Business Context and Reporting Period
Company: Simmons First National Corp (Arkansas-based financial holding company with eight community banks).
Reporting Period: Quarter and nine months ended September 30, 2009.
Overview: The Company operates 88 offices across 47 communities in Arkansas. Total assets decreased slightly to $2.915 billion from $2.923 billion at year-end 2008. The Company decided not to participate in the U.S. Treasury's Capital Purchase Program (CPP) in July 2009, citing improved economic indicators and strong internal capital.
Key Financial Metrics
| Metric | Q3 2009 (3 Months) | Q3 2008 (3 Months) | YTD 2009 (9 Months) | YTD 2008 (9 Months) |
|---|---|---|---|---|
| Net Income | $7.66 million | $6.47 million | $18.41 million | $21.28 million |
| Diluted EPS | $0.54 | $0.46 | $1.30 | $1.51 |
| Net Interest Income | $25.39 million | $24.35 million | $72.51 million | $70.24 million |
| Non-Interest Income | $14.96 million | $11.29 million | $39.78 million | $38.00 million |
| Non-Interest Expense | $26.31 million | $24.44 million | $78.92 million | $71.78 million |
| Provision for Loan Losses | $2.79 million | $2.21 million | $7.55 million | $5.90 million |
| Cash and Cash Equivalents | $209.39 million | $139.54 million (Dec 31, 2008) | N/A | |
| Total Deposits | $2.33 billion | $2.34 billion (Dec 31, 2008) | N/A | |
| Long-Term Debt | $161.56 million | $158.67 million (Dec 31, 2008) | N/A |
Capital Ratios (Sept 30, 2009): Tier 1 Leverage Ratio: 9.60%; Tier 1 Risk-Based Capital Ratio: 13.89%; Total Risk-Based Capital Ratio: 15.14%. All subsidiaries are classified as "well-capitalized."
Material Changes vs. Prior Period
- Net Income: Q3 2009 net income increased 18.3% year-over-year, driven by improved net interest margin and non-interest income. YTD 2009 net income decreased 13.5% compared to YTD 2008, primarily due to a nonrecurring $3.0 million gain from Visa stock redemption in Q1 2008.
- Net Interest Margin (NIM): NIM improved to 3.97% in Q3 2009 from 3.84% in Q3 2008. YTD NIM was 3.79% vs. 3.77% in 2008. The improvement resulted from a significant decrease in interest expense (cost of funds dropped 102 bps in Q3) outpacing the decrease in interest income yields.
- Non-Interest Income: Increased 32.6% in Q3 2009, largely due to a $2.0 million increase in premiums on the sale of student loans. YTD 2009 non-interest income increased 4.7%.
- Non-Interest Expense: Increased 7.6% in Q3 and 10.0% YTD. A significant driver was a $1.5 million increase in deposit insurance expense due to FDIC special assessments and rate increases.
- Asset Quality: Non-performing loans increased to $19.13 million (0.99% of total loans) from $15.65 million at year-end 2008. Impaired loans rose to $47.69 million from $15.69 million. The allowance for loan losses remained stable at $25.83 million (1.34% of total loans).
Guidance, Outlook, and Risks
- Outlook: Management anticipates flat to slight net interest margin improvement for the remainder of 2009 based on current pricing models. The Company expects to record approximately $2.5 million in non-interest income from student loan sales in Q2 and Q3 of 2010.
- Capital Strategy: The Company filed a shelf registration statement to raise up to $175 million in capital if market conditions warrant. Stock repurchases remain suspended to preserve capital.
- FDIC Assessments: The Company accrued $1.5 million for a special FDIC assessment in 2009. Additionally, the FDIC proposed a rule requiring prepayment of assessments for 2010-2012, which the Company estimates could cost approximately $10.0 million.
- Risks:
- Economic Conditions: Continued deterioration in the Arkansas economy, particularly in Northwest Arkansas, could impact credit quality.
- Credit Card Portfolio: Net charge-offs on credit cards increased to 2.58% in Q3 2009. While below industry averages, rising unemployment poses a risk.
- Student Loans: Regulatory changes and market liquidity issues have increased holding periods and expenses for student loans.
- Legislation: The Credit CARD Act of 2009 may reduce profitability of the credit card portfolio by limiting fee increases and requiring longer notice periods.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $25.83 million allowance given the rise in impaired loans to $47.69 million and the specific concentration of risk in Northwest Arkansas real estate.
- FDIC Impact: Confirm the final impact of the proposed FDIC prepayment rule (estimated $10 million) on future liquidity and earnings.
- Student Loan Revenue: Monitor the realization of the projected $2.5 million in student loan premiums in 2010, as this revenue stream is dependent on government program extensions.
- Credit Card Charge-offs: Track the trend of credit card net charge-offs (currently 2.58%) against the national average to assess the impact of the economic downturn on unsecured lending.
- CPP Decision: Review the rationale for declining the Treasury's Capital Purchase Program and the Company's ability to raise capital independently via the new shelf registration.