Simmons First National Corporation — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. Simmons is a Mid-South bank holding company with approximately $28.0 billion in assets and 231 financial centers across six states. The prior-year comparison includes Spirit of Texas Bancshares only from its April 8, 2022 acquisition date, which affects year-over-year comparisons.
Financial performance and position
- Q2 earnings: Net income was $58.3 million, or $0.46 diluted EPS, versus $27.5 million, or $0.21, in Q2 2022. Adjusted net income, a non-GAAP measure, was $61.1 million, or $0.48 per diluted share. Management reported Q1 2023 net income of $45.6 million and adjusted net income of $47.3 million.
- Six-month earnings: Net income was $103.9 million, or $0.82 diluted EPS, versus $92.5 million, or $0.77, in the first half of 2022. Adjusted net income was $108.4 million, or $0.85 per diluted share, compared with $135.3 million, or $1.12, in the prior-year period. Adjusted figures exclude specified items and are not GAAP measures.
- Interest income and margin: Q2 interest income was $297.2 million and interest expense was $134.0 million, producing GAAP net interest income of $163.2 million, down from $185.1 million in Q2 2022. On a fully taxable-equivalent basis, Q2 net interest income was $169.3 million, down 8.0% sequentially; net interest margin was 2.76%, versus 3.09% in Q1. Six-month GAAP net interest income increased to $341.1 million from $330.7 million, while six-month fully taxable-equivalent margin declined to 2.92% from 3.01%.
- Other income and expenses: Q2 noninterest income was $45.0 million and noninterest expense was $139.7 million. First-half noninterest income rose 10.2% year over year to $90.8 million; noninterest expense fell 0.8% to $282.9 million. First-half other income included a $4.0 million legal reserve recapture. Q2 expenses included $3.6 million in early-retirement costs.
- Loans and credit: Loans totaled $16.83 billion, up $691.5 million from year-end 2022; real estate loans were 77.9% of the portfolio. The allowance for loan losses was $210.0 million, or 1.25% of loans. Nonperforming loans were $72.0 million, up from $58.9 million at year-end; nonperforming assets were $76.9 million, or 0.28% of assets. Allowance coverage of nonperforming loans was 292%, and first-half annualized net charge-offs were 0.04% of average loans.
- Deposits and liquidity: Deposits were $22.49 billion, roughly unchanged from year-end, but balances shifted: noninterest-bearing and interest-bearing transaction and savings deposits fell by $1.65 billion, while time deposits grew by $1.59 billion to $6.36 billion. Brokered deposits were $3.24 billion. Management reported $4.82 billion of uninsured deposits, $11.10 billion of additional liquidity sources, and 2.3x uninsured-deposit coverage. The loan-to-deposit ratio was 75%.
- Debt and capital: Other borrowings and subordinated debt totaled $1.74 billion, versus $1.23 billion at year-end, primarily reflecting increased FHLB advances. Cash and cash equivalents were $745.9 million. The company’s CET1 ratio was 11.92%, Tier 1 leverage ratio 9.23%, and tangible common equity to tangible assets 7.22%; management said regulatory capital requirements were met.
- Cash flow and securities: First-half operating cash flow was $158.9 million; investing activities used $419.8 million and financing activities provided $324.7 million. Available-for-sale securities had $430.4 million of gross unrealized losses at quarter-end; held-to-maturity securities had estimated fair value of $3.09 billion versus a $3.76 billion net carrying amount. Management attributed most declines to higher market rates, said it did not intend to sell securities before recovery, and identified two nonperforming corporate bonds.
Material changes and management commentary
- Rising deposit costs and migration into higher-rate time deposits pressured margins. Management attributed the sequential decline in fully taxable-equivalent net interest income mainly to higher deposit expense, increased short-term borrowing, and subordinated debt becoming floating-rate.
- Management said deposit balances were relatively stable in Q2 and liquidity and capital remained solid amid industry turmoil. It cited a lower commercial loan pipeline of $689.1 million, compared with $1.12 billion at year-end, despite broad loan growth during the first half.
- The Better Bank Initiative’s early-retirement program was substantially completed in Q2 and is expected to save approximately $5.1 million annually. Management said it remains on track to meet or exceed $15 million in identified annual savings by the end of 2023.
- Management expects service-charge income to moderate in the second half of 2023 following the planned elimination of returned-item fees for consumer deposit accounts beginning in Q3. The filing provides no formal earnings or revenue guidance.
- Interest-rate sensitivity modeling estimated net interest income would decline 0.29% with rates up 100 basis points and 1.05% with rates up 200 basis points over the next 12 months; lower rates were estimated to increase it. Management cautioned that model assumptions may not reflect actual results.
Risks, contingencies, and unusual items
- Key risks include deposit repricing and mix, reliance on wholesale funding, interest-rate sensitivity, economic and real-estate conditions, credit quality, securities valuation, and the assumptions used in credit-loss and goodwill estimates. The filing reports no material changes in previously disclosed risk factors.
- Nonaccrual loans and nonperforming assets increased from year-end. A single commercial relationship accounted for much of the rise in nonaccrual assets; the company received a $2.9 million payment shortly after quarter-end.
- In the overdraft-fee class action, the court denied class certification and ruled for Simmons Bank on outstanding issues; the court denied reconsideration on July 14, 2023. Management believes the ultimate outcome of legal proceedings will not materially affect the company, while noting that future developments could be material in a period.
- Q2 and first-half comparisons include unusual items, including acquisition and branch-right-sizing costs, early-retirement costs, a legal reserve recapture, and, in the 2022 comparison, Spirit acquisition-related Day 2 CECL provision and a foundation donation. Adjusted results exclude specified items.
Important facts for investors to verify
- Whether deposit pricing, brokered funding, and FHLB borrowing continue to pressure net interest margin and profitability.
- Trends in uninsured deposits, liquidity availability, and the company’s reliance on short-term funding.
- Whether nonperforming loans, commercial real estate exposures, and credit-loss reserves remain consistent with management’s expectations.
- The effect of unrealized securities losses, including the capacity to hold securities through recovery and the status of the two nonperforming corporate bonds.
- Delivery of the projected Better Bank cost savings and the impact of fee changes on noninterest income.
- Regulatory capital, dividends, and future repurchases; the company repurchased 1.13 million shares in the first half under its program.