Simmons First National Corporation — Q2 2021 Form 10-Q
Business context and period: Mid-South bank holding company operating through Simmons Bank and related subsidiaries across six states. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are primarily with 2020 or December 31, 2020, as applicable.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparison |
|---|---|---|
| Net income | $74.9 million; diluted EPS $0.69 | Q2 2020: $58.8 million; $0.54 per diluted share |
| Six-month net income | $142.3 million; diluted EPS $1.31 | First half 2020: $136.0 million; $1.22 per diluted share |
| Core earnings (non-GAAP) | Q2: $75.4 million, or $0.69 per diluted share; first half: $139.4 million, or $1.28 per diluted share | Q2 2020: $60.1 million, or $0.55; first half 2020: $134.0 million, or $1.21 |
| Net interest income | Q2 GAAP: $146.5 million; first half: $293.2 million | Down 10.5% and 11.5%, respectively, year over year; FTE net interest income fell 9.0% and 10.1% |
| Net interest margin | FTE: Q2 2.89%; first half 2.94% | Q2 2020: 3.42%; first half 2020: 3.55% |
| Provision for credit losses | Q2 benefit of $13.0 million; first-half benefit of $11.5 million | Q2 2020 expense: $21.9 million; first-half 2020 expense: $45.0 million |
| Non-interest income / expense | Q2: $47.9 million / $115.5 million; first half: $98.3 million / $229.3 million | First-half income down 24.3%; expense down 5.9% |
| Total assets | $23.42 billion | $22.36 billion at December 31, 2020 |
| Loans / deposits | Loans: $11.39 billion; deposits: $18.30 billion | Loans down from $12.90 billion and deposits up from $16.99 billion at year-end 2020 |
| Cash and cash equivalents | $2.34 billion | $3.47 billion at year-end 2020 |
| Debt | $1.72 billion in other borrowings and subordinated debt | Broadly unchanged from year-end 2020 |
| Capital | CET1 14.20%; Tier 1 leverage 8.99%; total risk-based capital 17.49% | All above stated minimum requirements; tangible common equity to tangible assets was 8.36% |
| Cash flows, first half | Operating +$176.3 million; investing -$2.46 billion; financing +$1.15 billion | Cash decreased $1.13 billion to $2.34 billion |
Material changes and key drivers
- Higher net income reflected substantially lower credit-loss provisions and lower expenses, partly offset by weaker net interest income and non-interest income.
- Lower loan interest income reflected a smaller average loan balance and lower yields. Deposit repricing reduced interest expense, but did not fully offset the effects of lower asset yields and elevated cash balances. Management attributed margin pressure partly to pandemic-related liquidity and loan paydowns.
- First-half non-interest income declined mainly because securities-sale gains were $10.6 million versus $32.5 million in the first half of 2020, and mortgage lending income fell. The company sold about $249.5 million of securities in the first half of 2021, versus about $1.2 billion in 2020.
- Non-interest expense decreased, supported by branch-network changes and savings from the prior-year early retirement program. Q2 salaries and benefits increased as the company hired lending, wealth and mortgage staff.
- Loans contracted as PPP forgiveness and repayments, customer paydowns and weak demand outweighed production. PPP balances were $441.4 million at quarter-end, down from $904.7 million at year-end 2020. Management reported a $1.3 billion loan pipeline and $467.1 million of approved loans ready to close.
- Deposits increased, which management linked in significant part to government stimulus and customer liquidity. Core deposits were 86.4% of total deposits.
- The available-for-sale securities portfolio expanded to $6.56 billion. About $3.2 billion, or 48.6%, was in an unrealized loss position, which management attributed principally to market interest rates rather than credit deterioration; management said it did not expect to need to sell before recovery.
- Accumulated other comprehensive income fell to $12.1 million from $59.7 million at year-end, reflecting securities-market movements. Stockholders’ equity was $3.04 billion.
Outlook, risks and unusual items
- Management expected modest organic loan growth in the second half of 2021 and said loan demand and the pipeline were improving. It expected PPP balances to continue declining and mortgage lending volume to decline through the remainder of 2021. No specific earnings or revenue guidance was provided.
- Two proposed Tennessee-area acquisitions were announced June 4: Landmark Community Bank, with approximately $986.7 million of assets, and Triumph Bancshares, with approximately $886.7 million. Both were expected to close in Q4 2021, subject to shareholder and regulatory approvals. Consideration includes newly issued Simmons shares and cash.
- The company announced plans to close 12 branches in Q3 2021. It completed the sale of four Illinois branches in March and recorded a $5.3 million gain in the first half.
- Effective July 23, 2021, the board increased the authorized stock repurchase program from $180 million to $276.5 million and extended it through October 31, 2022. The program is discretionary; no shares were repurchased under it in Q2.
- COVID-19 remains a credit risk, particularly for hotel, restaurant and retail borrowers. At June 30, 43 COVID-related loan modifications totaling $134.5 million remained outstanding; management said most remaining modified loans were expected to resume regular payments. Nonperforming loans were 0.71% of total loans, and the allowance was 281% of nonperforming loans.
- Interest-rate sensitivity modeling estimated net interest income would increase 4.53% with rates up 100 basis points and 9.52% with rates up 200 basis points, but decrease 0.67% with rates down 25 basis points over 12 months. Management cautioned that estimates depend on assumptions and actual outcomes may differ.
- Legal matters include several putative class actions alleging improper overdraft or insufficient-funds fees. One matter had a settlement in principle subject to definitive documentation and court approval; the company denied allegations in the other cases. Management did not expect the proceedings, based on information available, to have a material adverse effect, while noting future outcomes could be material in a given period.
- Management identified uncertainty around economic recovery, COVID-19 variants, credit-loss estimates and collateral values, competition, interest rates, litigation, acquisitions, cybersecurity and the transition away from LIBOR. The FHLB may terminate certain advances before stated maturity, although management did not expect it to do so in the prevailing low-rate environment.
Most important facts for investors to verify
- Progress, regulatory and shareholder approvals, final consideration and integration risks for the Landmark and Triumph acquisitions.
- Whether loan demand, the reported pipeline and production translate into sustained loan growth as PPP balances run off.
- Credit performance of the remaining COVID-19 modifications and exposure to vulnerable industries; monitor delinquencies, nonperforming loans, charge-offs and allowance assumptions.
- Net interest margin and deposit pricing as excess liquidity is redeployed, securities mature and interest rates change; compare actual outcomes with management’s sensitivity estimates.
- Composition and liquidity implications of the expanded securities portfolio, including unrealized losses and any future sales.
- Costs and execution of the planned branch closures, and the actual pace and funding of discretionary share repurchases and dividends.
- Developments in overdraft-fee litigation and any resulting settlements or financial exposure.