Simmons First National Corporation — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. Simmons is a financial holding company operating Simmons Bank across Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas, with approximately 191 financial centers. The bank provides consumer, real estate and commercial lending, deposits, credit cards, trust, investment, insurance and other services.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $552.6 million | $354.9 million |
| Non-interest income | $143.9 million | $138.8 million |
| Provision for loan losses | $38.1 million | $26.4 million |
| Non-interest expense | $392.2 million | $312.4 million |
| Net income | $215.7 million | $92.9 million |
| Diluted earnings per share | $2.32 | $1.33 |
| Diluted core earnings per share (non-GAAP) | $2.37 | $1.70 |
Management attributed the substantial earnings growth primarily to a full year of contributions from the 2017 acquisitions, organic loan growth and higher loan yields. Core earnings exclude specified non-core items; the measure is non-GAAP and should be considered alongside reported results.
- Fourth quarter: Net income available to common shareholders was $55.6 million and diluted EPS was $0.60. Net interest income was $137.8 million, provision for loan losses $9.6 million and non-interest expense $95.4 million. In fourth-quarter 2017, net income was $18.9 million and diluted EPS was $0.22; acquisitions and associated costs affect comparability.
- Interest and operating performance: Fully taxable equivalent net interest income rose 53.8% to $557.8 million, while net interest margin declined to 3.97% from 4.07%. Core net interest margin was 3.72% versus 3.76%. The efficiency ratio improved to 52.85% from 55.27%.
- Balance sheet and lending: Year-end assets were $16.54 billion, loans $11.72 billion and deposits $12.40 billion. Loans increased 8.8% overall; legacy loans grew 31.2% excluding balances migrated from acquired portfolios. Stockholders’ equity was $2.25 billion; tangible book value per share (non-GAAP) was $14.18.
- Credit quality: Nonperforming assets were $60.5 million, or 0.37% of assets, versus $79.0 million, or 0.52%, a year earlier. Net charge-offs were 0.29% of average loans; the allowance for loan losses was $56.6 million, equal to 0.67% of legacy loans. Total allowance and acquired-loan credit discounts provided stated coverage of 0.90% of gross loans.
- Capital and liquidity: Company CET1 and total risk-based capital ratios were 10.22% and 13.35%; the bank was reported well-capitalized. Cash and cash equivalents were $833.5 million. Operating cash flow was $260.7 million; investing activities used $1.43 billion and financing activities provided $1.40 billion. Cash increased $235.4 million during the year.
- Funding and debt: Total borrowings and subordinated debt were $1.70 billion, including $1.35 billion of FHLB advances and $330 million of newly issued subordinated notes. Deposits included $1.39 billion of brokered time deposits. The debt maturity table shows $1.33 billion due in 2019, largely short-term FHLB advances; some FHLB advances have early termination options.
Material changes, outlook and risks
- 2018 included completion of systems conversions for the 2017 First Texas and OKSB acquisitions, strong organic growth, and closure of eight branches and two mobile branches. The company sold about $32 million of substandard loans; the sale increased net charge-offs by approximately $4.6 million, with no additional provision required.
- Interest expense rose materially as deposit costs and borrowings increased. Management reported four Federal Reserve rate increases during 2018; the deposit beta was 57% and core loan beta 50%. The net interest margin was also reduced by the 2018 subordinated debt issuance.
- The debit-card interchange cap took effect July 1, 2018, reducing debit-card fees by approximately $5.9 million pre-tax in the second half. Management expected a similar reduction in the first half of 2019 compared with the first half of 2018.
- Management said it expected loan growth to continue in 2019, but at a smaller scale than in 2018, and described continued investment in the Next Generation Banking initiative to upgrade banking systems and digital channels.
- The pending Reliance Bancshares acquisition, announced in November 2018, was expected to close in the second quarter of 2019, subject to approvals and other conditions. The stated consideration included 4 million Simmons common shares and $62.7 million cash; Reliance had approximately $1.5 billion in assets, $1.1 billion in loans and $1.2 billion in deposits.
- The company identified economic and local-market conditions, interest-rate and funding-cost changes, real estate and other credit exposure, acquisition integration, competition, regulation, cybersecurity and technology disruption as risks. It also warned that the expected-credit-loss standard (CECL), scheduled for adoption in 2020, could materially increase the allowance; the amount had not been determined.
- Interest-rate simulations estimated next-12-month net interest income changes of +3.66% under a 100-basis-point increase and +6.67% under a 200-basis-point increase; declines of 100 and 200 basis points were estimated to reduce it by 4.27% and 8.79%, respectively. These are model estimates dependent on assumptions, not forecasts.
- Income tax expense fell to $50.4 million from $62.0 million; the effective tax rate was 18.9% versus 40.0%, reflecting the lower federal corporate tax rate and discrete tax benefits. The 2017 comparison included an $11.5 million non-cash tax-reform adjustment.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. Legal proceedings were described as not expected, in aggregate, to have a material adverse effect.
Important facts for investors to verify
- Assess whether earnings growth is sustainable after separating acquired-company contributions, loan-yield accretion and non-core items from recurring performance.
- Track deposit pricing, brokered-deposit reliance, FHLB advance renewals or option exercise, and the substantial amount shown due in 2019.
- Review credit quality as the loan book expands, especially commercial real estate, construction, commercial lending and credit cards; compare allowance coverage with future losses and portfolio growth.
- Confirm the Reliance transaction’s final approvals, closing, consideration, integration costs and realization of expected benefits.
- Monitor the effect of interchange fee limits and system-modernization spending on fee income, expenses and efficiency, as well as the eventual CECL allowance and capital impact.