Simmons First National Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and nine months ended September 30, 2020. Simmons is an Arkansas-based bank holding company with approximately $21.4 billion in assets and 226 financial centers across seven states. Results include the Landrum acquisition, completed in October 2019, and 2020 sales of branches in Texas and Colorado.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $153.6 million | $149.3 million | $484.8 million | $434.7 million |
| Non-interest income | $71.9 million | $84.7 million | $204.5 million | $159.4 million |
| Net income | $65.9 million | $81.8 million | $201.9 million | $185.4 million |
| Diluted EPS | $0.60 | $0.84 | $1.83 | $1.94 |
| Provision for credit losses | $23.0 million | $22.0 million | $68.0 million | $38.3 million |
- Underlying earnings: Management-reported core earnings, a non-GAAP measure, were $68.3 million, or $0.63 per diluted share, in Q3 versus $84.0 million, or $0.87, a year earlier. Nine-month core earnings were $202.3 million versus $198.5 million; core diluted EPS was $1.83 versus $2.08.
- Margins: Fully taxable equivalent net interest margin was 3.21% in Q3 (3.82% prior year) and 3.43% for nine months (3.88% prior year). Q3 margin adjusted for PPP loans and excess liquidity was 3.51%, a non-GAAP measure. Management expected continued margin pressure for the remainder of 2020.
- Balance sheet at September 30: Assets were $21.44 billion; loans were $14.02 billion, down from $14.43 billion at year-end 2019; deposits were $16.25 billion, up from $16.11 billion. Cash and cash equivalents totaled $2.52 billion, versus $997 million at year-end.
- Credit quality: Allowance for credit losses on loans was $248.3 million, or 1.77% of loans, and 148% of nonperforming loans. Nonperforming loans were $167.9 million (1.20% of loans), up from $94.2 million (0.65%) at year-end; nonperforming assets were $182.5 million. Nine-month net charge-offs were $46.6 million, including $32.6 million of energy credit charge-offs during Q2.
- Cash flow, debt and capital: Nine-month operating cash flow was $76.4 million, compared with $197.9 million in 2019. Investing activities provided $1.21 billion, reflecting substantial securities activity; financing activities provided $242.6 million. Total other borrowings and subordinated debt were $1.73 billion. Regulatory capital ratios included a 12.55% CET1 ratio and 9.05% Tier 1 leverage ratio; management reported the company and bank met applicable capital requirements.
Material changes and unusual items
- Q3 net income fell $15.9 million year over year. The prior-year quarter included a $42.9 million gain on Visa Class B stock; Q3 2020 included $22.3 million of securities-sale gains. Nine-month 2020 non-interest income also included $54.8 million of securities gains and an $8.1 million gain on branch sales.
- Interest expense declined substantially as deposit and borrowing rates fell, supporting higher net interest income despite lower asset yields. Q3 loan yield declined to 4.54% from 5.47%; management attributed pressure to lower rates, excess liquidity and low-yielding PPP loans.
- Non-interest expense rose 11.3% in Q3 and 14.5% for nine months, primarily reflecting acquisition-related operating costs and technology spending. Nine-month software and technology expense increased $12.4 million, principally for the Next Generation Banking initiative.
- The company adopted CECL on January 1, 2020, recording an additional $151.4 million loan allowance and a $24.0 million reserve for unfunded commitments; the after-tax retained-earnings adjustment was $128.1 million. The company elected the regulatory capital transition provision.
Outlook, management commentary and risks
- Management cited weak loan demand and continued economic uncertainty. The CECL provision reflected concern about a potentially prolonged recovery, especially for restaurant, retail and hotel borrowers; the allowance was described as at the high end of the company’s calculated range.
- By September 30, the company had modified 3,956 COVID-affected loans totaling $3.21 billion; deferred interest was $27.6 million. More than 2,900 previously modified loans totaling $1.9 billion had returned to regular payment terms or paid off. The company expected most higher-risk commercial modifications it identified to resume regular payments, but outcomes remain uncertain.
- The company originated $970.5 million of PPP loans. Management said it planned to reinvest liquidity from securities sales as PPP loans are repaid, subject to economic conditions. It also reported approximately $2.5 billion of additional FHLB borrowing capacity.
- Cost actions included 11 branch closures in June, with estimated annual net savings of $2.4 million, and 23 additional closures on October 9, expected to save $6.7 million annually. An early-retirement program was expected to produce approximately $2.9 million in annualized net savings.
- Management warned that a renewed downturn or delayed recovery could worsen credit quality, delinquencies, charge-offs and collateral values. Other disclosed risks include interest-rate changes, real-estate values, pandemic impacts, acquisition integration, cybersecurity and litigation. Management said pending legal proceedings were not expected to have a material adverse effect. No formal earnings guidance was provided.
Important facts for investors to verify
- Whether COVID-related loan modifications, particularly in hotels and other stressed industries, return to regular payments and how nonaccrual loans and charge-offs evolve.
- Whether the CECL allowance remains adequate as economic forecasts change, and the effects of the regulatory transition on reported capital ratios.
- How much reported earnings depend on securities-sale and branch-sale gains versus recurring operations, and whether core non-GAAP reconciliations remain comparable.
- Whether low rates, excess liquidity and PPP loan repayments affect net interest margin and loan growth as management anticipates.
- Whether announced branch and retirement savings are realized, alongside acquisition and technology-related expense levels.
- Liquidity and funding exposures, including the treatment and potential termination of $1.30 billion in FHLB advances described as short-term FOTO advances, and the use of securities pledged as collateral.