SIMMONS FIRST NATIONAL CORP filed 10-Q on May 08

SIMMONS FIRST NATIONAL CORP filed 10-Q with SEC. Read ‘s full filing at 000162828019006227.

Certain investment securities are valued at less than their historical cost. Total fair value of these investments at March 31, 2019 and December 31, 2018, was $1.4 billion and $1.7 billion, which is approximately 60.1% and 70.3%, respectively, of the Company’s combined AFS and HTM investment portfolios.

The Company’s leases are classified as operating leases with a term, including expected renewal or termination options, greater than one year, and are related to certain office facilities and office equipment. As of March 31, 2019, right-of-use lease assets included in premises and equipment are $30.5 million and lease liabilities included in other liabilities are $30.4 million. During the three months ended March 31, 2019, the Company recognized lease expense of $2.6 million and the weighted average discount rate was 3.46%. At March 31, 2019, the weighted average remaining lease term was 9.29 years.

In March 2018, the Company issued $330.0 million in aggregate principal amount, of 5.00% Fixed-to-Floating Rate Subordinated Notes (‘the Notes’) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.6 million in debt issuance costs related to the offering during March. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 215 basis points, payable quarterly in arrears. The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its general creditors. The Notes are obligations of Simmons First National Corporation only and are not obligations of, and are not guaranteed by, any of its subsidiaries. During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Revolving Credit Agreement (the ‘Credit Agreement’), certain trust preferred securities, both discussed below, and unsecured debt from correspondent banks. The Notes qualify for Tier 2 capital treatment.

In 2017, the Company entered into the Credit Agreement with U.S. Bank National Association and executed an unsecured Revolving Credit Note pursuant to which the Company may borrow, prepay and re-borrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. The Credit Agreement contained customary representations, warranties, and covenants of the Company, including, among other things, covenants that impose various financial ratio requirements. In October 2018, the Company and U.S. Bank National Association entered into a First Amendment to the Credit Agreement, which extended the expiration date from October 5, 2018 to October 4, 2019, reduced the $75.0 million to $50.0 million, and increased the commitment fee on the unused portion from an annual rate of 0.25% to 0.30%. In December 2018, the Company entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants are evaluated on a consolidated basis. In October 2019, all amounts borrowed, together with applicable interest, fees, and other amounts owed by the Company are due and payable. The balance due under the Credit Agreement at March 31, 2019 was zero.

On January 18, 2018, the board of directors of the Company approved a two-for-one stock split of the Corporation’s outstanding Class A common stock (‘Common Stock’) in the form of a 100% stock dividend for shareholders of record as of the close of business on January 30, 2018 (‘Record Date’). The new shares were distributed by the Company’s transfer agent, Computershare, and the Company’s common stock began trading on a split-adjusted basis on the NASDAQ Global Select Market on February 9, 2018. All previously reported share and per share data included in filings subsequent to February 8, 2018 are restated to reflect the retroactive effect of this two-for-one stock split.

On July 23, 2012, the Company approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares (split adjusted) of Class A common stock, or approximately 2% of the shares outstanding. Under the current plan, the Company can repurchase an additional 308,272 shares. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes.

The Company’s subsidiary bank is subject to legal limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Commissioner of the Arkansas State Bank Department is required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent (75%) of the total of its net profits, as defined, for that year combined with seventy-five percent (75%) of its retained net profits of the preceding year. At March 31, 2019, the Company’s subsidiary bank had approximately $57.7 million available for payment of dividends to the Company, without prior regulatory approval.

The risk-based capital guidelines of the Federal Reserve Board and the Arkansas State Bank Department include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. Under the Basel III Rules effective January 1, 2015, the criteria for a well-capitalized institution are: a 5% ‘Tier l leverage capital’ ratio, an 8% ‘Tier 1 risk-based capital’ ratio, 10% ‘total risk-based capital’ ratio; and a 6.50% ‘common equity Tier 1 (CET1)’ ratio.

The Company and Bank must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019). As of March 31, 2019, the Company and its subsidiary bank met all capital adequacy requirements under the Basel III Capital Rules. The Company’s CET1 ratio was 10.46% at March 31, 2019.

The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, collateral discounts ranged from 10% to 40% for commercial and residential real estate collateral.

Stockholders’ equity as of March 31, 2019 was $2.3 billion, book value per share was $24.87 and tangible book value per share was $14.78. Our ratio of stockholders’ equity to total assets was 14.3% and the ratio of tangible stockholders’ equity to tangible assets was 9.0% at March 31, 2019. See ‘Reconciliation of Non-GAAP Measures’ below for additional discussion of non-GAAP measures. The Company’s Tier I leverage ratio of 9.1%, as well as our other regulatory capital ratios, remain significantly above the ‘well capitalized’ levels (see Table 12 in the Capital section of this Item).

We continue to have good asset quality. At March 31, 2019, the allowance for loan losses for legacy loans was $59.2 million. The allowance for loan losses for loans acquired was $1.3 million and the acquired loan discount credit mark was $42.4 million. The allowances for loan losses and credit marks provide a total of $103.0 million of coverage, which equates to a total coverage ratio of 0.9% of gross loans. The ratio of credit mark and related allowance to loans acquired was 1.4%.

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 26.135% for periods beginning January 1, 2018.

Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. Historically, approximately 65% of our loan portfolio and approximately 75% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 60% of our loans and 80% of our time deposits will reprice in the next year.

For the three month period ended March 31, 2019, net interest income on a fully taxable equivalent basis was $138.6 million, an increase of $2.5 million, or 1.9%, over the same period in 2018. The increase in net interest income was the result of a $22.4 million increase in interest income partially offset by a $19.9 million increase in interest expense.

Our net interest margin decreased 32 basis points to 3.85% for the three month period ended March 31, 2019, when compared to 4.17% for the same period in 2018. Normalized for all accretion, our core net interest margin at March 31, 2019 and 2018 was 3.67% and 3.82%, respectively.

Total non-interest income was $33.8 million for the three month period ended March 31, 2019, a decrease of approximately $3.8 million, or 10.1%, compared to $37.5 million for the same period in 2018.

During the first quarter 2019, we had decreases in total service charges and fees, mortgage and SBA lending income, and debit and credit card fees that were partially offset by additional trust income and gains on the sale of securities. Total service charges and fees decreased $1.7 million, or 13.3%, mortgage and SBA lending income decreased $1.1 million, or 25.3%, and debit and credit card fees decreased $2.7 million, or 30.7%. Service charges and fees decreased due to less NSF revenue and ATM interchange income. Mortgage and SBA lending income decreased due to less mortgage lending transactions as a result of the rising rate environment and remaining selective in our decisions regarding loan sales as premium rates continue to be lower, respectively. The interchange rate cap as established by the Durbin amendment became effective for us July 1, 2018, resulting in a $2.8 million reduction in debit card fees when compared to the first quarter of last year. The additional gains on the sale of securities was a result of selling approximately $197 million of securities during the first quarter, which resulted in a gain of $2.7 million, as part of a bond portfolio analysis of expected cash flow changes.

Non-interest expense for the three months ended March 31, 2019 was $101.4 million, an increase of $3.3 million, or 3.4%, from the same period in 2018. Normalizing for the non-core costs, such as the early retirement program costs, merger related costs and branch right sizing expenses, non-interest expense for the three months ended March 31, 2019 increased $3.2 million, or 3.4%, from the same period in 2018.

Consumer loans consist of credit card loans and other consumer loans.  Consumer loans were $395.2 million at March 31, 2019, or 4.6% of total loans, compared to $405.5 million, or 4.8% of total loans at December 31, 2018. The decrease in consumer loans from December 31, 2018, to March 31, 2019, was primarily due to the expected seasonal decline in our credit card portfolio partially offset by growth in direct consumer loans.

$129.8 million, or 4.0%. The construction portfolio is continuing to fund loans that were closed in prior quarters, however, the overall commitments have trended down in the first quarter of 2019.

Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were $1.949 billion at March 31, 2019, or 22.4% of total loans, compared to $1.939 billion, or 23.0% of total loans at December 31, 2018, an increase of $9.2 million, or 0.5%. Non-agricultural commercial loans increased to $1.801 billion, a $26.5 million increase, or 1.5%, from December 31, 2018. Agricultural loans decreased to $147.2 million, a $17.3 million decrease, or (10.5)%, primarily due to seasonality of the portfolio, which normally peaks in the third quarter and is at its lowest point at the end of the first quarter.

Total non-performing assets, excluding all loans acquired, increased $20.1 million from December 31, 2018 to March 31, 2019. Nonaccrual loans increased by $26.7 million during the period, primarily commercial loans, partially offset by a decrease in foreclosed assets held for sale of $6.6 million. The nonaccrual loan increase was primarily due to one loan in the Southwest Market. Non-performing assets, including troubled debt restructurings (‘TDRs’) and acquired foreclosed assets, as a percent of total assets were 0.54% at March 31, 2019, compared to 0.40% at December 31, 2018.

We continue to maintain good asset quality, compared to the industry. Strong asset quality remains a primary focus of our strategy. The allowance for loan losses as a percent of total legacy loans was 0.68% as of March 31, 2019. Non-performing loans equaled 0.70% of total loans. Non-performing assets were 0.50% of total assets, a 13 basis point increase from December 31, 2018. The allowance for loan losses was 97% of non-performing loans. Our annualized net charge-offs to total loans for the first three months of 2019 was 0.20%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.16%. Annualized net credit card charge-offs to total credit card loans were 1.92%, compared to 1.64% during the full year 2018, and 165 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of 191 financial centers. We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of March 31, 2019, core deposits comprised 78.6% of our total deposits.

In March 2018, we issued $330 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes (‘the Notes’) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.6 million in debt issuance costs related to the offering. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 125 basis points, payable quarterly in arrears. The notes will be subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of Simmons First National Corporation only and are not obligations of, and are not guaranteed by, any of its subsidiaries.

At March 31, 2019, total capital was $2.302 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At March 31, 2019, our common equity to assets ratio was 14.31% compared to 13.58% at year-end 2018.

On July 23, 2012, we announced the adoption by our Board of Directors of a stock repurchase program which authorized the repurchase of up to 1,700,000 (split adjusted) of Class A common stock, or approximately 2% of the shares outstanding. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that we intend to repurchase. We may discontinue purchases at any time that management determines additional purchases are not warranted. We intend to use the repurchased shares to satisfy stock option exercises, payment of future stock awards and dividends and general corporate purposes. We had no stock repurchases during the first three months of 2019 or 2018.

We declared cash dividends on our common stock of $0.16 per share for the first three months of 2019 compared to $0.15 per share for the first three months of 2018, an increase of $0.01, or 7%. The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors. Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all.

The Basel III Capital Rules expanded the risk-weighting categories from four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate.

The final rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance with all of the final rule’s requirements on January 1, 2019.

Fifth, we use a laddered investment portfolio that ensures there is a steady source of intermediate term liquidity. These funds can be used to meet seasonal loan patterns and other intermediate term balance sheet fluctuations. Approximately 97.3% of the investment portfolio is classified as available-for-sale. We also use securities held in the securities portfolio to pledge when obtaining public funds.

As of March 31, 2019, the model simulations projected that 100 and 200 basis point increases in interest rates would result in a positive variance in net interest income of 2.13% and 4.02%, respectively, relative to the base case over the next 12 months, while decreases in interest rates of 100 basis points and 200 basis points would result in a negative variance in net interest income of (2.03)% and (4.81)%, respectively, relative to the base case over the next 12 months. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each period-end will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

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