Simmons First National Corporation (NASDAQ: SFNC) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. The company is a regional bank holding company operating in eight states. Fourth-quarter figures are included where noted.
Financial performance and position
- Earnings: Net income available to common shareholders was $237.8 million, up from $215.7 million in 2018; diluted EPS was $2.41 versus $2.32. Management’s non-GAAP core earnings were $269.6 million, or $2.73 per diluted share, versus $220.2 million, or $2.37, in 2018.
- Revenue and margin: Net interest income was $605.3 million, up 9.5%; fully taxable-equivalent net interest income was $612.6 million, up 9.8%. Non-interest income rose 40.0% to $201.5 million. Net interest margin declined to 3.83% from 3.97%; core margin declined to 3.58% from 3.72%.
- Costs and credit provision: Non-interest expense increased 17.6% to $461.1 million, including $36.4 million of merger costs, $3.5 million of early-retirement costs and $3.1 million of branch-right-sizing costs. Provision for loan losses was $43.2 million versus $38.1 million.
- Fourth quarter: Net income available to common shareholders was $52.7 million and diluted EPS was $0.49, compared with $55.6 million and $0.60 in Q4 2018. Q4 2019 included $142.1 million of non-interest expense and $4.9 million of loan-loss provision.
- Balance sheet and growth: Total assets were $21.3 billion, up from $16.5 billion; loans were $14.4 billion, up 23.0%; deposits were $16.1 billion, up from $12.4 billion. Growth primarily reflected the Reliance and Landrum acquisitions, which added approximately $4.9 billion of assets.
- Cash flow and liquidity: Operating cash flow was $266.3 million; investing activities provided $594.2 million; financing activities used $697.4 million. Cash and cash equivalents ended the year at $996.6 million. Management described liquidity as strong and cited approximately $3.2 billion of additional FHLB borrowing capacity.
- Debt and capital: Total debt was approximately $1.69 billion, including $1.25 billion of FHLB advances and $330 million of subordinated notes. The company’s CET1 ratio was 10.92%, Tier 1 leverage ratio 9.59%, and total risk-based capital ratio 13.73%. Simmons Bank was reported as well capitalized.
Material changes versus 2018
- Reliance was acquired in April and Landrum in October; Landrum’s bank systems conversion and merger into Simmons Bank occurred in February 2020. Acquisition accounting added substantial goodwill; Landrum and Reliance purchase price allocations remained preliminary at year-end.
- Reported non-interest income benefited from a $42.9 million gain on sale of Visa Class B shares and $13.3 million of net securities gains. The company also sold $114 million of primarily commercial real estate loans, recording a $5.1 million net loss.
- Nonperforming loans rose to 0.74% of loans from 0.41%; nonperforming assets were 0.43% of assets versus 0.37%. Net charge-offs increased to 0.31% of average loans from 0.29%.
- Common dividends increased to $0.64 per share from $0.60. The company repurchased 390,000 shares under a new $60 million authorization.
Outlook, risks and unusual items
- Management expected continued net interest margin pressure into early 2020, as loan repricing following 2019 rate cuts could outpace deposit-cost reductions. No specific 2020 earnings or revenue guidance was provided.
- The company planned continued investment in its Next Generation Banking technology program and digital offerings. It reported a successful core-platform migration and launch of a new mobile app in 2019.
- A $14.7 million loss was recorded on the company’s $19.1 million participation in White Star Petroleum’s shared national credit; related provision expense was approximately $15 million. Management said it was changing underwriting and approval processes and expected to exit at least $120 million of purchased syndicated energy credits by Q2 2020.
- CECL adoption began January 1, 2020. Management’s preliminary estimate was an allowance for credit losses of approximately 1.40%–1.50% of loans at adoption; the estimate was subject to change and adoption could materially affect future earnings.
- Five Texas branches were classified for sale, with closing expected in February 2020; a subsequent agreement covered four Colorado branches, with closing expected in Q2 or Q3 2020. These transactions were subject to customary conditions.
- Key risks include credit deterioration, real-estate and regional economic exposure, acquisition integration and goodwill impairment, interest-rate and deposit-cost changes, liquidity and funding access, cybersecurity and third-party technology risks, and the transition from LIBOR. Management said unrelated legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the acquired portfolios integrate as planned and preliminary purchase accounting, including goodwill, is finalized without material adverse adjustments.
- Whether rising nonaccrual loans, commercial credit charge-offs and the White Star exposure remain contained; assess allowance coverage alongside the CECL transition.
- How NIM, deposit pricing and funding costs develop after rate cuts, and whether management’s margin-pressure expectations are borne out.
- Whether planned exits of syndicated energy credits and branch sales close on expected terms and timing.
- Separate recurring earnings from the Visa and securities gains and from merger, retirement and restructuring costs; non-GAAP core measures are company-defined.