Simmons First National Corporation — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2012. Simmons is an Arkansas-based bank holding company operating through eight community banks across Arkansas, Kansas and Missouri. The statements received an independent accountant’s interim review, not an audit.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $31.7 million | $32.2 million | $94.9 million | $97.1 million |
| Net interest income | $27.9 million | $27.3 million | $82.9 million | $81.4 million |
| Net interest margin, FTE | 3.94% | 3.86% | 3.91% | 3.87% |
| Provision for loan losses | $1.3 million | $2.8 million | $2.8 million | $8.8 million |
| Non-interest income | $11.8 million | $13.7 million | $33.6 million | $40.6 million |
| Non-interest expense | $28.7 million | $27.6 million | $85.6 million | $86.2 million |
| Net income | $6.8 million | $7.3 million | $19.7 million | $19.1 million |
| Diluted EPS | $0.41 | $0.42 | $1.16 | $1.10 |
Balance sheet and liquidity at September 30, 2012: Total assets were $3.415 billion, up from $3.320 billion at year-end 2011. Total deposits were $2.795 billion, compared with $2.650 billion; total loans, including acquired loans, were $1.860 billion, compared with $1.738 billion. Cash and cash equivalents were $488.5 million, down from $570.2 million. Cash and cash equivalents, trading and available-for-sale securities, and mortgage loans held for sale were 21.2% of assets, versus 23.1% at year-end.
- Cash flow, nine months: Operating activities provided $24.0 million; investing activities provided $75.2 million; financing activities used $180.9 million. Cash and cash equivalents decreased $81.8 million to $488.5 million.
- Debt: Total other borrowings and subordinated debentures were $109.5 million, down $11.6 million from year-end. The company retired $10.3 million of fixed-rate trust preferred securities; payment was still in process at quarter-end. Approximately $461.8 million of additional FHLB borrowing capacity was available.
- Capital: Stockholders’ equity was $404.2 million; equity-to-assets was 11.8%, tangible equity-to-tangible assets 10.2%, and Tier 1 leverage 11.68%. The company reported a 20.55% total risk-based capital ratio; subsidiary banks met well-capitalized standards.
- Credit quality: Allowance for loan losses was $28.1 million, or 1.73% of total loans; non-performing loans were 0.73% of loans and non-performing assets 1.22% of assets. Classified loans declined to $45.5 million from $60.6 million at year-end; nonaccrual loans declined to $8.5 million from $12.9 million. Nine-month net charge-offs were $4.8 million, versus $6.1 million.
Material changes versus comparable periods
- Q3 net income declined to $6.8 million from $7.3 million, while nine-month net income increased to $19.7 million from $19.1 million. Reported diluted EPS was $0.41 for Q3 and $1.16 year to date, versus $0.42 and $1.10, respectively.
- Management’s non-GAAP diluted core EPS was $0.40 for Q3, down from $0.42, and $1.15 for nine months, up from $1.08. These measures exclude specified nonrecurring items and are not substitutes for GAAP results.
- Net interest income and FTE margin improved despite lower interest income, primarily as deposit and borrowing costs declined and yields on acquired covered loans increased. Management noted that high liquidity continued to constrain margin.
- Provision expense fell substantially, which management attributed to improved asset quality, credit upgrades and lower credit-card charge-offs. The allowance fell $2.0 million from year-end even as total loans increased.
- Non-interest income fell year over year, in part because higher expected cash collections on FDIC-covered acquired loans reduced related indemnification-asset income. Mortgage lending income increased with refinancing activity; service-charge and card-fee income faced regulatory-related pressure.
- Loans grew, with growth in real estate and agricultural lending; consumer loans declined, including as the company ran off its student-loan portfolio. Deposits increased, particularly interest-bearing transaction and savings accounts.
Outlook, commentary, risks and unusual items
- Acquisitions: In September, the bank acquired substantially all assets and assumed substantially all deposits and certain liabilities of Truman Bank in an FDIC-assisted transaction. The fair-value table reported $253.2 million of acquired assets and $228.6 million of deposits. The transaction included 80% FDIC loss sharing on covered assets, a $1.12 million pretax bargain-purchase gain and $815,000 of merger costs; management said the net after-tax contribution was $185,000, or $0.01 per diluted share.
- Subsequent event: On October 19, 2012, the bank agreed to acquire substantially all assets and assume deposits and substantially all other liabilities of Excel Bank. The announced terms included approximately $184.1 million of assets, $177.4 million of liabilities and an $13.8 million FDIC payment, subject to customary adjustment. The FDIC was to cover 80% of losses on approximately $126.6 million of specified loans and foreclosed real estate. Final acquired balances remained subject to adjustment.
- Management outlook: Management expected to continue pursuing acquisitions, particularly in Kansas and Missouri, and described strong capital and liquidity as supporting that strategy. It anticipated continuing quarterly dividends but gave no earnings or revenue guidance. The board’s new repurchase authorization covered up to 850,000 shares; 691,200 remained available at September 30.
- Unusual acquired-loan accounting: In the first nine months, estimated cash-flow revisions on older acquired covered-loan pools increased interest income by $9.1 million and reduced non-interest income by $8.2 million, for a net pretax benefit of $859,000. Management estimated remaining adjustments of $18.0 million to increase interest income and $15.8 million to reduce non-interest income; these estimates may change with future cash-flow assessments.
- Key risks: Management cited uncertainty in the national and regional economies, unemployment, real estate and agricultural markets, loan-loss estimation, interest rates, competition, regulatory changes, and acquisition evaluation and integration. FDIC loss-share agreements require compliance with servicing conditions and may include clawback obligations. Management reported no material change to the risk factors in its 2011 Form 10-K.
- Management said disclosure controls were effective and reported no significant changes in internal control over financial reporting during the period. It did not expect the discussed proposed capital rules to prevent the company or subsidiaries from meeting capital requirements if then in effect, while noting the proposals could change.
Important facts for investors to verify
- Whether loan-quality improvement and lower provisions are sustainable, particularly given loan growth, regional real estate exposure and the reduced allowance.
- The assumptions, timing and earnings effects of acquired-loan accretion and FDIC indemnification-asset adjustments.
- Final Excel acquisition balances, integration costs, loss-share coverage and any subsequent credit or liquidity effects.
- The effect of continued low rates, liquidity levels and regulatory fee changes on net interest margin and recurring fee income.
- Capital and parent-company liquidity after dividends, share repurchases, debt repayment and further acquisitions; subsidiary bank dividends are subject to regulatory limits.