Simmons First National Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017; filed May 9, 2017. Simmons First is an Arkansas-based bank holding company operating in Arkansas, Kansas, Missouri and Tennessee. Unless noted otherwise, financial figures below are in millions of dollars. The interim statements were reviewed by BKD, LLP; the review was not an audit.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $72.4; $74.3 on a fully taxable equivalent basis | $70.2; $72.3 fully taxable equivalent in Q1 2016 |
| Net interest margin | 4.04%; 3.80% excluding acquired-loan accretion | 4.41%; 3.92% excluding acquired-loan accretion in Q1 2016 |
| Noninterest income | $30.1 | $29.5 in Q1 2016 |
| Noninterest expense | $66.3 | $61.8 in Q1 2016 |
| Provision for loan losses | $4.3 | $2.8 in Q1 2016 |
| Net income / diluted EPS | $22.1 / $0.70 | $23.5 / $0.77 in Q1 2016 |
| Core net income / diluted core EPS (non-GAAP) | $22.5 / $0.71 | $23.2 / $0.76 in Q1 2016 |
| Operating cash flow | $41.8 provided | $5.1 used in Q1 2016 |
| Total assets | $8,626.6 | $8,400.1 at December 31, 2016 |
| Total loans, including acquired loans | $5,777.2 | $5,632.9 at December 31, 2016 |
| Deposits | $6,788.3 | $6,735.2 at December 31, 2016 |
| Other borrowings and subordinated debentures | $501.6 | $333.6 at December 31, 2016 |
| Stockholders’ equity / CET1 ratio | $1,170.9 / 12.81% | $1,151.1 / 13.45% at December 31, 2016 |
Year over year, net interest income rose 3%, but net income fell about 6% and diluted EPS fell about 9%. Net interest margin compressed 37 basis points, largely reflecting lower accretion from acquired loans and lower loan yields. Total noninterest expense rose 7.3%; management attributed much of the increase to the Citizens acquisition, compliance and audit spending, and other operating costs.
Loans grew $144.3 million during the quarter, including $50.0 million of balances transferred from acquired to legacy loan categories. Deposits increased $53.1 million; non-time transaction and savings accounts rose $94.2 million while time deposits declined $41.1 million. Cash and cash equivalents ended at $305.3 million. Financing activities provided $210.4 million, chiefly reflecting a $167.9 million increase in other borrowed funds; investing activities used $232.6 million, including loan originations and securities purchases.
Capital remained above regulatory well-capitalized thresholds: Tier 1 leverage was 10.94%, Tier 1 risk-based capital 13.75%, and total risk-based capital 14.40%. Book value per share was $37.30 and tangible book value per share was $24.51 (non-GAAP). The filing reports ample liquidity sources, including approximately $285 million in correspondent-bank federal funds lines and about $1.1 billion of available FHLB capacity.
Material changes, outlook, and risks
- Credit quality: Nonaccrual loans excluding acquired loans increased to $52.9 million from $39.1 million at year-end, primarily due to commercial real estate credits. Nonperforming loans were 1.15% of total loans; the allowance was 71% of nonperforming loans. Total nonperforming assets were $79.9 million, or 0.93% of assets under the table’s stated definition. The narrative also cites 1.05% using a broader measure that includes TDRs and acquired non-covered foreclosed assets.
- Credit costs and transactions: The provision rose to $4.3 million, including $750,000 for acquired loans after subsequent credit deterioration. Simmons sold 11 substandard loans, primarily acquired loans, with $11 million net principal and recorded a $676,000 loss. TDR balances increased to $22.2 million from $14.2 million at year-end.
- Unusual items: Q1 results included $524,000 of merger costs and $154,000 of branch-right-sizing costs used in the company’s core earnings reconciliation. A one-time data aggregation project cost approximately $1 million. Adoption of stock-compensation accounting guidance reduced income tax expense by approximately $1.2 million.
- Strategy and acquisitions: Simmons exited indirect lending in March, citing low margins and capital reallocation. It completed the Citizens acquisition in September 2016. At filing, Hardeman County Investment Company was expected to close May 15, 2017; Southwest Bancorp and First Texas were expected to close in Q3 2017, subject to approvals and closing conditions. Management said the three announced acquisitions could add approximately $5 billion in assets and expected to move the company above $10 billion in assets.
- Regulatory and operating outlook: Crossing $10 billion is expected to bring debit interchange caps, CFPB oversight, annual stress-test requirements and potentially higher FDIC assessments. Management estimated the interchange cap could reduce after-tax debit fees by $3.8 million in 2018 and $7.5 million in 2019. The company anticipated significant preparation and compliance spending. No specific near-term earnings or revenue guidance is provided.
- Interest-rate sensitivity: The company’s model estimated a 0.46% increase in next-12-month net interest income under a 100-basis-point rate rise, a 1.03% increase under a 200-basis-point rise, and a 3.54% decline under a 100-basis-point fall. Management cautioned that results depend on assumptions and actual outcomes may differ materially.
- Other risks and accounting: Management cited uncertainty around acquisition integration, credit-loss estimates, interest rates and evolving regulation. It expects a one-time allowance adjustment upon adoption of the expected-credit-loss standard but cannot yet estimate its size. The company reported no material change to its previously disclosed risk factors and said disclosure controls were effective.
Key facts investors should verify
- Whether asset quality stabilizes, particularly commercial real estate nonaccruals, TDRs and acquired-loan credit performance.
- Whether loan growth, deposit mix and funding costs support net interest income as acquired-loan accretion declines.
- Whether operating expenses and integration costs moderate, and how recurring earnings compare with management’s non-GAAP core measure.
- Closing, regulatory approval, purchase accounting and integration progress for Hardeman, Southwest Bancorp and First Texas, including the expected move above $10 billion in assets.
- The eventual cost and earnings effects of new regulatory obligations and the expected debit interchange cap.
- Liquidity and capital effects of the increased FHLB borrowing, acquisition financing needs and regulatory capital requirements.
- The differing nonperforming-asset ratios reported under different definitions, and the assumptions behind the allowance for loan losses.