities. The 2012 acquired locations had been integrated, including system conversions.
- Management noted that historically low interest rates and high liquidity weigh on margin, while repricing of deposits reduced funding costs. Actual future performance may differ from management’s expectations.
- Credit risks include commercial real estate and construction exposures, agricultural seasonality, unsecured credit-card lending and broader economic weakness. Nonperforming assets were $42.7 million, or 1.20% of assets under the filing’s stated measure; nonperforming loans were 0.74% of total loans. TDRs totaled $13.8 million, mainly in commercial real estate.
- FDIC loss-share accounting remains significant: acquired covered loans and related indemnification assets depend on estimates of future collections and reimbursements. In Q1, acquisition-related cash-flow estimate adjustments added $119,000 to pre-tax income; management expected a net addition of about $270,000 for the remainder of 2013, subject to revised estimates.
- Outstanding commitments to extend credit were approximately $771.5 million in total, including $423.0 million of credit-card commitments and $348.5 million of other loan commitments. Standby letters of credit totaled $6.9 million. These amounts are not necessarily expected cash outflows. Various legal proceedings, mostly loan foreclosures, were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors. Proposed Basel III and standardized capital rules were delayed, and their final form and timing remained uncertain.
Important facts for investors to verify
- Whether loan growth persists: reconcile management’s approximately 4% normalized organic growth claim with the quarter-end decline in total and legacy loans, including seasonal effects and runoff of acquired loans.
- Whether net interest margin can hold or improve as rates, liquidity levels and acquired-loan yields change.
- Credit trends, especially the rise in classified loans, commercial real estate concentrations, agricultural exposures and credit-card charge-offs; also monitor TDRs and nonperforming assets.
- The assumptions, timing and sensitivity of FDIC indemnification assets and acquired-loan accretion, including the expected remaining 2013 net income contribution.
- Whether acquisition integration, future acquisitions, repurchases and dividends remain consistent with capital, liquidity and expense-control objectives.
- Regulatory capital rule changes and limits on subsidiary-bank dividends, which affect parent-company liquidity and capital deployment.