Simmons First National Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Simmons is a regional bank holding company operating 150 financial centers in Arkansas, Kansas, Missouri and Tennessee. It completed the Citizens National Bank acquisition in September 2016.
Financial results and position
Unless otherwise stated, amounts are in millions of dollars. Comparisons are with 2015.
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net interest income, GAAP | $279.2 | $278.6 | Nearly flat; fully taxable-equivalent NII was $286.9, down slightly. |
| Non-interest income | $139.4 | $94.7 | Up 47.2%; includes acquisition-related scale effects and $5.8 of securities-sale gains. |
| Provision for loan losses | $20.1 | $9.0 | More than doubled, reflecting loan growth, loans migrating from acquired portfolios and identified credit exposures. |
| Non-interest expense | $255.1 | $257.0 | Down 0.7%, despite merger and branch-right-sizing costs. |
| Net income | $96.8 | $74.4 | Up 30.2%. |
| Diluted EPS | $3.13 | $2.63 | Up 19.0%; diluted core EPS, a non-GAAP measure, was $3.28 versus $3.18. |
| Net interest margin, FTE | 4.19% | 4.55% | Down 36 basis points; management’s normalized core margin was 3.83% versus 3.82%. |
| Efficiency ratio | 56.32% | 59.01% | Improved; non-GAAP measure. |
Q4 selected results: Net interest income was $74.3 million, provision for loan losses $4.3 million, non-interest income $36.1 million, non-interest expense $66.7 million, net income available to common shareholders $27.0 million and diluted EPS $0.85.
- Balance sheet: Assets were $8.40 billion, up $840 million; gross loans were $5.63 billion, up 14.5%; deposits were $6.74 billion, up 10.7%. Legacy loans grew 33.3%, including $274 million of acquired loans reclassified to legacy loans.
- Funding and liquidity: Cash and cash equivalents were $285.7 million. Core deposits were 91.1% of deposits. The company reported approximately $285 million in correspondent-bank federal-funds lines and $998 million of available FHLB lines. These are stated available facilities, not cash balances.
- Debt: Total debt was $333.6 million, versus $222.9 million; the 2016 balance included $180 million of short-term FHLB advances. Scheduled 2017 debt maturities were $193.7 million.
- Capital: Stockholders’ equity was $1.15 billion; tangible common equity to tangible assets was 9.37%. Regulatory ratios included 13.45% CET1, 14.45% Tier 1 risk-based capital and 15.12% total risk-based capital. The bank was reported well capitalized.
- Cash flow: Operating activities provided $91.1 million; investing activities used $250.9 million, primarily reflecting loan growth and securities activity; financing activities provided $193.2 million. Cash and cash equivalents increased $33.4 million to $285.7 million. Bank cash flows are affected by deposit and lending activity and are not directly comparable to industrial-company free cash flow.
Material changes and credit quality
- Citizens added approximately $585.5 million in assets, including $340.9 million in loans, and $509.9 million in deposits. The acquisition generated $21.5 million of goodwill and was integrated in October.
- Non-performing loans, excluding acquired loans, rose to $39.4 million from $18.9 million; nonaccrual loans increased to $39.1 million from $17.7 million. Non-performing assets were 0.79% of assets, compared with 0.85%.
- The legacy-loan allowance was $36.3 million, or 0.84% of legacy loans; total allowance including acquired-loan allowance was $37.2 million. Management also cited $35.4 million in loan discount credit marks. Net charge-offs were $14.5 million on legacy loans, versus $6.0 million in 2015.
- Troubled debt restructurings increased to $14.2 million from $5.6 million. Management attributed credit deterioration principally to certain commercial real estate exposures, migrated acquired loans and an agricultural-loan fraud matter.
- Net interest margin declined as loan yields fell and acquired-loan accretion was lower. Management said the normalized core margin was broadly stable. Lower loan yields reduced interest income by more than volume growth added.
Outlook, risks and unusual items
- Management emphasized continued organic lending growth, efficiency initiatives and opportunistic acquisitions, but provided no numerical earnings or margin guidance in the supplied filing text.
- Three pending acquisitions—Hardeman County Investment Company, Southwest Bancorp and First Texas—were expected to add approximately $4.9 billion in assets and close during 2017, subject to shareholder, regulatory and other closing conditions. Management expected each to be accretive to diluted core EPS in the first year or first full year, as applicable.
- Those transactions were expected to take the company above $10 billion in assets. The filing estimated an after-tax debit-card interchange revenue reduction of approximately $3.8 million in 2018 and $7.5 million in 2019 from the applicable cap, and anticipated added compliance, stress-testing and CFPB oversight costs. The first stress-test reporting was expected around 2020.
- Unusual items included $4.8 million of merger-related costs, $3.6 million of branch-right-sizing costs and $5.8 million of securities-sale gains in 2016. In 2015, termination of FDIC loss-share agreements resulted in a $7.5 million pretax charge; the FDIC made a $2.4 million net payment. The company stated there would be no further indemnification-asset amortization following termination.
- Key risks include regional economic and real-estate concentration, credit deterioration and allowance estimation, acquisition execution and integration, interest-rate sensitivity, funding costs, regulatory change, cybersecurity and the effect of growth beyond the $10 billion regulatory threshold. The company reported no significant oil-and-gas concentration.
- Legal proceedings, mostly loan foreclosures, were not expected to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Track non-performing and acquired-loan delinquencies, TDRs, charge-offs and allowance adequacy against rapid loan growth.
- Assess how much earnings growth came from recurring fees and operating improvements versus acquisition effects, securities gains and other non-core items.
- Monitor whether loan yields and net interest margin stabilize as rates and repricing patterns change.
- Confirm closing timing, purchase accounting, integration costs, expected synergies and capital effects for the three announced acquisitions.
- Evaluate liquidity and refinancing needs, particularly the $193.7 million of scheduled 2017 debt maturities and continued reliance on borrowings to support asset growth.
- Consider the effect of crossing $10 billion in assets on interchange revenue, regulatory costs, stress testing and consumer-finance supervision.
- Review the available cash-flow, capital and dividend capacity alongside the bank’s regulatory limits on upstream dividends; only approximately $3.6 million was available for dividends without regulatory approval at year-end.