Simmons First National Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Interim financial statements are unaudited. Simmons First is a regional bank holding company operating across Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas.
Financial performance and position
| Metric | Reported result |
|---|---|
| Q2 net income / diluted EPS | $27.5 million / $0.21 |
| First-half net income / diluted EPS | $92.5 million / $0.77 |
| Q2 net interest income | $185.1 million GAAP; $191.2 million fully taxable equivalent (FTE) |
| FTE net interest margin | 3.24% in Q2; 3.01% for the first half |
| Q2 provision for credit losses | $33.9 million expense |
| Total assets / loans / deposits | $27.22 billion / $15.11 billion / $22.04 billion at June 30 |
| Cash and cash equivalents | $964.8 million at June 30, down from $1.65 billion at year-end 2021 |
| First-half operating cash flow | $177.9 million; cash decreased $685.8 million over the period |
| Total debt | $1.48 billion at June 30, compared with $1.72 billion at year-end |
| Stockholders’ equity / tangible book value per share | $3.26 billion / $14.07 at June 30 |
Q2 non-interest income was $40.2 million and non-interest expense was $156.8 million. The filing does not provide a clear GAAP profit-margin figure; management described an improvement in the efficiency ratio but the excerpt provides no specific ratio value.
Material changes versus comparable periods
- Compared with Q2 2021, net income fell from $74.9 million to $27.5 million and diluted EPS from $0.69 to $0.21. Q2 2022 included substantial Spirit merger costs and a Day 2 credit provision.
- Management reported Q2 adjusted earnings of $66.8 million and adjusted diluted EPS of $0.52, excluding specified merger, branch-right-sizing and Day 2 provision items. These are non-GAAP measures.
- First-half net income declined from $142.3 million in 2021 to $92.5 million in 2022. First-half adjusted earnings were $134.0 million versus $139.4 million, and adjusted diluted EPS was $1.11 versus $1.28.
- FTE net interest margin increased to 3.24% from 2.76% in Q1 2022, which management attributed mainly to higher asset yields in the rising-rate environment. First-half margin was 3.01%, versus 2.94% in first-half 2021.
- Loans and deposits rose substantially from year-end, primarily reflecting the April 8 acquisition of Spirit of Texas Bancshares. Spirit added approximately $3.12 billion of assets, $2.29 billion of loans and $2.72 billion of deposits; the acquisition added $163.9 million of goodwill. Purchase accounting remains preliminary.
- Investment securities shifted materially: the company transferred $1.99 billion of securities from available-for-sale to held-to-maturity in Q2. At June 30, available-for-sale securities had $390.0 million of gross unrealized losses, largely attributed to higher market rates; management said it did not expect to sell them before recovery of cost.
Outlook, management commentary and risks
- Management cited strong organic loan growth, a commercial loan pipeline of $3.02 billion, improved asset quality, solid liquidity and strong capital. It reported nearly 2,000 new business deposit accounts in Q2. No specific earnings or revenue guidance was provided.
- Nonperforming loans were $63.6 million, or 0.42% of loans; nonperforming assets including performing TDRs were 0.27% of assets. The allowance for credit losses was $212.6 million, or 1.41% of loans, and 334% of nonperforming loans. First-half annualized net charge-offs were 0.11% of average loans.
- The Q2 provision included a $33.8 million Day 2 CECL provision related to Spirit-acquired loans and unfunded commitments. Management said the allowance was sufficient, citing improved credit metrics and economic modeling, but noted uncertainty around economic recovery and forecasts.
- Capital remained above regulatory minimums: CET1 was 12.10%, Tier 1 leverage 9.22% and total risk-based capital 14.83%. Tangible common equity to tangible assets was 7.03%, down from 8.51% at year-end, while common equity to assets was 11.98%, down from 13.14%.
- Core deposits were 89.3% of total deposits, but brokered time deposits increased to $1.35 billion from $466.0 million at year-end. The company reported $3.7 billion of additional FHLB borrowing capacity and approximately $415 million in correspondent federal-funds lines.
- Interest-rate sensitivity modeling estimated that a 100- or 200-basis-point increase would raise next-12-month net interest income by 2.88% or 5.33%, respectively; a 25-basis-point decrease would reduce it by 0.82%. Management cautioned that model assumptions are uncertain and actual results may differ materially.
- Key exposures include rising deposit costs, interest-rate and securities valuation risk, commercial real estate and construction lending, acquisition integration and preliminary purchase accounting, and potential credit deterioration. The company also disclosed several overdraft/insufficient-funds class actions; some matters were settled or had settlements in principle, while others remained contested. Management did not expect the described proceedings to have a material adverse effect, but noted future outcomes could be material in a period.
- The company expected to redeem five trust-preferred securities issuances in Q3 2022, subject to its stated Federal Reserve approval. Some debt instruments still reference LIBOR; the company was evaluating replacement-rate arrangements.
Important facts for investors to verify
- Track post-acquisition operating contribution, integration costs and final Spirit purchase-price allocation.
- Assess whether loan and deposit growth is organic and sustainable, and monitor brokered deposit levels and funding costs.
- Follow net interest margin and deposit repricing as rates change, alongside the assumptions behind management’s sensitivity estimates.
- Monitor credit trends, particularly commercial real estate and construction exposure, criticized loans, charge-offs and allowance adequacy.
- Review the effect of securities unrealized losses, AOCI and the AFS-to-HTM transfer on tangible capital and liquidity flexibility.
- Confirm completion and terms of the planned trust-preferred redemptions, and progress on LIBOR-linked contract transitions.