Simmons First National Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Simmons is an Arkansas-based bank holding company operating across seven states. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $137.0 million | $135.0 million, Q1 2018 |
| Net interest income, fully taxable equivalent | $138.6 million | $136.1 million, Q1 2018 |
| Net interest margin, fully taxable equivalent | 3.85% | 4.17%, Q1 2018; core margin was 3.67% versus 3.82% |
| Net income / diluted EPS | $47.7 million / $0.51 | $51.3 million / $0.55, Q1 2018 |
| Core net income / diluted core EPS (non-GAAP) | $49.1 million / $0.53 | $52.6 million / $0.57, Q1 2018 |
| Provision for loan losses | $9.3 million | $9.2 million, Q1 2018 |
| Total assets | $16.09 billion | $16.54 billion |
| Total loans | $11.74 billion | $11.72 billion |
| Total deposits | $11.99 billion | $12.40 billion |
| Total borrowings and subordinated debt | $1.52 billion | $1.70 billion |
| Cash and cash equivalents | $491.2 million | $833.5 million |
| Stockholders’ equity / tangible book value per share | $2.30 billion / $14.78 | $2.25 billion / $14.18 at year-end |
Interest income increased $22.4 million year over year, but interest expense rose $19.9 million, reflecting higher deposit costs and additional debt. Net interest margin compression was attributed to rising funding costs outpacing loan-yield increases. Non-interest income fell 10.1% to $33.8 million; non-interest expense rose 3.4% to $101.4 million. The effective tax provision was $12.4 million.
Operating cash flow was $88.8 million, compared with $80.3 million in Q1 2018. Investing activities provided $145.4 million, while financing activities used $576.5 million, including a $409.2 million net deposit outflow and repayment of borrowings. The resulting decrease in cash was $342.3 million. At quarter-end, regulatory capital ratios included a 10.46% CET1 ratio, 9.07% Tier 1 leverage ratio, and 13.62% total risk-based capital ratio; management reported the company and bank met capital requirements.
Changes, asset quality, and notable items
- Net income declined about 7% year over year and diluted EPS declined from $0.55 to $0.51. Core earnings, a company-defined non-GAAP measure, also declined.
- Deposit balances fell $409.2 million during the quarter. Management attributed this partly to reducing higher-cost public-fund and brokered deposits; core deposits increased $148.0 million. Brokered deposits were $1.1 billion at quarter-end, down from $1.4 billion.
- Nonaccrual legacy loans increased to $60.9 million from $34.2 million at year-end, primarily due to one commercial loan in the Southwest market. Non-performing assets were $80.7 million, or 0.50% of assets, versus $60.5 million, or 0.37%, at year-end. Legacy-loan allowance coverage was 0.68%; annualized net charge-offs were 0.20% of total loans.
- Management recorded $2.5 million of provision on acquired loans, primarily tied to loans in the Dallas market described as poorly structured or managed after funding. Management said it had reviewed the exposures and believed associated risks were adequately identified. Total allowance and acquired credit marks provided approximately $103 million of coverage, or 0.9% of gross loans.
- Accretion income on acquired loans was $6.7 million, down from $11.3 million in Q1 2018. Debit and credit card fees declined $2.7 million; the Durbin interchange cap contributed a $2.8 million reduction in debit card fees year over year. A $2.7 million securities-sale gain partly offset these decreases.
- On April 12, 2019, after the reporting date, Simmons completed its Reliance Bancshares merger, issuing approximately 4.0 million common shares and paying $62.7 million cash. Management reported post-merger assets of approximately $17.6 billion and expanded presence in St. Louis; purchase-price allocation remained preliminary.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management expects deposit funding costs to rise amid higher rates and competition. Its stated priorities include maintaining asset quality and advancing the Next Generation Banking technology initiative; Q1 software and technology expense included $1.8 million primarily related to that initiative. The company also highlighted integration and acquisition risks, interest-rate and funding sensitivity, competition, credit-loss estimation, regulatory oversight, and execution risks. Its model estimated that a sustained 100-basis-point rate increase would raise next-12-month net interest income 2.13%, while a 100-basis-point decrease would reduce it 2.03%; management cautioned that modeled results are uncertain and actual outcomes may differ.
The company adopted lease accounting in Q1, recognizing $32.8 million of right-of-use assets and liabilities at adoption, with no material operating-results impact. It expected to adopt the new credit-loss standard in 2020, but had not determined the magnitude of the initial adjustment or overall impact. Management reported no material change to previously disclosed risk factors and no material expected adverse effect from unrelated legal proceedings. It declared dividends of $0.16 per share in Q1; future dividends remain subject to board discretion and regulatory constraints.
Important facts for investors to verify
- Whether the increase in nonaccrual and classified loans persists, especially the Southwest-market exposure and acquired Dallas-market credits; monitor subsequent charge-offs and reserve adequacy.
- Whether deposit outflows, brokered-deposit reliance, and higher funding costs continue to pressure liquidity and net interest margin.
- Reliance merger integration, final purchase accounting, realized synergies, and the effects of issued shares and cash consideration on earnings and capital.
- Actual spending and benefits from the Next Generation Banking initiative, alongside operating-expense trends.
- The eventual credit-loss standard adoption impact and any resulting capital or earnings adjustment; the filing does not provide a clear quantified estimate.