Simmons First National Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Simmons is a Mid-South bank holding company operating in Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas. The April 8, 2022 Spirit of Texas Bancshares acquisition added approximately $3.12 billion of assets, including $2.29 billion of loans and $2.72 billion of deposits. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance and position
- Q3 earnings: Net income was $80.6 million, or $0.63 diluted EPS, essentially unchanged from $80.6 million and $0.74 diluted EPS in Q3 2021. Adjusted net income, a non-GAAP measure, was $82.3 million, or $0.64 adjusted diluted EPS.
- Nine-month earnings: Net income was $173.2 million and diluted EPS was $1.40, versus $222.9 million and $2.05 in 2021. Adjusted earnings were $216.3 million, or $1.75 adjusted diluted EPS, compared with $218.8 million and $2.01.
- Net interest income and margin: Q3 GAAP net interest income was $193.6 million, up from $145.2 million a year earlier. On a fully taxable equivalent (FTE) basis, Q3 net interest income rose 4.5% sequentially to $199.8 million; FTE net interest margin was 3.34%, up from 3.24% in Q2. Nine-month FTE net interest income was $542.2 million, up 19.9%, and FTE margin was 3.12% versus 2.91%.
- Revenue and expenses: Q3 total interest income was $230.6 million and noninterest income was $43.0 million. Nine-month noninterest income fell 13.6% to $125.4 million, largely reflecting lower securities-sale gains, no comparable branch-sale gain, and weaker mortgage lending income. Q3 noninterest expense was $138.9 million; nine-month expense increased 24.0% to $424.2 million, including acquisition-related costs and expenses associated with the expanded business.
- Loans and credit: Period-end loans were $15.61 billion, up $3.59 billion from year-end 2021, primarily reflecting Spirit and organic growth. The allowance for loan losses was $197.6 million, or 1.27% of loans. Nonperforming loans were $57.8 million, 0.37% of loans, versus $68.6 million and 0.57% at year-end 2021; annualized net charge-offs were 0.07% for the first nine months.
- Deposits and liquidity: Deposits totaled $22.15 billion, up $2.78 billion from year-end 2021, mainly due to Spirit. Brokered deposits increased to $1.82 billion from $466 million; management reported core deposits were 86.1% of total deposits. Cash and cash equivalents were $679.4 million, down from $1.65 billion at year-end. The Bank reported about $5.0 billion of additional FHLB borrowing capacity and $415 million of correspondent-bank federal funds lines.
- Debt and capital: Total borrowings and subordinated debt were $1.33 billion, down from $1.72 billion at year-end; the balance included $934.1 million of FHLB advances. The company reported a 11.73% CET1 ratio and a 9.24% Tier 1 leverage ratio, meeting applicable capital requirements. Book value per share was $24.87 and tangible book value per share was $13.51.
- Cash flow: For the first nine months, operating activities provided $226.2 million; investing activities used $592.2 million and financing activities used $605.3 million. Cash and cash equivalents decreased $971.2 million.
Material changes and unusual items
- The Spirit acquisition materially increased loans, deposits, goodwill and the share count. Simmons issued 18.3 million shares valued at approximately $464.9 million and paid approximately $1.4 million in cash; recorded acquisition goodwill was $162.3 million. The purchase-price allocation remained preliminary.
- Interest expense rose as deposit rates repriced upward. Management cited a 40-basis-point sequential increase in the rate on interest-bearing deposits; rising rates also lifted loan yields and supported margin expansion.
- Q3 provision for credit losses was $0.1 million, compared with $33.9 million in Q2. Loan-loss reserve releases, including reduced pandemic-related qualitative factors, were largely offset by a $16.0 million expense for increased unfunded commitments. The nine-month provision was $14.0 million, versus a $31.4 million recapture in 2021.
- Available-for-sale securities had $547.0 million of gross unrealized losses at quarter-end; 98.5% of their fair value was in a loss position. Management attributed declines primarily to higher market rates, said it did not consider the securities credit-impaired, and stated it did not expect to need to sell them before recovery. Simmons transferred $1.99 billion of securities from available-for-sale to held-to-maturity in Q2. Accumulated other comprehensive loss reached $567.7 million, compared with $10.5 million at year-end.
- The company repurchased 1.88 million shares in Q3 at an average $23.91 per share. Nine-month common dividends were $0.57 per share, versus $0.54 in 2021. The board retains discretion over future repurchases and dividends.
Outlook, commentary and risks
- Management described Q3 results as strong, citing loan growth, margin expansion, improved asset quality and capital. It reported a $1.55 billion commercial loan pipeline, down from $2.31 billion at year-end, and $5.14 billion of unfunded commitments, up 15% sequentially. Management noted higher rates had slowed commercial pipeline activity and emphasized underwriting and pricing discipline. The filing provides no specific earnings or revenue guidance.
- Management’s interest-rate simulation estimated next-12-month net interest income would rise 1.14% with rates up 100 basis points and 2.25% with rates up 200 basis points; a 200-basis-point decline was estimated to reduce it 5.79%. The filing cautions that these modeled estimates depend on assumptions and may differ materially from actual results.
- Key exposures include rising deposit costs, rate-driven securities valuation losses, possible deposit mix shifts, commercial real estate and construction lending, economic and collateral-value changes, and the timing or exercise of FHLB options on certain advances. The company also identified acquisition integration, cybersecurity, competition and the LIBOR transition among forward-looking risks.
- Several overdraft-fee class actions are disclosed. Two matters had settlements subject to court approval; the company denied allegations in another case and said it was defending it. Management did not expect the matters to have a material adverse effect, while noting future developments could be material in a given period.
Most important facts for investors to verify
- Whether Spirit integration and preliminary acquisition valuations change reported goodwill, expenses or expected benefits.
- Whether margin gains persist as deposit pricing responds to rising rates, and how brokered deposits and time-deposit balances evolve.
- Whether loan growth and the $5.14 billion unfunded commitment balance translate into funded loans without weakening underwriting or credit quality.
- How available-for-sale securities losses, accumulated other comprehensive loss and interest-rate hedges affect tangible equity and capital over time.
- Whether non-GAAP adjusted earnings are comparable with GAAP results; adjustments include merger costs, branch right-sizing, the Spirit Day 2 provision and other specified items.