Simmons First National Corporation — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, for the Arkansas-based financial holding company operating across seven states. The quarter includes the acquired Southwest Bancorp/Bank SNB and First Texas businesses, acquired in October 2017; therefore, year-over-year comparisons reflect a substantially larger company. Amounts below are in millions except per-share data. Shares and per-share amounts reflect the February 2018 two-for-one stock split.
Financial performance and position
- Earnings: Net income was $51.3 million, up from $22.1 million in Q1 2017. Diluted EPS was $0.55 versus $0.35. Management’s non-GAAP core earnings were $52.6 million and core diluted EPS was $0.57, compared with $22.5 million and $0.36, respectively.
- Revenue and margin: Net interest income was $135.0 million versus $72.4 million; fully taxable-equivalent net interest income was $136.1 million versus $74.3 million. Net interest margin increased to 4.17% from 4.04%; excluding acquired-loan accretion, core margin was 3.82% versus 3.80%. Non-interest income rose 24.9% to $37.5 million. Net interest income plus non-interest income totaled $172.5 million versus $102.4 million.
- Expense and credit costs: Non-interest expense increased 47.9% to $98.1 million, primarily reflecting acquired operations; merger-related costs were $1.7 million. Provision for loan losses was $9.2 million versus $4.3 million. Income tax expense was $14.0 million versus $9.7 million; the federal statutory rate was 21% in 2018 versus 35% in 2017.
- Loans and asset quality: Total loans were $11.0 billion at quarter-end, up $208 million from December 31, 2017. The allowance for loan losses was $47.6 million, with an additional $79.1 million acquired-loan credit mark; management reported combined coverage of $126.7 million, or 1.1% of gross loans. Non-performing loans were $47.7 million, or 0.76% of loans, versus 0.81% at year-end; non-performing assets were $77.7 million, or 0.50% of assets. Annualized net charge-offs were 0.24%.
- Cash flow and liquidity: Operating cash flow was $80.3 million, investing cash flow was negative $456.2 million, and financing cash flow was positive $637.6 million. Cash and cash equivalents ended at $859.7 million, up $261.6 million during the quarter. Deposits were $11.66 billion, up $564.0 million from year-end; core deposits were 91.1% of deposits.
- Debt and capital: Total other borrowings and subordinated debt were $1.61 billion, compared with $1.52 billion at year-end. The company issued $330 million of 5.00% fixed-to-floating subordinated notes due 2028 and used part of the proceeds to repay borrowings. Stockholders’ equity was $2.11 billion; book value per share was $22.86 and tangible book value per share was $12.62. The capital table reports CET1 of 9.86%, Tier 1 leverage of 8.64%, and total risk-based capital of 14.08%. The filing also states CET1 of 9.64% elsewhere, an inconsistency to verify.
Material changes and notable items
- Assets increased to $15.60 billion from $15.06 billion at December 31, 2017. Acquisitions materially expanded the loan, deposit, and expense base; the 2017 comparison period did not include the acquired banks’ results.
- Acquired-loan accretion contributed $11.3 million of interest income in Q1 2018 versus $4.4 million a year earlier. Management expects accretion income to decline gradually during 2018.
- Available-for-sale securities had $46.4 million of gross unrealized losses at quarter-end, largely attributed to higher market rates. Management considered the losses temporary and stated it did not intend, and was not likely required, to sell before recovery.
- Comprehensive income was $34.5 million, below net income due mainly to a $16.8 million after-tax other comprehensive loss on securities.
- The company completed the First Texas systems conversion in February 2018; Bank SNB conversion was expected in May 2018. It also sold certain Heartland Bank assets and liabilities in March and expected to dispose of remaining assets within a year of acquisition.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management described loan growth in several markets and anticipated continued deposit funding-cost increases amid rising rates and competition.
- Management estimated the debit-card interchange cap, effective July 1, 2018 after the bank exceeded $10 billion in assets, would reduce pre-tax debit-card fees by about $7 million in 2018 and $14 million in 2019. It also anticipated additional spending to meet stress-testing requirements, with the first stress test expected to be reported in July 2019.
- Interest-rate simulations estimated net interest income changes over the next 12 months of +7.81% for a 200-basis-point increase, +4.23% for a 100-basis-point increase, and -5.14% for a 100-basis-point decrease. Management cautioned that these are assumption-dependent estimates, not predictions.
- Key risks include acquisition integration and execution, credit quality and allowance-estimation uncertainty, interest-rate and deposit competition, regulatory changes and costs, and potential effects of future economic conditions. Adoption of the expected-credit-loss standard may require a one-time allowance adjustment; the amount was not yet estimable.
- The company disclosed various legal proceedings that it did not expect, in aggregate, to have a material adverse effect. Management reported no material changes to the risk factors in its 2017 Form 10-K. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- How much of reported earnings growth and margin depends on acquisitions and acquired-loan accretion, and how quickly accretion is expected to run off.
- Whether acquired-bank integration, including the planned Bank SNB conversion, delivers the expected operating benefits and expense control.
- Credit trends in acquired and legacy portfolios, including nonaccrual acquired loans, commercial real estate exposure, charge-offs, and the adequacy of reserves and credit marks.
- The CET1 figure: the filing reports 9.86% in its capital table but 9.64% elsewhere.
- Deposit pricing, funding costs, the interchange-fee impact, and the effects of new regulatory and stress-testing requirements.
- The recoverability of securities unrealized losses and the final purchase-accounting values for the recent acquisitions.