Simmons First National Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is an Arkansas-based financial holding company operating eight community banks in Arkansas, Kansas and Missouri. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income (GAAP) | $29.6 | $27.3 | $59.7 | $55.0 |
| Non-interest income | $11.3 | $11.1 | $22.6 | $21.8 |
| Net income | $6.6 | $6.5 | $12.5 | $12.9 |
| Diluted EPS | $0.40 | $0.38 | $0.76 | $0.75 |
| Net interest margin (FTE) | 3.96% | 3.87% | 3.98% | 3.90% |
- Q2 net income increased about 0.6% year over year, while diluted EPS rose 5.3%. First-half net income declined about 2.9%, while diluted EPS increased slightly.
- Q2 and first-half non-interest expense was $30.3 million and $62.2 million, up 7.4% and 9.4%, respectively. Management attributed much of the increase to normal operating costs from 2012 acquisitions.
- At June 30, assets were $3.42 billion, down from $3.53 billion at year-end 2012. Deposits were $2.81 billion, down $61.0 million; total loans, including acquired loans, were $1.88 billion, down from $1.92 billion.
- Core loans excluding acquired loans rose $21.9 million from year-end to $1.65 billion. Management reported normalized organic loan growth of approximately 3%.
- Cash and cash equivalents were $459.2 million, versus $537.8 million at year-end. Management said cash, trading and available-for-sale securities, and mortgage loans held for sale equaled 19.3% of assets, compared with 21.6% at year-end. Available FHLB advances were approximately $523.9 million; federal funds lines were approximately $71 million.
- Total debt described as FHLB advances and subordinated debentures was $98.3 million, down $11.8 million from year-end. Federal funds purchased and repurchase agreements added $79.1 million of balance-sheet funding. Shareholders’ equity was $401.9 million; total risk-based capital was 20.24%, and management reported all eight subsidiary banks were well capitalized.
- Operating cash flow for the first half was $26.3 million, compared with $28.9 million in 2012. Cash decreased $78.6 million, including $112.6 million of net cash used in financing activities, primarily reflecting deposit outflows, dividends and share repurchases.
Changes, credit quality and unusual items
- Interest income benefited from loan growth and acquired covered loans; lower loan and securities yields partly offset that benefit. Lower deposit and borrowing costs reduced interest expense. Management noted that high liquidity continued to compress margin despite the year-over-year margin improvement.
- Nonperforming loans were $9.4 million, or 0.57% of total loans, versus $12.0 million and 0.74% at year-end. Nonperforming assets were $39.9 million; the reported ratio was 1.17% of assets. Impaired loans excluding acquired loans declined to $16.7 million from $30.8 million.
- The allowance for loan losses was $27.4 million, 1.66% of total loans; it covered 292% of nonperforming loans. First-half net charge-offs were $2.4 million, or an annualized 0.31% of loans. The provision was $2.0 million, compared with $1.5 million a year earlier.
- Acquired loans and related FDIC indemnification accounting materially affect reported interest and non-interest income. First-half acquired-loan cash-flow adjustments increased interest income by $6.1 million and reduced non-interest income by $5.9 million, for a $0.2 million pretax benefit. Management expected roughly offsetting $5.5 million income and non-interest-income reductions during the rest of 2013; future estimates may change.
- Q2 included a $467,000 reversal of previously accrued merger costs and a $193,000 loss on securities sold from acquired portfolios. Management reported non-GAAP core net income of $6.4 million and diluted core EPS of $0.39 for Q2, and $12.5 million and $0.76 for the first half. These measures exclude specified nonrecurring items and are not GAAP measures.
- Unrealized losses on investment securities increased; accumulated other comprehensive loss was $2.4 million at June 30. Management attributed securities declines mainly to higher market rates, considered the impairments temporary, and stated it did not expect to sell the securities before recovery.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management cited favorable loan-growth and asset-quality trends as supporting the balance of the year and said it was pursuing acquisition opportunities. It also planned continued share repurchases and anticipated quarterly dividends, subject to board discretion and financial, regulatory and liquidity considerations.
- Key risks include changes in interest rates and their effects on margins, deposits, loan demand and asset values; credit deterioration, particularly in real estate, commercial and consumer lending; uncertainty in loan-loss estimates and acquired-loan cash flows; and the costs and integration risks of acquisitions.
- The company had approximately $432.1 million of credit-card commitments, $333.1 million of other loan commitments and $9.0 million of standby letters of credit. Management said unrelated legal proceedings, mostly loan-foreclosure matters, were not expected in aggregate to materially adversely affect financial position.
- New Basel III capital rules were issued in July 2013 and are scheduled to begin taking effect in 2015. Management believed the company and its banks would meet the fully phased-in requirements based on June 2013 positions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic loan growth and margin performance persist as interest rates, yields and excess liquidity change.
- Trends in nonperforming assets, charge-offs, real estate credit exposure and the adequacy of the allowance, including the effect of the allowance-methodology refinement.
- The assumptions, remaining duration and FDIC reimbursement exposure associated with acquired loans, indemnification assets and loss-share agreements.
- The effect of securities interest-rate movements on fair value, accumulated other comprehensive income and liquidity.
- Deposit trends, capital and liquidity needs, the pace of share repurchases, and regulatory capacity of bank subsidiaries to dividend funds to the parent.
- Acquisition execution and integration, and any changes in litigation, commitments or regulatory requirements.
The interim financial statements were reviewed by the independent accounting firm, not audited; the review report expressed no awareness of material modifications needed for GAAP conformity.