Simmons First National Corporation — 2017 Form 10-K
Reporting period: Year ended December 31, 2017. Figures are in U.S. dollars; per-share amounts reflect the February 2018 two-for-one stock split.
Business context
Simmons is a regional financial holding company headquartered in Arkansas, operating about 200 financial centers across seven states. It provides community banking, lending, deposits, credit cards, trust, investment, insurance and related services. The year was shaped by acquisitions: Hardeman County Investment Company in May and First Texas and Southwest Bancorp (OKSB) in October. Southwest Bank joined Simmons Bank in February 2018; Bank SNB’s merger was planned for May 2018.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $354.9 million | $279.2 million |
| Net interest income, fully taxable equivalent | $362.7 million | $286.9 million |
| Provision for loan losses | $26.4 million | $20.1 million |
| Non-interest income | $138.8 million | $139.4 million |
| Non-interest expense | $312.4 million | $255.1 million |
| Net income | $92.9 million | $96.8 million |
| Diluted earnings per share | $1.33 | $1.56 |
| Diluted core earnings per share, non-GAAP | $1.70 | $1.64 |
| Net interest margin | 4.07% | 4.19% |
| Efficiency ratio | 55.27% | 56.32% |
| Return on average assets | 0.92% | 1.25% |
At year-end, total assets were $15.1 billion, loans $10.8 billion, deposits $11.1 billion and stockholders’ equity $2.1 billion. Assets increased 79% from 2016, primarily from acquisitions. Legacy loans grew 31.9% to $5.7 billion; acquired loans were $5.1 billion.
Cash and cash equivalents were $598.0 million. Operating cash flow was $114.6 million; investing activities used $338.5 million and financing activities provided $536.3 million, resulting in a $312.4 million increase in cash. Deposits rose 64.7% to $11.1 billion; 90.2% were core deposits. Total debt was $1.52 billion, including $1.1 billion of short-term FHLB advances. The filing reports $2.3 billion of additional FHLB borrowing capacity.
Capital remained above regulatory minimums: consolidated CET1 was 9.80%, Tier 1 leverage 9.21% and total risk-based capital 11.35%. Tangible common equity to tangible assets was 8.05%, down from 9.37%, while tangible book value per share was $12.34. Management reported that subsidiary banks were well capitalized.
Changes, unusual items and outlook
- GAAP net income fell 4.0% and diluted EPS fell from $1.56 to $1.33, while core earnings rose to $119.0 million and diluted core EPS rose to $1.70. Core measures are non-GAAP and exclude items management considers non-core.
- Net interest income growth reflected acquisitions and loan growth; the margin declined 12 basis points. Management attributed pressure to lower acquired-loan accretion and competitive loan pricing. Interest expense rose as funding balances and rates increased.
- Non-interest expense rose 22.5%, including $21.9 million of merger-related costs, higher acquisition-related staffing and professional expenses, and a $5 million Foundation donation. The 2017 core reconciliation also excludes a $11.5 million noncash deferred-tax remeasurement charge and a $3.7 million insurance-business sale gain; the net after-tax effect of the listed non-core items was $26.1 million.
- Tax reform reduced the enacted corporate tax rate to 21% from 35%. The 2017 tax provision included the provisional deferred-tax remeasurement; final effects could differ as interpretations or guidance develop.
- Credit quality indicators were mixed. Nonperforming loans were 0.81% of loans, versus 0.91% in 2016, and nonperforming assets were 0.52% of assets. Net charge-offs were 0.35% of average loans, while credit-card charge-offs rose to 1.61% from 1.28%. The company built reserves for three Wichita commercial credits and recorded $7.6 million in related charge-offs.
- Management emphasized further integration of recent acquisitions, continued organic lending growth and selective acquisition opportunities, but provided no specific earnings guidance. It anticipated lower debit-card fee income from the interchange cap—about $4.7 million after tax in 2018 and $9.4 million in 2019—and additional costs to prepare for stress testing and expanded CFPB oversight after crossing $10 billion in assets.
- Key risks include regional economic and real-estate exposure, credit-card losses, interest-rate and funding-cost changes, acquisition integration and goodwill valuation, regulatory costs, and cyber and operational disruption. Management said pending legal proceedings were not expected to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control; acquired Bank SNB and Southwest Bank operations were excluded from the internal-control assessment/audit scope.
Important facts for investors to verify
- Whether the 2017 acquisitions integrate as planned and deliver the expected cost savings and earnings contribution.
- How much future earnings depend on acquired-loan discount accretion, and whether core margin stabilizes amid competition and higher funding costs.
- Performance of the Wichita credits, real-estate portfolio and credit-card book; compare charge-offs, nonperforming assets and allowance coverage over subsequent periods.
- Ability to manage higher borrowings and refinance or repay the large short-term FHLB advances, alongside deposit retention and liquidity needs.
- Realized effects of the debit interchange cap, CFPB oversight, stress-testing requirements and other post-$10-billion regulatory costs.
- Final tax-reform accounting and any material revisions to the preliminary purchase-price allocations for 2017 acquisitions.