Simmons First National Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited interim results. Simmons is an Arkansas-based financial holding company operating through Simmons Bank and related subsidiaries across seven states.
Financial performance and position
- Q2 earnings: Net income was $58.8 million and diluted EPS was $0.54, versus $55.9 million and $0.58 in Q2 2019. Management’s non-GAAP core earnings were $60.1 million, or $0.55 per diluted share, versus $65.5 million, or $0.68.
- First-half earnings: Net income was $136.0 million and diluted EPS was $1.22, compared with $103.6 million and $1.09 in 2019. Core earnings were $134.0 million versus $114.5 million; core diluted EPS was $1.21 in both periods.
- Net interest: Q2 net interest income was $163.7 million, up from $149.4 million; first-half net interest income was $331.2 million, up from $285.4 million. On a fully taxable-equivalent basis, net interest margin fell to 3.42% from 3.94% in Q2 and to 3.55% from 3.90% for the first half.
- Other income and expenses: Q2 non-interest income rose 25.8% to $50.2 million, including higher mortgage lending income. First-half non-interest income rose 77.5% to $132.6 million, helped by $32.5 million of securities-sale gains and $8.1 million of branch-sale gains. Non-interest expense increased 1.7% in Q2 and 12.4% in the first half, with acquisition and technology costs contributing.
- Credit costs and asset quality: Provision for credit losses was $26.9 million in Q2 and $53.0 million for the first half, versus $7.1 million and $16.4 million a year earlier. The June 30 loan allowance was $231.6 million, or 1.59% of loans; non-performing loans were 0.91% of loans, and allowance coverage was 175%. Non-performing assets were $148.5 million, or 0.68% of assets, up from $113.7 million at year-end. Net charge-offs were $40.9 million for the first half, an annualized 0.56% of loans.
- Balance sheet and liquidity: Total assets were $21.9 billion, up from $21.3 billion at year-end. Loans were $14.6 billion; deposits were $16.6 billion, up $507 million. Cash and cash equivalents reached $2.55 billion, compared with $997 million at year-end. First-half operating, investing and financing cash flows were $87 million, $706 million and $755 million, respectively.
- Debt and capital: Other borrowings and subordinated debt totaled $1.78 billion. FHLB advances were $1.36 billion, with approximately $2.8 billion of additional FHLB capacity available. The company reported a 11.85% CET1 ratio and an 8.78% Tier 1 leverage ratio; management said the company and bank met capital requirements. Common equity to assets was 13.26% and tangible common equity to tangible assets was 8.31%.
Material changes and notable items
- The company adopted CECL on January 1, 2020. Adoption added approximately $151.4 million to the loan allowance, $24.0 million to the unfunded-commitment reserve, and reduced beginning retained earnings by $128.1 million after tax. The company elected the regulatory CECL transition provision.
- Four energy credits were charged off for $32.6 million in Q2. Management attributed higher credit provisioning to updated economic forecasts, COVID-19 effects and deterioration in energy credits. Nonaccrual loans rose approximately $40 million from year-end, including energy exposures.
- Through June 30, Simmons originated 7,826 PPP loans totaling $963.7 million and had modified more than 4,600 customer loans totaling approximately $3.3 billion under COVID-19 relief programs. Management warned that prolonged economic weakness could worsen credit quality, delinquencies, charge-offs and collateral values.
- The company sold approximately $1.2 billion of securities during the first half, primarily to strengthen liquidity and support PPP lending. It completed sales of five Texas and four Colorado branches, recognizing $8.1 million in combined gains.
- Management closed 11 branches in June, estimating $2.4 million in annual net savings, and expected to close a further 23 branches and one loan production office in Q4 2020, with estimated annual net savings of $6.8 million. An early-retirement program was expected to generate approximately $2.9 million of annual savings.
- Management expected continued net interest margin pressure for the remainder of 2020, citing rapid repricing of deposits, lower market rates, PPP lending and elevated liquidity. The filing provides no formal earnings or revenue guidance.
Risks, contingencies and reporting notes
- COVID-19 duration and recovery remain uncertain; disclosed risks include borrower stress in hospitality, retail, restaurants and energy, operational disruption, cybersecurity exposure and potential litigation or government action related to pandemic relief programs.
- Management’s credit-loss estimates depend on forecasts and assumptions. The allowance model weighted Moody’s baseline, downside S-2 and downside S-3 scenarios at 68%, 22% and 10%, respectively.
- The company reported various legal proceedings but did not expect them, in aggregate, to have a material adverse effect. The independent accountant performed an interim review, not an audit, and reported no material modifications needed to the interim statements.
Key facts for investors to verify
- How CECL assumptions and subsequent economic forecasts affect provisions, allowance adequacy and capital after transition relief.
- Performance of COVID-modified loans and PPP balances, including deferrals, borrower repayment and forgiveness trends.
- Further deterioration, recoveries or concentrations in energy and commercial real estate exposures.
- Whether deposit and borrowing costs can offset lower asset yields and sustain margins as management anticipates pressure through year-end.
- Execution and realized savings from planned branch closures, technology spending and other cost initiatives.