Simmons First National Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Simmons is an Arkansas-based financial holding company operating through Simmons Bank and related businesses across eight states. Results include the acquired Landrum operations; Landmark Bank’s systems conversion was completed in February 2020.
Financial performance and position
| Metric | Q1 2020 | Comparable period / prior date |
|---|---|---|
| Interest income | $209.2 million | $178.1 million in Q1 2019 |
| Net interest income | $167.5 million; $169.8 million fully taxable equivalent (FTE) | $136.0 million GAAP; $137.6 million FTE in Q1 2019 |
| FTE net interest margin | 3.68%; core margin 3.42% | 3.86%; core margin 3.68% in Q1 2019 |
| Provision for credit losses | $26.1 million | $9.3 million in Q1 2019 |
| Non-interest income | $82.4 million | $34.8 million in Q1 2019 |
| Non-interest expense | $125.8 million | $101.4 million in Q1 2019 |
| Net income / diluted EPS | $77.2 million / $0.68 | $47.7 million / $0.51 in Q1 2019 |
| Loans / allowance for credit losses | $14.37 billion / $243.2 million | $14.43 billion / $68.2 million at December 31, 2019 |
| Deposits | $15.56 billion | $16.11 billion at December 31, 2019 |
| Total debt | $1.79 billion | $1.69 billion at December 31, 2019 |
| Cash and cash equivalents | $1.74 billion | $996.6 million at December 31, 2019 |
Operating cash flow was $103.6 million; investing activities provided $928.1 million and financing activities used $291.1 million. Stockholders’ equity was $2.85 billion. Regulatory capital ratios were 11.10% CET1, 8.96% Tier 1 leverage and 14.13% total risk-based capital; the company reported that it met applicable capital requirements.
Material changes and unusual items
- Net income rose year over year, but the comparison includes significant nonrecurring gains: a $32.1 million net gain on securities sales and a $5.9 million gain on the Texas branch sale. Management reported core earnings of $73.8 million, or $0.65 core diluted EPS, versus $49.1 million, or $0.53, in Q1 2019; these are non-GAAP measures.
- The company adopted CECL on January 1, 2020. Adoption added approximately $151.4 million to the loan allowance and $24.0 million to the unfunded-commitment reserve, reducing beginning retained earnings by $128.1 million after tax. It elected the regulatory capital transition relief.
- The quarter’s credit-loss provision included $22 million of specific provisions for two deteriorating energy credits, affected by lower commodity prices, as well as COVID-19-related economic concerns. Nonperforming assets increased to $181.0 million, or 0.87% of assets, from $113.7 million, or 0.53%, at year-end; nonperforming loans were 1.10% of loans.
- The company sold approximately $1.1 billion of securities to increase liquidity, generating the securities gain. Deposits declined by $549.2 million from year-end, partly as the company reduced higher-cost public-fund and brokered deposits and reclassified deposits related to the planned Colorado branch sale.
- It repurchased 4.92 million shares for approximately $93.3 million during the quarter. The repurchase authorization was increased to $180 million in March; management said future repurchases would depend on market conditions and capital needs.
Outlook, risks and contingencies
- Management expected continued net interest margin pressure for the remainder of 2020: March rate cuts were expected to affect interest-bearing deposits more quickly than variable-rate loans. No specific full-year earnings or revenue guidance was provided.
- As of April 30, management reported approximately $6.1 billion in liquidity sources and described the company as well capitalized. Q1 securities-sale proceeds were intended in part to support anticipated PPP lending.
- Through May 5, the company had completed or was processing modifications on more than 4,300 loans totaling over $3.2 billion, and had funded over $978 million of PPP loans through more than 7,600 applications. These are post-quarter figures.
- The COVID-19 pandemic could further weaken borrower credit quality, increase delinquencies and charge-offs, and reduce collateral values. The filing also identifies potential operational disruption and litigation or government-action risks related to pandemic relief programs.
- The Colorado branch sale was expected to close in Q2 2020, subject to conditions. The company reported that legal proceedings were not expected to have a material adverse effect. The Landrum purchase-price allocation remained preliminary.
Most important facts for investors to verify
- Whether COVID-related loan modifications transition into delinquency, nonaccrual status, charge-offs or additional reserve needs, especially for energy, hospitality, retail and restaurant exposures.
- How the CECL allowance and unfunded-commitment reserve evolve, including the effect of changing economic forecasts and the two energy credits.
- Whether securities gains, branch-sale gains and acquisition-related accretion materially affect reported earnings compared with recurring performance and core NIM.
- Whether deposit trends, liquidity sources and short-term FHLB/FOTO funding remain adequate as PPP lending and customer funding needs develop.
- Whether the Colorado sale closes as expected and whether additional share repurchases or dividends remain consistent with capital and liquidity needs.