Business context and reporting period
Simmons First National Corporation (Nasdaq: SFNC) is a regional bank holding company headquartered in Arkansas, operating through Simmons Bank across Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas. This is its Form 10-K for the fiscal year ended December 31, 2022; it reports annual results, not standalone fourth-quarter results. The company completed its Spirit of Texas Bancshares acquisition on April 8, 2022.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income, fully taxable equivalent | $742.0 million | $610.8 million | +21.5% |
| Net interest margin, fully taxable equivalent | 3.17% | 2.89% | +28 basis points |
| Noninterest income | $170.1 million | $191.8 million | -11.3% |
| Noninterest expense | $566.7 million | $483.6 million | +17.2% |
| Net income available to common shareholders | $256.4 million | $271.1 million | -5.4% |
| Diluted earnings per share | $2.06 | $2.46 | -16.3% |
| Adjusted earnings and adjusted diluted EPS (non-GAAP) | $298.6 million; $2.40 | $295.0 million; $2.68 | Earnings +1.2%; EPS lower |
- Net interest income growth reflected higher loan and securities income, acquisition-related balances and rising rates. Deposit and borrowing costs also rose substantially.
- Loans increased 34.4% to $16.14 billion, primarily reflecting Spirit and organic growth. Real estate loans were 77.9% of total loans.
- Deposits rose to $22.55 billion from $19.37 billion. Core deposits were 83.0% of deposits; brokered deposits increased to $2.75 billion from $466 million, and uninsured deposits were $7.27 billion.
- Cash and cash equivalents were $682.1 million, down from $1.65 billion. Operating cash flow was $322.2 million; investing cash flow was negative $946.2 million and financing cash flow negative $344.5 million.
- Total debt was $1.23 billion, down from $1.72 billion. Year-end borrowings included $835 million of FHLB FOTO advances classified as short-term; the FHLB could terminate these before stated maturity. The company reported approximately $5.4 billion of additional FHLB borrowing capacity.
- Common equity was $3.27 billion. The company’s CET1 ratio was 11.90%, Tier 1 leverage ratio 9.34%, and total risk-based capital ratio 14.22%; Simmons Bank was reported well capitalized.
- Annual dividends increased to $0.76 per share from $0.72. The company repurchased approximately 4.43 million shares during 2022; about $79.9 million remained under its $175 million repurchase authorization at year-end.
Material changes, outlook and risks
- GAAP earnings declined despite stronger net interest income, as higher expenses, lower noninterest income and credit-loss provision expense weighed on results. Adjusted earnings were modestly higher, but adjusted EPS declined, reflecting a larger share count.
- 2022 included $42.2 million of net-of-tax adjustments, principally acquisition-related Day 2 credit provisions, merger costs and branch right-sizing, partly offset by a $4.1 million insurance-settlement gain. Management’s adjusted results are non-GAAP.
- Provision for credit losses was $14.1 million, versus a $32.7 million recapture in 2021. The 2022 amount included Spirit acquisition provisions and reserves for increased unfunded commitments, partly offset by improved credit measures and releases of certain qualitative reserves.
- Asset-quality indicators improved: nonperforming loans were $58.9 million, down from $68.6 million; nonperforming assets were 0.23% of total assets versus 0.33%; and net charge-offs were 0.09% of average loans. The allowance for credit losses was $197.0 million, or 1.22% of loans.
- Rising rates materially reduced securities market values. AFS securities had $478.9 million of gross unrealized losses at year-end, while HTM securities’ estimated fair value was about $697 million below amortized cost. Management attributed these declines principally to rates, said it did not consider the securities credit-impaired, and stated it had the intent and ability to hold them as described in the filing. AOCI was negative $517.6 million.
- Management expects margin pressure and only modest organic loan growth in 2023, citing the higher-rate environment and a smaller loan pipeline. It plans to redeploy investment cash flows toward loans and reduce reliance on wholesale funding. No quantified earnings or revenue guidance is provided.
- Key risks include deposit repricing and funding competition, liquidity and interest-rate sensitivity, commercial real estate and construction credit exposure, economic conditions in the six-state footprint, acquisition integration, cybersecurity and third-party service disruptions, and the transition from LIBOR. The filing estimates LIBOR publication would cease after June 30, 2023; certain debt and contracts still reference LIBOR.
- Several overdraft-fee matters were settled or resolved without material adverse effect, according to management. A separate Simmons Bank class action alleging multiple fees on resubmitted payments remained pending; in February 2023, the court denied class certification and granted summary judgment in part. Management said the ultimate outcome of legal proceedings could still be unfavorable.
- The Spirit purchase-price allocation remained preliminary, and goodwill increased by approximately $173 million from the acquisition. The company reported no goodwill impairment in 2022. Management and the independent auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- How deposit pricing, brokered and uninsured deposit balances, and short-term FOTO advance exposure evolve as rates and funding competition change.
- Whether the reported 2023 margin outlook and modest loan-growth expectations are borne out, including the impact of wholesale funding and the callable municipal securities swaps.
- Credit performance in commercial real estate and construction, the adequacy of loan and unfunded-commitment allowances, and the effect of the large real-estate share of the portfolio.
- Whether AFS and HTM securities values recover as management expects, and the effects of accumulated unrealized losses on reported equity and capital measures.
- Final Spirit acquisition valuations, integration costs and realized benefits; also monitor the pending overdraft litigation and LIBOR-linked obligations.