Simmons First National Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Simmons is a Mid-South bank holding company operating in six states, with approximately 231 financial centers. The April 2022 Spirit of Texas acquisition affects year-over-year comparisons.
Financial performance and position
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $177.8 million | +$32.2 million year over year |
| Net interest income (fully taxable equivalent) | $184.1 million | +$32.9 million year over year; down $15.7 million sequentially |
| Net interest margin (fully taxable equivalent) | 3.09% | 2.76% a year ago; 3.31% in Q4 2022 |
| Net income / diluted EPS | $45.6 million / $0.36 | Compared with $65.1 million / $0.58 a year ago |
| Adjusted net income / adjusted diluted EPS (non-GAAP) | $47.3 million / $0.37 | Compared with $67.2 million / $0.59 a year ago |
| Noninterest income / expense | $45.8 million / $143.2 million | Income up 8.6% and expense up 11.5% year over year |
| Total assets | $27.58 billion | $27.46 billion at December 31, 2022 |
| Loans / deposits | $16.56 billion / $22.45 billion | Loans up $413 million; deposits down $96 million since year-end |
| Cash and cash equivalents | $524.5 million | Down $157.7 million during the quarter |
| Total debt | $1.39 billion | $1.23 billion at year-end; includes $1.00 billion of FHLB advances |
- Loan growth and higher asset yields lifted year-over-year net interest income, but deposit repricing and funding costs pressured the sequential quarter: interest expense was $101.3 million versus $16.1 million in Q1 2022.
- Operating cash flow was $98.7 million; investing cash flow was negative $280.7 million, primarily reflecting loan growth. Financing cash flow was positive $24.2 million.
- Credit provision was $24.2 million versus a $19.9 million provision recapture in Q1 2022. The 2023 expense included $10.9 million for loans and $13.3 million for securities, including an AFS securities provision and HTM provision.
- Regulatory capital remained above well-capitalized thresholds: CET1 11.87%, Tier 1 leverage 9.24%, and total risk-based capital 14.47%. Book value per share was $26.24 and tangible book value per share was $14.88.
Material changes and notable items
- Net income declined year over year despite higher net interest income, principally reflecting the shift from a credit-loss recapture to expense, higher funding costs, and higher operating expenses.
- Deposit balances were relatively stable overall, but the mix shifted: noninterest-bearing and interest-bearing transaction/savings deposits fell by about $1.01 billion, while time deposits rose by $910 million. Brokered deposits increased to $2.95 billion from $2.75 billion.
- Uninsured deposits were $5.27 billion, or 23% of deposits. Management reported a 74% loan-to-deposit ratio and $10.78 billion in additional available liquidity sources, including approximately $5.6 billion of FHLB capacity.
- Available-for-sale securities had $425.1 million of gross unrealized losses; held-to-maturity securities had an estimated fair value approximately $618 million below net carrying value. Management attributed most declines to interest rates and said it did not expect to sell securities before recovery, but recorded credit losses on corporate bonds. One corporate bond was charged off for $7.0 million; two nonperforming corporate bonds remained.
- Asset quality indicators remained comparatively low: nonperforming loans were $63.7 million, or 0.38% of loans; the allowance was 1.25% of loans and 324% of nonperforming loans. Nonperforming assets were $71.4 million, or 0.26% of assets.
- Q1 other income included a $4.0 million recapture of a previously recorded legal reserve. The company reported $1.4 million in merger costs and $1.0 million in branch right-sizing costs.
- Accumulated other comprehensive loss improved to $470.7 million from $517.6 million at year-end, but remains a material mark-to-market component of equity.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expects approximately $15 million of annual expense savings from its Better Bank Initiative to be fully incorporated by year-end 2023.
- Management cited higher interest rates, deposit competition and migration to higher-yielding products, inflation, and softer economic conditions as factors affecting funding costs and loan activity. The commercial loan pipeline was $1.05 billion, down from $1.12 billion at year-end.
- Management’s 12-month interest-rate sensitivity estimates show net interest income declining 0.08% with rates up 100 basis points and 0.18% with rates up 200 basis points; a 100-basis-point decline was estimated to increase it 0.50%. These are model estimates subject to assumptions and may differ materially from actual outcomes.
- The filing identifies industry liquidity concerns following bank failures as a risk, including the potential for deposit outflows, higher borrowing costs, and greater competition for funding. Management described liquidity and capital as solid; these are management assessments.
- Commercial real estate and construction lending, economic conditions, collateral values, deposit behavior, interest-rate exposure, and indirect effects from financial-sector disruption remain key risks. The company also notes potential LIBOR transition impacts on subordinated debt referencing three-month LIBOR.
- A putative overdraft-fee class action remains pending. In February 2023, the court denied class certification and granted the bank’s summary judgment motion in part; the company says the ultimate outcome cannot be determined, though management does not expect a material adverse effect based on information currently available.
- The company declared a $0.20-per-share dividend for the quarter. Future dividends remain subject to board discretion, earnings, liquidity, capital needs, and regulatory constraints. No shares were repurchased in Q1.
Important facts for investors to verify
- Whether deposit stability holds and whether uninsured and brokered deposit levels, deposit costs, and available liquidity change materially.
- Whether net interest margin stabilizes as deposit rates reprice and loan yields adjust.
- Whether unrealized securities losses remain recoverable without sales, and whether the corporate-bond credit allowance or losses increase.
- Whether loan growth, nonperforming loans, charge-offs, and commercial real estate credit quality develop as expected.
- Whether the stated $15 million of Better Bank savings is achieved by year-end and whether merger and integration costs subside.
- Developments in the overdraft-fee litigation, LIBOR transition for subordinated debt, and regulatory capital and dividend capacity.