Simmons First National Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts below are in millions unless stated otherwise. Simmons is an Arkansas-based bank holding company operating across eight states. Reliance Bancshares was acquired in April 2019; The Landrum Company acquisition closed after quarter-end, on October 31, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $150.2 | $143.0 | $437.5 | $414.8 |
| Provision for loan losses | $22.0 | $10.3 | $38.3 | $28.5 |
| Non-interest income | $83.8 | $33.7 | $156.5 | $109.3 |
| Non-interest expense | $106.9 | $100.3 | $319.0 | $296.8 |
| Net income | $81.8 | $55.2 | $185.4 | $160.1 |
| Net income available to common stockholders | $81.8 | $55.2 | $185.1 | $160.1 |
| Diluted EPS | $0.84 | $0.59 | $1.94 | $1.72 |
- Q3 fully taxable-equivalent net interest margin was 3.81%, down from 3.98%; nine-month margin was 3.86%, versus 4.04%. Core margin, a non-GAAP measure excluding acquired-loan accretion, was 3.58% and 3.63%, respectively.
- Core earnings, a non-GAAP measure, were $84.0 million, or $0.87 diluted EPS, in Q3 and $198.5 million, or $2.08 diluted EPS, for the nine months.
- At September 30, total assets were $17.76 billion; loans were $13.00 billion; deposits were $13.47 billion; and stockholders’ equity was $2.55 billion. Since December 31, 2018, total assets rose from $16.54 billion, loans from $11.72 billion, and deposits from $12.40 billion, with Reliance contributing materially to growth.
- Nine-month operating cash flow was $188.4 million, compared with $152.1 million in 2018. Cash and cash equivalents declined $303.5 million during the period to $530.0 million. Investing activities provided $152.1 million, while financing activities used $643.9 million.
- Other borrowings and subordinated debt totaled $1.45 billion, down from $1.70 billion at year-end; repurchase agreements were a further $116.5 million. The company reported a 9.05% Tier 1 leverage ratio, 10.25% CET1 ratio, and 13.17% total risk-based capital ratio, above stated minimum guidelines.
Material changes and unusual items
- Q3 earnings benefited from a $42.9 million gain on sale of Visa Class B shares and a $7.4 million net securities gain. The company contributed $4 million to the Simmons First Foundation in connection with the Visa sale.
- Q3 provision expense included a $14.7 million loss on the company’s $19.1 million participation in White Star Petroleum’s shared national credit. Management said it changed underwriting and approval processes and plans to exit purchased syndicated energy credits; it expected to exit at least $120 million of its $187 million non-lead syndicated energy exposure by Q2 2020.
- The company sold approximately $114 million of primarily commercial real estate loans during Q3, recording a net loss of $5.1 million as part of efforts to manage CRE concentration. Separately, it sold about $89 million of bonds in Q3 as part of portfolio rebalancing.
- Reliance added approximately $1.5 billion in assets, including $1.1 billion in loans and $1.2 billion in deposits; the transaction generated $81.0 million of goodwill. Purchase-price allocations remained preliminary. Landrum had approximately $3.3 billion in assets, $2.0 billion in loans, and $2.9 billion in deposits at September 30; consideration included approximately 17.35 million Simmons common shares.
- Nonaccrual legacy loans rose to $72.7 million from $34.2 million at year-end; nonperforming loans were 0.76% of total loans versus 0.41%. The allowance was 91% of nonperforming loans, down from 164%. Management cited two loans becoming reportable during the quarter, including an acquired loan migrating into legacy loans.
Outlook, risks, and contingencies
- Management reported strong loan demand but said customers were cautiously optimistic amid global economic uncertainty and interest-rate changes. It expects margin pressure after Federal Reserve rate reductions because variable-rate loans may reprice downward before deposit costs adjust.
- Interest-rate simulations estimated next-12-month net interest income changes of +2.24% and +4.64% for rate increases of 100 and 200 basis points, and −2.37% and −3.40% for decreases of 100 and 200 basis points. These are model estimates based on assumptions, not forecasts or guarantees.
- CECL was scheduled for adoption January 1, 2020. Preliminary estimates, incorporating Landrum, indicated an allowance increase of approximately 165%–215% over the allowance under the existing model; including purchase discounts, total credit coverage was estimated to increase 5%–25%. Management cautioned that estimates could change with portfolio quality, composition, and economic forecasts, and said CECL could materially affect ongoing earnings.
- Other disclosed risks include real-estate and borrower credit conditions, deposit pricing and funding costs, acquisition integration, regulatory oversight, and sensitivity to interest rates. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. No material changes to the prior Form 10-K risk factors were reported.
- Subsequent to quarter-end, the board authorized a discretionary share-repurchase program of up to $60 million through October 31, 2021. It declared a regular $0.16-per-share quarterly dividend; future dividends remain subject to board discretion and regulatory constraints.
Key facts for investors to verify
- How much of reported earnings growth is recurring after the Visa and securities gains, loan-sale loss, White Star provision, merger costs, and other adjustments?
- Whether asset-quality deterioration persists, especially in commercial credits, and whether planned reductions in syndicated energy exposure are completed.
- CECL adoption impact against the preliminary estimates, including the effect on capital and subsequent provisions.
- Reliance and Landrum integration, final purchase accounting, expected synergies, and the dilution associated with Landrum share consideration.
- Whether deposit costs and loan repricing further compress net interest margin, and how funding needs evolve as cash balances and borrowings change.