Simmons First National Corporation — Q3 2013 Form 10-Q
Business context and reporting period
Arkansas-based bank holding company reporting the unaudited quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. The filing describes operations across Arkansas, Kansas and Missouri, with consumer credit-card lending nationwide. Interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income (GAAP) | $31.6 | $27.9 | $91.2 | $82.9 |
| Provision for loan losses | $1.1 | $1.3 | $3.0 | $2.8 |
| Non-interest income | $10.3 | $11.8 | $32.9 | $33.6 |
| Non-interest expense | $30.9 | $28.7 | $93.1 | $85.6 |
| Net income | $6.9 | $6.8 | $19.4 | $19.7 |
| Diluted EPS | $0.43 | $0.41 | $1.19 | $1.16 |
| Net interest margin, FTE | 4.27% | 3.94% | 4.08% | 3.91% |
Management reported non-GAAP core earnings of $7.4 million for Q3, up 12.1%, and $19.9 million for nine months, versus $6.6 million and $19.5 million, respectively. Diluted core EPS was $0.45 for the quarter and $1.21 year to date. These measures exclude specified nonrecurring items and should be considered alongside GAAP results.
- Balance sheet: Total assets were $3.442 billion, down from $3.527 billion at year-end. Total loans, including acquired loans, were $1.958 billion versus $1.922 billion; loans excluding acquired balances grew $112.7 million. Deposits were $2.839 billion, down $35.4 million. Interest-bearing transaction and savings deposits rose $32.0 million, while time deposits fell $70.8 million.
- Cash flow: Nine-month operating cash flow was $30.6 million (prior year $24.0 million); investing activities used $80.6 million (prior year provided $75.2 million), and financing activities used $111.2 million (prior year $180.9 million). Cash and cash equivalents declined $161.3 million to $376.5 million.
- Debt and liquidity: Other borrowings and subordinated debentures totaled $96.6 million, down from $110.1 million. Federal funds purchased and repurchase agreements were an additional $62.3 million. Management cited approximately $528 million of available FHLB borrowing capacity and strong overall liquidity; liquid assets as defined in the filing were 16.7% of assets, versus 21.6% at year-end.
- Capital: Stockholders’ equity was $403.0 million; equity-to-assets was 11.7%. Tier 1 leverage was 11.13%, Tier 1 risk-based capital 18.36%, and total risk-based capital 19.62%. Subsidiary banks were reported well-capitalized. Book value per share was $24.88 and tangible book value per share $20.80.
- Credit quality: Allowance for loan losses was $27.5 million, or 1.58% of loans; nine-month net charge-offs were $3.4 million, or 0.28% annualized. Nonperforming loans were $9.7 million (0.56% of loans) and nonperforming assets $35.9 million (1.04% of assets), both improved from year-end ratios. Classified loans were $38.1 million. Total TDRs were $10.3 million.
- Other comprehensive income: Nine-month comprehensive income was $16.6 million, below net income due mainly to $2.9 million of after-tax unrealized securities losses; accumulated other comprehensive loss was $2.6 million.
Material changes versus comparable periods
- Q3 net income rose modestly, while nine-month net income declined slightly; diluted EPS increased in both comparisons. The reduced average share count, following stock repurchases, contributed to the per-share results.
- Net interest income and margin improved, supported by loan growth, acquired covered-loan income and lower funding costs. Management also noted that high liquidity constrained margin.
- Recurring fee income increased, but total non-interest income declined, including because the prior-year period included a $1.1 million FDIC-assisted acquisition gain and current-period covered-asset income reflected greater FDIC indemnification-asset amortization.
- Reported non-interest expense increased, partly from acquired-bank operating costs and $533,000 of branch-closure costs. Management said expense growth was more limited after excluding acquisition-related and nonrecurring items.
- Nonaccrual loans declined from $9.1 million at year-end to $6.0 million. Impaired loans (excluding acquired loans and net of government guarantees) fell from $30.8 million to $16.4 million.
Outlook, commentary, risks and unusual items
- Pending acquisition: The company agreed to buy all shares of Metropolitan National Bank for $53.6 million cash, with closing expected in Q4 2013, subject to regulatory approval. The stated funding plan included $46 million of unsecured correspondent-bank debt at a floating 3.25% rate, repayable within three years. Management projected combined assets of approximately $4.4 billion, deposits of $3.7 billion and net loans of $2.3 billion. Branch consolidation and integration were expected.
- The company acquired a $9.8 million credit-card portfolio on September 30 and recorded $2.1 million of purchased credit-card relationship intangibles, to be amortized over five years. It also closed five underperforming branches and suspended share repurchases in August following the Metropolitan announcement.
- Acquired-loan cash-flow revisions increased Q3 interest income by $4.0 million and reduced non-interest income by $3.8 million, for a $161,000 pretax net benefit. Management estimated a further $476,000 pretax net benefit from these adjustments during the remainder of 2013; estimates could change with future cash-flow assessments.
- No specific earnings or margin guidance was provided. Management stated its focus remained improving core operating income and pursuing acquisition opportunities.
- Key stated risks include economic and interest-rate changes, collateral values and loan losses, competition, acquisition integration, liquidity and deposit behavior, and regulatory changes. The filing reported no material change to the risk factors in the 2012 Form 10-K. Legal proceedings, mostly loan foreclosures, were not expected to have a material adverse effect.
- Management said it believed investment-security unrealized losses were temporary and not credit-related; fair values were affected primarily by rising market rates. This judgment, acquired-loan cash-flow estimates, and the FDIC indemnification asset are significant estimates.
Important facts for investors to verify
- Whether Metropolitan closed on schedule, the final acquisition economics and funding, and realized integration costs, branch actions and synergies.
- Whether loan growth, deposit mix and funding costs sustain net interest margin as liquidity levels change and rates move.
- Whether asset-quality improvement continues, particularly in commercial real estate, agriculture, consumer credit cards and government-guaranteed student loans; verify allowance adequacy against subsequent losses.
- How acquired-loan cash-flow revisions and related FDIC indemnification-asset amortization affect future earnings, including whether the estimated remaining benefits materialize.
- Whether reported core earnings adjustments remain comparable and transparent relative to GAAP earnings; also track the effects of branch closures and acquisition-related expenses.
- Capital and liquidity after the acquisition and under Basel III implementation; the filing’s capital figures are as of September 30, 2013, before the planned acquisition financing.