Simmons First National Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Simmons is a regional bank holding company operating across seven states, with approximately 204 financial centers.
Financial performance and condition
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Interest income | $759.7 million | $783.1 million |
| Net interest income | $639.7 million; $650.7 million fully taxable equivalent | $601.8 million; $609.1 million fully taxable equivalent |
| Net interest margin | 3.38% (FTE) | 3.85% (FTE) |
| Provision for credit losses | $75.0 million | $43.2 million |
| Non-interest income | $248.5 million | $205.0 million |
| Non-interest expense | $493.5 million | $461.1 million |
| Net income available to common shareholders | $254.9 million; diluted EPS $2.31 | $237.8 million; diluted EPS $2.41 |
| Core earnings / core diluted EPS (non-GAAP) | $264.3 million / $2.40 | $269.6 million / $2.73 |
| Total assets | $22.36 billion | $21.26 billion |
| Loans / deposits | $12.90 billion / $16.99 billion | $14.43 billion / $16.11 billion |
| Cash and cash equivalents | $3.47 billion | $1.00 billion |
| Total borrowings and subordinated debt | $1.72 billion | $1.69 billion |
Operating cash flow was $202.5 million. Cash increased $2.48 billion during the year, largely reflecting deposit growth and balance-sheet liquidity management. Year-end capital included a 9.08% Tier 1 leverage ratio, 13.41% CET1 ratio and 16.78% total risk-based capital ratio; Simmons Bank was classified as well capitalized. Common equity was 13.31% of assets and tangible common equity was 8.45% of tangible assets.
Material changes versus the prior year
- Net income rose about 7%, but diluted EPS fell from $2.41 to $2.31, in part as average diluted shares increased. Core diluted EPS declined from $2.73 to $2.40.
- Net interest income increased as deposit and borrowing costs fell, but net interest margin contracted 47 basis points amid lower rates, excess liquidity and lower-yielding PPP loans.
- Non-interest income rose 21%, including $54.8 million in securities-sale gains and $8.4 million in branch-sale gains. The prior year included a $42.9 million gain on Visa shares.
- Loans fell 10.6%; deposits increased 5.5%. Year-end loans included $904.7 million of outstanding PPP loans. Non-interest-bearing deposits increased to $4.48 billion from $3.74 billion.
- The allowance for loan losses rose to $238.1 million from $68.2 million. The January 2020 CECL adoption increased the loan allowance by $151.4 million and reduced opening retained earnings by $128.1 million after tax.
- Net charge-offs increased to 0.45% of average loans from 0.24%; nonperforming loans rose to 0.96% of loans from 0.65%.
Outlook, risks and unusual items
- Management expected slight net interest margin improvement and modest organic loan growth in 2021, as the pipeline rebuilt and PPP loans were forgiven or repaid. These are expectations, not guarantees.
- COVID-19 created significant uncertainty. The bank made 3,729 loan modifications totaling about $2.99 billion by year-end; management reported that most modified balances had returned, or were expected to return, to regular payments. As of mid-February 2021, about $390 million of commercial modified loans were in the bank’s higher-risk internal categories, predominantly hotel-related.
- Four energy credits totaling $32.6 million were charged off in 2020; a $22.0 million energy loan moved to nonaccrual in the fourth quarter. Management said it was seeking to exit most energy lending.
- FY2020 included $21.5 million of non-core expenses, including merger, early-retirement and branch-right-sizing costs, offset in part by branch-sale gains. The early-retirement program was expected to generate about $2.9 million in annual savings; branch closures were expected to produce further annual savings.
- The company repurchased 5.96 million shares for $113.3 million and paid $0.68 per common share in dividends. Future repurchases and dividends remain discretionary and subject to capital, liquidity and regulatory considerations.
- Risks highlighted include pandemic-related credit deterioration, commercial real estate and hotel exposure, interest-rate sensitivity, LIBOR transition, cybersecurity and third-party dependence, acquisition integration, and regulatory or litigation outcomes. Three overdraft-fee putative class actions were disclosed; management did not expect their ultimate outcomes to materially affect consolidated results, condition or cash flows, while noting outcomes remain uncertain.
- Management reported no goodwill impairment. The auditor issued an unqualified opinion on the financial statements and internal controls; the allowance for credit losses and goodwill impairment were identified as critical audit matters.
Investor verification priorities
- Review the allowance methodology, CECL assumptions and sensitivity to recovery scenarios, especially given the large adoption adjustment and higher charge-offs.
- Track criticized or modified commercial credits, hotel exposure, energy balances, nonaccrual loans and subsequent charge-offs.
- Assess whether loan growth and PPP repayment or forgiveness support the margin and earnings outlook, and distinguish recurring income from securities- and branch-sale gains.
- Check liquidity composition, deposit retention, borrowing costs and the terms or potential early termination of FHLB FOTO advances.
- Confirm capital, share-count and dividend implications of repurchases, and monitor the pending Illinois branch sale and overdraft litigation.