Simmons First National Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Simmons is a Mid-South bank holding company with approximately $27.6 billion of assets and 232 financial centers across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas.
Financial performance and position
- Q3 earnings: Net income was $47.2 million and diluted EPS was $0.37, versus $80.6 million and $0.63 in Q3 2022. Management reported adjusted net income of $48.8 million and adjusted diluted EPS of $0.39; these are non-GAAP measures.
- Nine-month earnings: Net income was $151.2 million and diluted EPS was $1.19, versus $173.2 million and $1.40 in the prior-year period. Adjusted net income was $157.2 million and adjusted diluted EPS was $1.24, versus $217.5 million and $1.76.
- Interest income and margins: Q3 GAAP net interest income was $153.4 million, down from $193.6 million a year earlier. Fully taxable equivalent (FTE) net interest income was $159.9 million, down 5.5% sequentially from Q2; FTE net interest margin was 2.61%, versus 2.76% in Q2 and 3.12% for the first nine months of 2022. Higher deposit pricing and a shift to time deposits pressured margin.
- Fees and expenses: Q3 noninterest income was $42.8 million, compared with $43.0 million a year earlier; noninterest expense was $132.0 million, down from $138.9 million. Nine-month noninterest income rose 6.5% to $133.6 million, while expenses fell 2.2% to $414.9 million.
- Loans and credit: Loans were $16.77 billion, up $629.8 million from year-end 2022. The allowance for loan losses was $218.5 million, or 1.30% of loans. Nonperforming loans were $81.9 million (0.49% of loans), up from $58.9 million at year-end; nonperforming assets were $87.2 million. Nine-month net charge-offs were $14.6 million, or 0.12% annualized.
- Deposits and liquidity: Deposits totaled $22.23 billion, down $316.9 million from year-end. Noninterest-bearing and interest-bearing transaction/savings balances declined, while time deposits increased $1.90 billion to $6.67 billion. Brokered deposits were $3.26 billion. Management reported $11.45 billion of additional liquidity sources and 2.5x coverage of uninsured, non-collateralized deposits; the loan-to-deposit ratio was 75%.
- Debt, cash flow, and capital: Other borrowings and subordinated debt totaled $1.71 billion, up from $1.23 billion at year-end, including $1.33 billion of FHLB advances. Nine-month operating cash flow was $120.4 million, compared with $226.2 million in 2022; cash and cash equivalents declined $76.5 million to $605.6 million. CET1 was 12.02%, Tier 1 leverage was 9.31%, and tangible common equity to tangible assets was 7.07%.
Material changes and management commentary
- Interest expense rose sharply year over year as deposit rates and time-deposit balances increased. For the first nine months, interest expense was $392.1 million versus $72.9 million; higher asset yields did not fully offset funding-cost increases.
- Management said Q3 loan growth moderated, with increased payoffs and a commercial loan pipeline of $877.3 million, down from $1.12 billion at year-end. The allowance increase reflected loan growth and updated economic assumptions.
- A $9.6 million charge-off was recorded on a modified, collateral-dependent commercial real estate loan. Nonperforming loans increased, primarily due to commercial loans.
- Management reported completing its early-retirement program in Q3 and achieving the Better Bank Initiative’s original $15 million of annual cost savings one quarter earlier than planned. The early-retirement program is expected to generate approximately $5.1 million of annual savings.
- Q3 results included $1.6 million of early-retirement costs and $0.5 million of branch-right-sizing costs. Nine-month other income included a $4.0 million legal-reserve recapture. Management expects deposit service charges to moderate through year-end and early 2024 following consumer fee changes.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management describes continued focus on liquidity, capital, asset quality, disciplined underwriting, deposit pricing, and operating efficiency.
- Interest-rate sensitivity modeling estimated that a 100- or 200-basis-point rate increase would reduce next-12-month net interest income by 0.87% or 1.76%, respectively, versus the base case; a 100- or 200-basis-point decrease would increase it by 0.80% or 1.28%. These estimates depend on assumptions and exclude possible management responses.
- Available-for-sale securities had $531.4 million of gross unrealized losses; management attributed most declines to higher market rates and said it did not expect to be required to sell securities before recovery. Held-to-maturity securities had an estimated fair value about $894 million below net carrying amount, a material interest-rate valuation exposure.
- Two nonperforming corporate bonds remained in the portfolio. The company charged off $7.0 million on one corporate bond during the first nine months and held a $1.2 million allowance for two remaining nonperforming bonds.
- The company reported a putative overdraft-fee class action; the court denied class certification and ruled for Simmons Bank on outstanding issues in July 2023. Management believes pending legal proceedings will not materially affect the company, while noting outcomes remain uncertain.
- Other stated risks include changing rates and deposit mix, economic weakness and real-estate values, credit losses, competition, cybersecurity and third-party dependencies, and execution of acquisition integration and cost savings. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether margin pressure and deposit migration into higher-cost time and brokered deposits continue, and how that affects funding costs and earnings.
- Trends in nonperforming and modified loans, commercial real-estate exposures, charge-offs, and the adequacy of the $218.5 million loan-loss allowance.
- Liquidity assumptions and availability of pledged collateral and wholesale funding, alongside the rise in FHLB advances and brokered deposits.
- The sensitivity of capital and tangible book value to unrealized securities losses, interest rates, and any need to sell securities.
- Whether Better Bank Initiative savings are sustained and offset by higher operating and deposit-insurance costs; also distinguish management’s non-GAAP adjusted results from GAAP results.