SIMMONS FIRST NATIONAL CORP quarterly report, Q1 FY2022

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Simmons First National Corporation — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are against December 31, 2021. The filing is unaudited. Simmons is a Mid-South bank holding company operating across six states, with 197 financial centers at quarter-end.

Financial results and position

MetricQ1 2022Comparable period / change
Net interest income$145.6 million$146.7 million in Q1 2021; down 0.7%
Net interest margin, fully taxable equivalent2.76%2.99% in Q1 2021; 2.86% in Q4 2021
Provision for credit losses$(19.9) million, a recapture$1.4 million expense in Q1 2021
Non-interest income$42.2 million$49.5 million in Q1 2021; down 14.8%
Non-interest expense$128.4 million$113.0 million in Q1 2021; up 13.6%
Net income / diluted EPS$65.1 million / $0.58$67.4 million / $0.62 in Q1 2021
Core earnings / core diluted EPS (non-GAAP)$67.2 million / $0.59$64.0 million / $0.59 in Q1 2021

Q1 net interest income on a fully taxable equivalent basis was $151.2 million, up 0.2% year over year but down 4.7% sequentially. Core net interest margin was 2.70%. Management attributed margin pressure mainly to lower loan yields, partly offset by lower deposit costs.

  • Balance sheet: Assets were $24.48 billion; loans $12.03 billion; deposits $19.39 billion. Loans were nearly flat from year-end. Deposits rose $25.9 million, as transaction and savings balances increased while time deposits fell $389.8 million.
  • Cash flow: Operating activities provided $60.5 million, versus $75.8 million in Q1 2021. Investing activities used $20.9 million, versus $837.3 million used in the prior-year quarter; financing activities used $3.3 million, versus $1.19 billion provided. Cash and equivalents increased $36.4 million to $1.69 billion.
  • Debt and funding: Total other borrowings and subordinated debt were $1.72 billion, essentially unchanged from year-end. FHLB advances were $1.31 billion. The company reported approximately $3.6 billion of additional FHLB borrowing capacity and $415 million of correspondent-bank federal funds lines.
  • Capital and liquidity: CET1 was 13.52%, Tier 1 leverage 9.00%, and total risk-based capital 16.42%; management reported compliance with capital requirements. Common equity to assets was 12.10%, down from 13.14% at year-end. The bank had $176.5 million available for dividends to the parent without prior regulatory approval.
  • Credit quality: Non-performing loans were 0.53% of loans; non-performing assets, including performing TDRs, were 0.30% of assets. The allowance was $178.9 million, or 1.49% of loans and 278% of non-performing loans. Annualized net charge-offs were 0.22% of average loans.

Material changes and notable items

  • Year-over-year net income declined 3.4%, while core earnings increased 4.9%. Results included a $19.9 million credit-loss recapture, compared with a $1.4 million provision in Q1 2021. Management cited improved credit metrics, improved economic model scenarios, and planned exits from several large oil-and-gas relationships.
  • Non-interest expense increased year over year, including higher salaries and benefits, marketing, and merger costs. Q1 merger-related costs were $1.9 million; Q1 2021 included a $5.3 million gain on sale of Illinois branches and $5.5 million of net securities-sale gains, contributing to lower prior-year net income comparisons in certain revenue lines.
  • Rising market rates materially reduced the fair value of available-for-sale securities. Gross unrealized losses were $435.9 million at March 31, versus $61.3 million at year-end; accumulated other comprehensive loss grew to $327.0 million from $10.5 million. Management attributed the decline principally to interest rates, stated it did not consider the securities credit-impaired, and said it had no intent to sell and expected to hold them until recovery.
  • Landmark Community Bank and Triumph Bancshares, acquired in October 2021, contributed to year-over-year balance-sheet and operating comparisons. The Spirit of Texas Bancshares acquisition closed April 8, 2022, after quarter-end; Spirit had approximately $3.22 billion of assets, $2.38 billion of loans, and $2.74 billion of deposits at March 31. Consideration included 18.3 million Simmons shares and approximately $1.4 million cash.
  • The company repurchased 513,725 shares under its prior program during Q1. A new program authorizes up to $175 million of repurchases through January 2024; no repurchases had been made under it by March 31. The quarterly common dividend was $0.19 per share.

Outlook, risks, and contingencies

  • Management reported a commercial loan pipeline of $2.36 billion, up for a sixth consecutive quarter, and $775.7 million of approved loans ready to close. Unfunded commitments were reported at $3.43 billion. Management said loan demand appeared to be returning to more normalized levels and planned to continue recruiting loan producers.
  • Interest-rate simulations estimated net interest income increases of 3.05% and 5.62% under immediate, sustained rate increases of 100 and 200 basis points, respectively, and a 1.14% decrease under a 25-basis-point decline. Management cautioned that model assumptions are uncertain and actual outcomes may differ materially.
  • Key disclosed risks include interest-rate and inflation changes, credit and collateral deterioration, commercial real estate and energy exposures, deposit competition and liquidity, acquisition integration, cybersecurity and third-party service risks, LIBOR transition, and litigation. The filing provides no specific earnings or revenue guidance.
  • Several overdraft-fee class actions remain pending or subject to settlement or court approval. Management said the matters were not expected to have a material adverse effect based on information available, while acknowledging future developments could produce a material period-specific outcome.
  • The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The independent accountant’s interim review found no material modifications needed; it was not an audit opinion.

Investor verification priorities

  1. Track the large AFS securities valuation losses, AOCI, interest-rate exposure, and whether liquidity needs could require securities sales.
  2. Assess sustainability of the credit-loss recapture and monitor allowance coverage, charge-offs, criticized loans, and energy portfolio exits.
  3. Verify post-close Spirit integration, final purchase accounting, realized synergies, and the effect of the 18.3 million shares issued on per-share results and capital.
  4. Monitor net interest margin, loan yields and production, deposit mix, brokered deposits, and funding costs as rates and competition change.
  5. Reconcile GAAP earnings with management’s non-GAAP core measures and monitor elevated operating costs and the new share-repurchase program.