Simmons First National Corporation — Q1 2014 Form 10-Q
Business context and reporting period. Arkansas-based bank holding company operating in Arkansas, Kansas and Missouri. This unaudited quarterly report covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. The interim statements received an independent accountant’s review, not an audit.
Financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Total interest income | $45.0 million | $33.2 million in Q1 2013 |
| Net interest income (GAAP) | $41.5 million | $30.1 million in Q1 2013 |
| Net interest income (FTE) | $43.2 million, up 38.8% | $31.1 million in Q1 2013 |
| Net interest margin (FTE) | 4.54% | 4.01% in Q1 2013 |
| Provision for loan losses | $0.9 million | $0.9 million in Q1 2013 |
| Non-interest income | $9.2 million | $11.3 million in Q1 2013 |
| Non-interest expense | $44.6 million | $31.9 million in Q1 2013 |
| Net income / diluted EPS | $4.4 million / $0.27 | $5.9 million / $0.36 in Q1 2013 |
| Management-defined core earnings (non-GAAP) / diluted core EPS | $7.5 million / $0.46 | $6.1 million / $0.37 in Q1 2013 |
| Operating cash flow | $1.9 million | $14.4 million in Q1 2013 |
Net income fell year over year despite higher net interest income. Management attributed the increase in interest income chiefly to the Metropolitan acquisition and acquired-loan yield accretion. Higher FDIC indemnification-asset amortization reduced non-interest income. The company reported core earnings growth, but this non-GAAP measure excludes merger and branch-right-sizing costs and should be read alongside GAAP results.
At March 31, total assets were $4.40 billion (versus $4.38 billion at year-end); total loans were $2.37 billion (versus $2.40 billion); net loans were $2.34 billion; and deposits were $3.71 billion (versus $3.70 billion). Cash and cash equivalents were $522.1 million, down from $539.4 million. The cash-flow statement reports a $17.2 million decrease in cash, with investing activities using $22.5 million and financing activities providing $3.4 million.
Shareholders’ equity was $406.7 million; book value per share was $24.93 and tangible book value per share $19.23. The company reported a 9.3% equity-to-assets ratio, 7.3% tangible equity-to-tangible assets ratio and 8.21% Tier 1 leverage ratio. Total risk-based capital was 14.45%; management said subsidiary banks met well-capitalized standards. Total long-term debt, including FHLB advances, acquisition-related notes and trust preferred securities, was $137.6 million, essentially unchanged from year-end. Core deposits were 86.5% of deposits; available FHLB borrowing capacity was approximately $742 million.
Material changes and asset quality
- Net interest income (FTE) rose $12.1 million year over year, mainly from acquired loans and a larger investment-securities portfolio. Legacy-loan yield declined 53 basis points, partly offsetting loan-volume growth. Management said excess liquidity continued to weigh on margin.
- Non-interest income declined $2.1 million, including a $4.6 million year-over-year increase in reductions to FDIC indemnification assets. Excluding those additional adjustments, management reported non-interest income growth of $2.5 million, primarily from Metropolitan.
- Non-interest expense increased $12.6 million. Q1 included $3.9 million of branch-right-sizing expense for eleven legacy Simmons branches and $1.3 million of merger-related costs. Management said normalized expense growth was mainly due to Metropolitan’s operating costs.
- Legacy loans grew $37.0 million from year-end, including $27.4 million of balances migrating from acquired loans; acquired-loan balances declined. Total loans decreased overall from year-end.
- Nonaccrual legacy loans increased to $10.0 million from $6.3 million at year-end. Nonperforming loans were 0.70% of total loans; the allowance was $27.0 million, 1.52% of total loans and 216% of nonperforming loans. Annualized net charge-offs were 0.32% of loans. Management reported nonperforming assets of 1.59% of total assets, down from 1.69% at year-end, using its stated asset-quality presentation.
Outlook, commentary and risks
- No numerical full-year earnings or revenue guidance is provided. Management said its focus remains improving core operating income and described Q1 core earnings trends positively.
- The company completed Metropolitan system integration and branch consolidation during Q1. It expected to consolidate its seven subsidiary banks into one banking organization by August 2014.
- Delta Trust acquisition: announced March 24, valued at approximately $66 million based on the specified March share price, with closing expected in Q3 2014 subject to shareholder and regulatory approvals. Community First Bancshares acquisition: announced May 6, valued at approximately $245.1 million based on the specified May share price, with closing expected in Q4 2014 subject to approvals and other conditions. Management expected the Community First deal to be immediately accretive to diluted core EPS.
- Management estimated that a 100-basis-point rate increase would raise modeled next-12-month net interest income by 0.57%, while a 100-basis-point decrease would reduce it by 6.85%. These are scenario estimates based on assumptions, not forecasts.
- Key risks include credit deterioration and uncertainty in loan-loss estimates; acquired-loan cash-flow and FDIC loss-share assumptions; acquisition execution, integration and approval risks; interest-rate changes; and competitive and regulatory conditions. The filing says legal proceedings, primarily foreclosure matters, were not expected in aggregate to materially adversely affect the company.
- The company filed a shelf registration statement that, when effective, could permit up to $200 million of securities offerings. Stock repurchases remained suspended following the Metropolitan acquisition. The quarterly dividend was $0.22 per share; future dividends remain subject to board discretion, earnings, liquidity, capital needs and regulatory constraints.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s core earnings adjustments, particularly the $3.9 million branch-right-sizing charge and $1.3 million merger costs.
- Track nonaccrual loans, charge-offs, classified loans and allowance coverage as nonaccrual balances rose during the quarter.
- Assess how acquired-loan accretion and FDIC indemnification-asset reductions affect reported interest income, non-interest income and future periods; management estimated a net $0.5 million pre-tax reduction from remaining adjustments during the rest of 2014.
- Monitor completion, costs, financing and integration of the Delta Trust and Community First transactions, along with the planned bank consolidation.
- Evaluate liquidity and capital needs in light of acquisitions, the potential $200 million shelf offering, parent-company dependence on regulated bank dividends, and the disclosed interest-rate sensitivity.