Simmons First National Corporation (NASDAQ: SFNC) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing is unaudited; the interim financial statements received an independent accountant’s review, not an audit.
Business context
Simmons is a financial holding company operating through Simmons Bank across eight states. On April 12, 2019, it completed its acquisition of Reliance Bancshares, adding approximately $1.5 billion of assets, $1.1 billion of loans and $1.2 billion of deposits. The company reported 212 financial centers.
Financial performance
- Q2 earnings: Net income was $55.9 million, versus $53.6 million a year earlier. Net income available to common shareholders was $55.6 million; diluted EPS was $0.58, unchanged year over year.
- First-half earnings: Net income available to common shareholders was $103.3 million, down from $104.9 million; diluted EPS was $1.09 versus $1.13. Management’s non-GAAP core earnings were $65.5 million for Q2 and $114.5 million for the first half, with diluted core EPS of $0.68 and $1.21, respectively.
- Net interest income: GAAP net interest income was $150.4 million in Q2 and $287.4 million for the first half. On a fully taxable-equivalent basis, it was $152.1 million and $290.7 million, up 10.1% and 6.0% year over year.
- Margins: Fully taxable-equivalent net interest margin was 3.92% in Q2 versus 3.99% a year earlier, and 3.89% for the first half versus 4.08%. Core margin was 3.66% for Q2 and the first half. Management attributed pressure to rising deposit and borrowing costs.
- Noninterest income and expenses: Q2 noninterest income increased 2.5% to $39.0 million; first-half income fell 3.7% to $72.8 million, primarily reflecting lower card fees after the debit interchange cap took effect. Noninterest expense increased 12.4% to $110.7 million in Q2 and 7.9% to $212.2 million for the first half. Q2 included $13.3 million of identified non-core costs for merger activity, early retirement and branch right-sizing.
- Cash flow: First-half operating cash flow was $118.6 million. Investing activities provided $43.5 million and financing activities used $340.3 million; cash and cash equivalents declined $178.2 million to $655.3 million.
Financial position, credit and capital
- Total assets were $17.94 billion, up from $16.54 billion at year-end 2018. Total loans were $13.13 billion, including acquired loans; deposits were $13.52 billion. Management said loan growth included about $1.0 billion from Reliance and $387 million of organic growth.
- The allowance for loan losses was $64.2 million, alongside a $73.5 million acquired-loan credit mark; management cited combined coverage of $137.7 million, or 1.0% of gross loans. First-half provision was $16.4 million, down from $18.2 million.
- Credit indicators weakened from year-end: nonaccrual legacy loans rose to $62.0 million from $34.2 million; nonperforming assets were $87.6 million, or 0.49% of assets, versus $60.5 million and 0.37%. Nonperforming loans were 0.67% of total loans; annualized first-half net charge-offs were 0.17%.
- Total borrowings and subordinated debt were $1.68 billion. This included $1.32 billion of FHLB advances; the company reported approximately $2.9 billion of additional FHLB borrowing availability. Core deposits were 78.1% of total deposits; brokered deposits were $1.1 billion.
- Stockholders’ equity was $2.47 billion. The company reported a 9.80% CET1 ratio and an 8.87% Tier 1 leverage ratio, and stated that it met applicable capital requirements. Book value per share was $25.57 and tangible book value per share was $14.90.
Material changes, outlook and risks
- Reliance contributed to balance-sheet growth and $80.8 million of goodwill. Its purchase-price allocation remained preliminary and may be adjusted. The $42 million of preferred stock issued in the transaction was redeemed in May.
- On July 30, 2019, Simmons agreed to acquire The Landrum Company. The proposed transaction would add 39 branches and, based on June 30 figures, approximately $3.3 billion of assets, $2.1 billion of loans and $3.0 billion of deposits. Closing was expected in Q4 2019, subject to shareholder, regulatory and other conditions.
- Management described Q2 organic loan and core deposit growth as solid, margins as stable during the quarter, asset quality as improved, and expense management as effective. It provided no specific earnings or revenue forecast in the supplied filing text.
- Management’s rate-sensitivity model estimated that an immediate, sustained 100-basis-point rate increase would raise next-12-month net interest income 2.14%, while a 100-basis-point decrease would reduce it 2.12%. The filing cautions that actual results may differ materially from these modeled estimates.
- Key risks include higher funding costs and competition for deposits, interest-rate changes, credit deterioration and loan-loss estimation, acquisition integration and execution, and regulatory and operational demands. Adoption of the expected-credit-loss standard (CECL) was still being assessed; management had not determined the size of any transition impact.
- The company reported no material adverse effect expected from its legal proceedings and no material changes to the risk factors in its 2018 Form 10-K. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track nonaccrual and classified loans, especially the commercial-credit increase, acquired-loan performance, and adequacy of allowance and credit marks.
- Assess deposit pricing, brokered-deposit levels, FHLB advance terms and the sustainability of net interest margin as funding costs change.
- Verify Reliance integration progress, final purchase-accounting adjustments and realization of expected benefits; monitor Landrum approvals, consideration and closing timing.
- Separate GAAP results from management’s non-GAAP core measures, including the effect of recurring technology investment and other expenses.
- Review CECL implementation and capital impact, along with the assumptions and limitations behind interest-rate sensitivity estimates.