Simmons First National Corporation (SFNC) — Q3 2021 Form 10-Q
Business context and period: Mid-South financial holding company and bank operating across six states. This unaudited report covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020 unless stated otherwise. Landmark Community Bank and Triumph Bancshares were acquired on October 8, after quarter-end.
Financial performance and condition
- Earnings: Q3 net income was $80.6 million, versus $65.9 million a year earlier; diluted EPS was $0.74 versus $0.60. Nine-month net income was $222.9 million versus $201.9 million, with diluted EPS of $2.05 versus $1.83. Management’s non-GAAP core diluted EPS was $0.73 for Q3 and $2.01 for the nine months, compared with $0.63 and $1.83, respectively.
- Net interest income and margin: GAAP net interest income was $145.2 million in Q3, down from $153.6 million; nine-month net interest income was $438.5 million, down from $484.8 million. Fully taxable-equivalent net interest margin declined to 2.85% from 3.21% in Q3 and to 2.91% from 3.43% for the nine months. Lower loan balances and excess liquidity weighed on results; lower deposit costs partly offset the decline.
- Fees and expenses: Non-interest income fell 30% to $48.6 million in Q3 and 27% to $145.2 million for the nine months, mainly reflecting lower securities-sale gains and mortgage lending income. Non-interest expense declined 1.9% to $114.3 million in Q3 and 4.7% to $342.0 million year to date.
- Credit costs and asset quality: The company recorded a $19.9 million Q3 provision credit (reversal), versus $23.0 million of provision expense in Q3 2020; the nine-month reversal was $31.4 million versus $68.0 million of expense. Nonperforming loans were $59.4 million, or 0.55% of loans, compared with $123.5 million, or 0.96%, at year-end 2020. Allowance for loan losses was $202.5 million, 1.87% of loans and 341% of nonperforming loans. Nine-month annualized net charge-offs were 0.06% of average loans.
- Balance sheet and funding: Total assets were $23.23 billion, up from $22.36 billion. Deposits rose to $18.07 billion from $16.99 billion; loans declined to $10.83 billion from $12.90 billion, reflecting paydowns, PPP forgiveness, weaker demand and commercial real estate portfolio management. Cash and cash equivalents were $1.78 billion, down from $3.47 billion, as cash was redeployed into securities. Securities totaled $8.34 billion, versus $3.81 billion; the company transferred $500.8 million of securities from available-for-sale to held-to-maturity during Q3.
- Debt, capital and liquidity: Other borrowings and subordinated debt totaled $1.72 billion, broadly unchanged from year-end; FHLB advances accounted for $1.31 billion. Total stockholders’ equity was $3.03 billion. CET1 was 14.27%, Tier 1 leverage 9.07%, and total risk-based capital 17.42%; management said the company met regulatory capital requirements. It reported approximately $3.0 billion of additional FHLB borrowing capacity. Nine-month operating cash flow was $219.9 million; investing activities used $2.79 billion and financing activities provided $879.6 million.
Material changes, outlook and risks
- Management attributed improving credit metrics and the provision reversal to better asset quality and improved economic forecasts. Nonperforming loans declined for a fourth consecutive quarter. However, pandemic-related uncertainty and ongoing stress in some hotel, restaurant and retail borrowers remain risks; 35 COVID-related loan modifications totaling $82.0 million remained outstanding.
- Loan balances contracted, but Q3 loan production was $1.5 billion, the commercial pipeline reached $1.5 billion, and management expected modest organic loan growth in Q4. Management expected mortgage lending volume to decline for the rest of 2021 and PPP balances to continue shrinking.
- Management reported that Landmark and Triumph closed and systems conversions were completed October 8. Landmark holders received approximately 4.50 million shares and $6.5 million cash; Triumph holders received approximately 4.16 million shares and $1.7 million cash. Purchase accounting remained preliminary.
- Q3 securities valuation movements contributed to a $23.5 million other comprehensive loss; nine-month other comprehensive loss was $71.2 million. At September 30, available-for-sale securities had $57.1 million of gross unrealized losses. Management attributed the declines mainly to market interest rates, considered them temporary, and said it did not expect forced sales before cost recovery.
- Interest-rate sensitivity modeling estimated net interest income would rise 3.04% with rates up 100 basis points and 6.65% with rates up 200 basis points, and decline 0.18% with rates down 25 basis points over 12 months. These are model estimates dependent on assumptions, not forecasts.
- The company repurchased 1.81 million shares in Q3 at an average $28.48 per share. Its repurchase authorization was increased to $276.5 million and extended through October 2022. The common dividend was $0.54 per share for the first nine months, versus $0.51 a year earlier.
- Two overdraft-fee class actions had settlements in principle, subject to written agreements and court approval; the company denied the allegations. It was defending other overdraft-fee class actions. Management did not expect the proceedings to have a material adverse effect, but noted outcomes could affect a particular period.
- LIBOR transition remains relevant to certain debt instruments and contracts. The company said it would not enter new LIBOR-based credit agreements after December 31, 2021 and was working on replacement rates for existing arrangements.
Key investor verification points
- Track whether loan production converts into portfolio growth and how quickly deposit-driven liquidity is deployed without further margin pressure.
- Review credit quality, especially remaining COVID-modified loans, commercial real estate concentrations, energy exposure and the assumptions supporting the allowance and provision reversals.
- Assess the earnings contribution and integration, final purchase accounting, share dilution and capital effects of the October Landmark and Triumph acquisitions.
- Monitor securities portfolio duration, unrealized losses, hedging results and actual net interest income sensitivity as market rates change.
- Check the status and potential cost of overdraft litigation, remaining repurchase authorization, and regulatory limits on bank dividends to the parent.
- Note that the interim statements received an independent accountant’s review, not an audit; the review report stated it was not aware of material modifications needed for GAAP conformity.