Simmons First National Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Simmons is an Arkansas-based bank holding company operating in seven states. Results include the acquired OKSB and First Texas businesses, purchased in October 2017; therefore, year-over-year comparisons reflect a substantially larger company. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $179.0m | $87.5m | $502.4m | $249.8m |
| Net interest income | $143.0m | $78.8m | $414.8m | $228.0m |
| Provision for loan losses | $10.3m | $5.5m | $28.5m | $16.8m |
| Non-interest income | $33.7m | $36.3m | $109.3m | $102.1m |
| Non-interest expense | $100.3m | $66.2m | $296.8m | $203.9m |
| Net income | $55.2m | $28.9m | $160.1m | $74.0m |
| Diluted EPS | $0.59 | $0.44 | $1.72 | $1.16 |
- Management-reported core earnings (non-GAAP) were $56.5m, or $0.61 diluted per share, in Q3 and $163.8m, or $1.76 per share, for nine months. Core measures exclude selected merger, branch-right-sizing, and other non-core items; they are not GAAP measures.
- Fully taxable-equivalent net interest margin was 3.98% for Q3 (3.91% prior year) and 4.04% year to date (3.99% prior year). Excluding acquired-loan accretion, core margin was 3.71% in Q3 versus 3.77% a year earlier.
- At September 30, total assets were $16.28bn, net loans $11.80bn, deposits $12.09bn, and stockholders’ equity $2.18bn. Total debt was approximately $1.79bn, up from $1.52bn at year-end 2017. Cash and cash equivalents were $513.8m.
- Nine-month operating cash flow was $152.1m; investing activities used $1.45bn, mainly reflecting loan growth and securities purchases; financing activities provided $1.22bn, primarily from deposit growth and subordinated-note proceeds. Cash fell $84.2m from year-end.
- Capital ratios at quarter-end included CET1 of 9.82%, Tier 1 leverage of 8.67%, and total risk-based capital of 13.08%. Tangible book value per share, a non-GAAP measure, was $13.48.
Material changes and operating developments
- Net income increased year over year, driven chiefly by acquired and organic loan growth and higher loan yields. Nine-month net interest income on a fully taxable-equivalent basis rose 79% to $418.6m; higher funding costs partially offset increased interest income.
- Loans totaled $11.86bn, up from $10.78bn at December 31, 2017. Deposits grew $995.6m; time deposits increased $600.8m, and brokered deposits rose to $902.6m from $442.0m.
- In March, Simmons issued $330m of 5.00% fixed-to-floating subordinated notes due 2028 and used part of the proceeds to repay debt. FHLB advances were $1.42bn at quarter-end, including $675m of option-terminable advances that management monitors as short-term funding.
- Available-for-sale securities had $65.8m of gross unrealized losses at September 30. Management attributed declines primarily to higher market rates and considered them temporary; the company recorded a $30.8m nine-month after-tax other comprehensive loss.
- Asset quality indicators improved in some areas: nonaccrual legacy loans declined to $40.5m from $45.6m at year-end, and nonperforming assets were $64.0m versus $79.0m. The allowance was $56.7m; management cited total allowance and acquired credit marks of $110.7m, or 0.9% of gross loans. A September sale of about $32m in substandard loans increased net charge-offs by approximately $4.6m without requiring additional provision.
Outlook, commentary, risks, and unusual items
- Management reported record earnings for the first three quarters, completion of the recent acquisition systems conversions, and organic loan growth across markets. It did not provide formal earnings guidance.
- Management expected approximately $4.2m of acquired-loan accretion income during the remainder of 2018; Q3 accretion exceeded original estimates by $5.2m. Future accretion depends on expected cash flows from acquired loans.
- The debit-card interchange cap took effect July 1, 2018 after Simmons Bank exceeded $10bn in assets. Management estimated a $7m pretax reduction in debit-card fees for 2018 and $14m for 2019; Q3 fees were reduced by $3.3m compared with Q2.
- Eight branches and two mobile branches closed in September. Branch-right-sizing expense was $1.0m for Q3. Merger-related costs were $0.8m for Q3 and $4.0m year to date.
- Credit risks include commercial real estate and construction exposure, borrower and local-market conditions, acquired-loan estimates, and the subjectivity of allowance assumptions. The company also cited rising deposit costs, interest-rate sensitivity, competition, integration risks, and expanded CFPB oversight. Its modeled net interest income sensitivity was +4.13% for a 100-basis-point rate increase, +5.57% for a 200-basis-point increase, and -8.13% for a 100-basis-point decrease over 12 months; management cautioned actual outcomes may differ materially.
- The expected-loss accounting standard (CECL) was expected to require significant process and modeling changes; the amount of any initial allowance adjustment was not yet determined. Management anticipated lease accounting would increase reported assets and liabilities but not materially affect earnings.
- Legal proceedings were not expected to have a material adverse effect. Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Key facts investors should verify
- How much reported earnings growth is sustainable after separating acquisition contribution, acquired-loan accretion, and non-GAAP adjustments.
- Whether deposit growth and funding costs, particularly time and brokered deposits and FHLB advances, preserve margins as rates and competition change.
- Whether credit quality and allowance coverage remain adequate after rapid loan growth and the substandard-loan sale; review acquired-loan performance and commercial real estate concentrations.
- The realized impact of the interchange cap, branch closures, and integration-related cost savings on future fee income and expenses.
- Potential effects of rising rates on securities values, AOCI, funding costs, modeled sensitivity, and liquidity; confirm available borrowing capacity and constraints on upstream bank dividends.