Simmons First National (SFNC) - 2023 Q2 - Quarterly Report

Part I: Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis of the Company's financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and financial instruments Consolidated Balance Sheets The Consolidated Balance Sheets show increased total assets and stockholders' equity, with a shift from noninterest-bearing to time deposits | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Total Assets | $27,959,123 | $27,461,061 | +$498,062 | | Net Loans | $16,623,687 | $15,945,169 | +$678,518 | | Total Deposits | $22,488,722 | $22,548,094 | -$59,372 | | Noninterest bearing transaction accounts | $5,264,962 | $6,016,651 | -$751,689 | | Interest bearing transaction and savings deposits | $10,866,078 | $11,762,885 | -$896,807 | | Time deposits | $6,357,682 | $4,768,558 | +$1,589,124 | | Total Liabilities | $24,602,797 | $24,191,699 | +$411,098 | | Total Stockholders' Equity | $3,356,326 | $3,269,362 | +$86,964 | Consolidated Statements of Income Net income significantly increased for both three and six months ended June 30, 2023, driven by higher interest income despite rising interest expense | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Total Interest Income | $297,220 | $204,806 | $576,357 | $366,533 | | Total Interest Expense | $133,990 | $19,707 | $235,292 | $35,828 | | Net Interest Income | $163,230 | $185,099 | $341,065 | $330,705 | | Provision for credit losses | $61 | $33,859 | $24,277 | $13,945 | | Total Noninterest Income | $44,980 | $40,178 | $90,815 | $82,396 | | Total Noninterest Expense | $139,696 | $156,813 | $282,924 | $285,230 | | Net Income | $58,314 | $27,454 | $103,903 | $92,549 | | Basic Earnings Per Share | $0.46 | $0.21 | $0.82 | $0.77 | | Diluted Earnings Per Share | $0.46 | $0.21 | $0.82 | $0.77 | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income improved significantly due to positive unrealized holding gains on available-for-sale securities for the periods ended June 30, 2023 | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net Income | $58,314 | $27,454 | $103,903 | $92,549 | | Other comprehensive income (loss), before tax effect | $938 | $(167,152) | $64,404 | $(595,523) | | Total Other Comprehensive Income (Loss) | $693 | $(123,467) | $47,572 | $(439,883) | | Comprehensive Income (Loss) | $59,007 | $(96,013) | $151,475 | $(347,334) | Consolidated Statements of Cash Flows Overall cash and cash equivalents increased for the six months ended June 30, 2023, primarily from financing activities, reversing a prior year decrease | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $158,932 | $177,857 | | Net cash used in investing activities | $(419,836) | $(353,188) | | Net cash provided by (used in) financing activities | $324,694 | $(510,475) | | Increase (decrease) in cash and cash equivalents | $63,790 | $(685,806) | | Cash and cash equivalents, end of period | $745,912 | $964,847 | Consolidated Statements of Stockholders' Equity Total equity increased at June 30, 2023, driven by comprehensive income and stock-based compensation, partially offset by repurchases and dividends | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance, beginning of period | $3,269,362 | $3,248,841 | | Comprehensive income (loss) | $151,475 | $(347,334) | | Stock issued for employee stock purchase plan | $833 | $1,151 | | Stock-based compensation plans, net | $5,513 | $4,259 | | Stock issued for Spirit acquisition | — | $464,918 | | Stock repurchases | $(20,022) | $(66,096) | | Dividends on common stock | $(50,835) | $(45,844) | | Balance, end of period | $3,356,326 | $3,259,895 | Condensed Notes to Consolidated Financial Statements These notes provide detailed disclosures for interim financial statements, covering accounting policies, acquisitions, investment securities, loans, and other financial instruments NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS This note outlines the basis for interim financial statements, detailing SEC compliance, management estimates, and the adoption of new accounting standards with no material impact - The Company early adopted ASU 2023-02 (Investments-Equity Method and Joint Ventures) in Q1 2023, applying the proportional amortization method for tax credits, with no material impact on financial results[27] - ASU 2022-02 (Credit Losses on Financial Instruments) was adopted effective January 1, 2023, eliminating troubled debt restructuring (TDR) guidance and amending vintage disclosures, also with no material impact[28] - ASU 2022-01 (Fair Value Hedging) was adopted, clarifying guidance on fair value hedge accounting for interest rate risk, with no material impact on financial results[29] - The Company refined its current expected credit losses calculation process in Q1 2023, determining that the changes did not and are not expected to result in material differences[36] NOTE 2: ACQUISITIONS This note details the merger with Spirit of Texas Bancshares, Inc., including consideration, acquired assets and liabilities, and recorded goodwill, along with pro forma financial information - The Company completed its merger with Spirit of Texas Bancshares, Inc. on April 8, 2022, issuing 18,275,074 shares of common stock (valued at approximately $464.9 million) and $1.4 million in cash[38] - The acquisition brought approximately $3.11 billion in assets, including $2.29 billion in loans, and $2.72 billion in deposits[39] - Goodwill of $174.1 million was recorded as a result of the transaction, strengthening the Company's position in the Texas market[40] | (In thousands, except per share data) | 2022 | 2021 | | :----------------------------------- | :----- | :----- | | Revenue | $912,631 | $927,061 | | Net income | $264,522 | $307,752 | | Diluted earnings per share | $2.04 | $2.40 | NOTE 3: INVESTMENT SECURITIES This note details HTM and AFS investment securities, highlighting significant unrealized losses due to rising interest rates, which management deems temporary and not credit-related | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Held-to-maturity (HTM) Amortized Cost | $3,759,968 | $3,761,094 | | Held-to-maturity (HTM) Estimated Fair Value | $3,094,858 | $3,063,233 | | Available-for-sale (AFS) Amortized Cost | $4,012,265 | $4,331,413 | | Available-for-sale (AFS) Estimated Fair Value | $3,579,758 | $3,852,854 | - As of June 30, 2023, 98.7% of AFS securities were in an unrealized loss position, primarily due to increases in market interest rates, which management believes are temporary and not credit-related[61][62] | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Total Investment Income | $97,525 | $71,560 | | HTM Allowance for Credit Losses (Ending Balance) | $3,214 | $1,381 | | AFS Allowance for Credit Losses (Ending Balance) | $2,396 | $0 | - The provision for credit losses related to AFS securities for the six months ended June 30, 2023, was $11.5 million, including a $7.0 million charge-off for one corporate bond[67] NOTE 4: OTHER ASSETS AND OTHER LIABILITIES HELD FOR SALE This note reports no remaining balance for loans previously held for sale from the Spirit acquisition and no other outstanding liabilities held for sale as of June 30, 2023 - Loans acquired as part of the Spirit acquisition, valued at $35.2 million at the acquisition date, had no remaining balance as of June 30, 2023[73] - There were no outstanding other liabilities held for sale as of June 30, 2023[74] NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES This note details the loan portfolio, credit risk, nonaccrual loans, and ACL methodology, showing increased total loans and ACL due to growth and updated economic assumptions | Loan Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :-------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Consumer | $357,785 | $349,810 | +$7,975 | | Real Estate | $13,110,081 | $12,581,262 | +$528,819 | | Commercial | $2,849,871 | $2,837,913 | +$11,958 | | Other | $515,916 | $373,139 | +$142,777 | | Total Loans | $16,833,653 | $16,142,124 | +$691,529 | | Loan Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :-------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Consumer | $897 | $782 | +$115 | | Real Estate | $38,969 | $40,116 | -$1,147 | | Commercial | $31,410 | $17,533 | +$13,877 | | Other | $3 | $3 | $0 | | Total Nonaccrual Loans | $71,279 | $58,434 | +$12,845 | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance, January 1 | $196,955 | $205,332 | | Provision for credit loss expense | $15,977 | $10,492 | | Net charge-offs | $(2,966) | $(7,256) | | Acquisition adjustment for PCD loans | — | $4,043 | | Ending balance, June 30 | $209,966 | $212,611 | | Component (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Loans | $5,061 | $30,406 | $15,977 | $10,492 | | Unfunded commitments | $(5,000) | $3,453 | $(5,000) | $3,453 | | Securities - HTM | $1,326 | — | $1,826 | — | | Securities - AFS | $(1,326) | — | $11,474 | — | | Total Provision for Credit Losses | $61 | $33,859 | $24,277 | $13,945 | NOTE 6: RIGHT-OF-USE LEASE ASSETS AND LEASE LIABILITIES This note details the recognition of right-of-use lease assets and lease liabilities on the balance sheet for operating leases under ASC Topic 842 | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------------- | :-------------- | :---------------- | | Right-of-use lease assets | $57,171 | $46,845 | | Lease liabilities | $58,379 | $47,850 | | Weighted average remaining lease term | 8.26 years | 6.69 years | | Weighted average discount rate | 3.33 % | 2.41 % | - Operating lease cost for the six months ended June 30, 2023, was $7.6 million, compared to $6.9 million for the same period in 2022[131] NOTE 7: PREMISES AND EQUIPMENT This note provides a breakdown of the Company's premises and equipment, net of accumulated depreciation and amortization, as of June 30, 2023, and December 31, 2022 | Component (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Right-of-use lease assets | $57,171 | $46,845 | | Land | $124,491 | $122,841 | | Buildings and improvements | $377,108 | $370,530 | | Furniture, fixtures and equipment | $108,106 | $122,029 | | Software | $59,841 | $70,984 | | Construction in progress | $16,023 | $15,488 | | Accumulated depreciation and amortization | $(180,715) | $(199,976) | | Total premises and equipment, net | $562,025 | $548,741 | NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill remained stable at $1.32 billion with no impairment, while other intangible assets decreased due to amortization, as detailed in this note - Goodwill totaled $1.32 billion at June 30, 2023, and December 31, 2022, with no impairment indicated or recorded during the six months ended June 30, 2023[133][134] | Component (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Core deposit premiums, net | $108,639 | $116,016 | | Books of business and other intangibles, net | $12,119 | $12,935 | | Total other intangible assets, net | $120,758 | $128,951 | - Estimated remaining amortization expense on other intangible assets is $8.1 million for the remainder of 2023 and $15.4 million for 2024[139] NOTE 9: TIME DEPOSITS This note details the composition of time deposits, highlighting a significant increase in certificates of deposit over $250,000 and brokered time deposits - Certificates of deposit over $250,000 increased to approximately $1.60 billion at June 30, 2023, from $1.08 billion at December 31, 2022[140] - Brokered time deposits increased to $3.24 billion at June 30, 2023, from $2.75 billion at December 31, 2022[140] NOTE 10: INCOME TAXES This note presents the provision for income taxes, deferred tax assets and liabilities, and reconciliation of tax expense, including expected utilization of federal net operating losses | Component (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Income taxes currently payable | $10,295 | $15,341 | $21,111 | $20,460 | | Deferred income taxes | $(156) | $(8,190) | $(335) | $917 | | Provision for income taxes | $10,139 | $7,151 | $20,776 | $21,377 | - Net deferred tax asset decreased to $159.3 million at June 30, 2023, from $173.1 million at December 31, 2022[142] - The Company expects to fully realize its deferred tax assets and anticipates utilizing approximately $44.4 million of federal net operating losses, subject to IRC Section 382 limitations, by 2036[143][145] NOTE 11: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE This note details the Company's use of repurchase agreements for short-term funding, noting a decrease in recognized liabilities and that all agreements were overnight and continuous - The gross amount of recognized liabilities for repurchase agreements was $102.2 million at June 30, 2023, a decrease from $152.4 million at December 31, 2022[148] - All repurchase agreements at both June 30, 2023, and December 31, 2022, were overnight and continuous, secured by U.S. Government agencies[149] NOTE 12: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES This note details the Company's debt, including a significant increase in FHLB advances for liquidity and the transition of subordinated debt from fixed to floating rates | Component (in thousands) | June 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :-------------- | :---------------- | :------- | | FHLB advances | $1,353,356 | $838,487 | +$514,869 | | Other long-term debt | $19,983 | $20,809 | -$826 | | Subordinated notes and debentures | $366,065 | $365,989 | +$76 | | Total Other Borrowings and Subordinated Debt | $1,739,404 | $1,225,285 | +$514,119 | - Approximately $330.0 million of subordinated notes transitioned from a fixed rate of 5.00% to a floating rate (LIBOR + 2.15%, transitioning to SOFR + 26.161 basis points from October 1, 2023) on April 1, 2023[150][151] - FHLB advances increased significantly due to a strategic decision to elevate the Company's liquidity position amidst the macroeconomic environment and debt ceiling debate[153] NOTE 13: CONTINGENT LIABILITIES This note addresses the Company's legal proceedings, including a class action regarding overdraft fees, with management believing no material adverse effect on financial condition - The Company is a party to various legal proceedings, including a putative class action complaint alleging improper charges of multiple insufficient funds or overdraft fees[155][156] - On July 14, 2023, the district court denied plaintiffs' motion to reconsider and ruled in favor of Simmons Bank on the outstanding issues in the overdraft fee litigation[156] - Management believes that the ultimate outcome of legal proceedings, individually or in aggregate, will not have a material adverse effect on the Company's business, consolidated results of operations, financial condition, or cash flows[157] NOTE 14: CAPITAL STOCK This note details changes in authorized capital stock, including an increase in Class A common stock and removal of Series D Preferred Stock, and outlines stock repurchase programs - The number of authorized shares of Class A common stock was increased from 175,000,000 to 350,000,000 on April 27, 2022[158] - The classification and designation for Series D Preferred Stock were removed, and no shares of preferred stock were issued or outstanding as of June 30, 2023[159] - The 2022 stock repurchase program, authorizing up to $175.0 million of Class A common stock repurchases, replaced the 2019 Program[161] - During the three and six months ended June 30, 2023, the Company repurchased 1,128,087 shares at an average price of $17.75 per share under the 2022 Program[162] NOTE 15: UNDIVIDED PROFITS This note addresses dividend limitations for Simmons Bank and confirms that both the Company and Simmons Bank met all Basel III capital adequacy requirements as of June 30, 2023 - As of June 30, 2023, Simmons Bank had approximately $285.9 million available for dividend payments to the Company without prior regulatory approval[164] - The Company and Simmons Bank met all capital adequacy requirements, including the capital conservation buffer, under the Basel III Capital Rules as of June 30, 2023[166] - The Company's Common Equity Tier 1 (CET1) ratio was 11.92% at June 30, 2023[166] NOTE 16: STOCK-BASED COMPENSATION This note summarizes stock-based compensation plans, reporting expense and unrecognized expense for future periods, including stock options, non-vested stock awards, and performance stock units - Stock-based compensation expense was $8.0 million for the six months ended June 30, 2023, compared to $8.2 million for the same period in 2022[170] - Unrecognized stock-based compensation expense related to non-vested stock awards and units was $21.3 million at June 30, 2023, with a weighted-average recognition period of 1.7 years[170] - No stock options were granted during the six months ended June 30, 2023, or 2022[172] | (Shares in thousands) | Stock Options Outstanding | Non-vested Stock Units Outstanding | | :----------------------------------- | :------------------------ | :--------------------------------- | | Beginning balance, January 1, 2023 | 470 | 1,197 | | Granted | — | 730 | | Vested (earned) | — | (381) | | Forfeited/expired | — | (138) | | Balance, June 30, 2023 | 469 | 1,408 | NOTE 17: EARNINGS PER SHARE ("EPS") This note provides the computation of basic and diluted earnings per share for the three and six months ended June 30, 2023, and 2022 | Metric (in thousands, except per share data) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net income available to common stockholders | $58,314 | $27,454 | $103,903 | $92,549 | | Basic earnings per share | $0.46 | $0.21 | $0.82 | $0.77 | | Diluted earnings per share | $0.46 | $0.21 | $0.82 | $0.77 | - 469,280 stock options were excluded from the EPS calculation for the three and six months ended June 30, 2023, because their exercise price exceeded the average market price of the Company's stock[173] NOTE 18: ADDITIONAL CASH FLOW INFORMATION This note presents supplementary cash flow information for the six months ended June 30, 2023, and 2022, including interest paid, income taxes paid, and transfers of loans to foreclosed assets | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Interest paid | $224,345 | $36,049 | | Income taxes paid | $1,425 | $4,881 | | Transfers of loans to foreclosed assets held for sale | $2,274 | $581 | NOTE 19: OTHER INCOME AND OTHER OPERATING EXPENSES This note breaks down other income and operating expenses, highlighting drivers of changes such as legal reserve recapture, fair value adjustments, and various operational costs - Other income for the six months ended June 30, 2023, was $21.1 million, an increase from $14.1 million in 2022, primarily due to a $4.0 million legal reserve recapture and $3.5 million in fair value adjustments[175] | Component (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Professional services | $9,642 | $9,648 | | Marketing | $12,254 | $14,894 | | Software and technology | $20,592 | $20,225 | | Amortization of intangibles | $8,194 | $7,582 | | Other expense | $18,213 | $17,829 | | Total other operating expenses | $86,012 | $86,129 | NOTE 20: CERTAIN TRANSACTIONS This note states that transactions with directors, officers, and their associates are conducted in the ordinary course of business on comparable terms and do not involve more than normal risk - Loans, credit extensions, deposits, and vendor contracts with directors, officers, and their associates are made in the ordinary course of business, on substantially the same terms as with unrelated persons, and do not involve more than normal risk[177] NOTE 21: COMMITMENTS AND CREDIT RISK This note outlines outstanding commitments to extend credit, including credit card and loan commitments, and standby letters of credit, along with associated credit risk management practices | Commitment Type (in millions) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Credit card commitments | $717.1 | $696.7 | | Other loan commitments | $4,710.0 | $5,640.0 | | Fixed-rate mortgage loan originations | $30.4 | $21.1 | | Standby letters of credit | $52.0 | $44.4 | - The credit risk involved in issuing letters of credit is similar to extending loans, with collateral requirements based on credit assessments[178][181] NOTE 22: FAIR VALUE MEASUREMENTS This note explains fair value measurement methodologies, categorizing financial instruments into Level 1, 2, or 3 inputs, and provides tables for assets measured at fair value - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[186] | Asset Type (in thousands) | Fair Value (June 30, 2023) | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :--------------------------- | :-------- | :-------- | :-------- | | Available-for-sale securities | $3,579,758 | $2,209 | $3,577,549 | — | | Mortgage loans held for sale | $10,342 | — | — | $10,342 | | Derivative asset | $152,697 | — | $152,697 | — | | Derivative liability | $(33,543) | — | $(33,543) | — | | Asset Type (in thousands) | Fair Value (June 30, 2023) | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :--------------------------- | :-------- | :-------- | :-------- | | Individually assessed loans (collateral-dependent) | $99,721 | — | — | $99,721 | | Foreclosed assets and other real estate owned | $3,052 | — | — | $3,052 | - Individually assessed loans (collateral-dependent) and foreclosed assets are classified within Level 3 due to the use of significant unobservable inputs in determining their fair value[189][190][191] NOTE 23: DERIVATIVE INSTRUMENTS This note describes the Company's use of derivative instruments, primarily interest rate swaps, to manage interest rate risk for itself and its customers, and notes the expiration of energy hedge contracts - The Company utilizes derivative instruments, mainly interest rate swaps, to manage interest rate risk for itself and its customers, ensuring transactions have an associated underlying exposure[208] - Fair value hedges, specifically interest rate swaps, are used to mitigate the effect of changing interest rates on $1.0 billion of fixed-rate callable AFS securities, converting fixed rates to variable rates[211][213] - Customer risk management interest rate swaps involve offsetting agreements with dealer counterparties to minimize market risk, with derivative assets valued at $33.6 million (notional $486.4 million) at June 30, 2023[215][217] - All energy hedge swap contracts expired during the second quarter of 2023, and the Company generally does not intend to offer these services to energy-related customers going forward[221] Report of Independent Registered Public Accounting Firm FORVIS, LLP reviewed the interim financial statements for June 30, 2023, finding no material modifications needed for US GAAP conformity, and confirmed an unqualified opinion for 2022 - FORVIS, LLP reviewed the consolidated interim financial statements for June 30, 2023, and found no material modifications necessary for conformity with US GAAP[223] - An unqualified opinion was expressed on the Company's audited consolidated financial statements for the year ended December 31, 2022[224] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results, including quarterly and year-over-year comparisons, strategic initiatives, asset quality, and capital management OVERVIEW This overview summarizes the Company's H1 2023 performance, highlighting resilience, solid liquidity, strong capital, stable deposits, and progress on the 'Better Bank Initiative' | Metric | Q2 2023 | Q1 2023 | | :----------------------------------- | :------ | :------ | | Net income (in millions) | $58.3 | $45.6 | | Diluted earnings per share | $0.46 | $0.36 | | Adjusted earnings (non-GAAP, in millions) | $61.1 | $47.3 | | Adjusted diluted earnings per share (non-GAAP) | $0.48 | $0.37 | - Total deposits were relatively stable at $22.49 billion at June 30, 2023, compared to $22.55 billion at December 31, 2022, with uninsured deposits (excluding collateralized and intercompany) at approximately $4.82 billion (21% of total deposits)[232] - Capital levels remained strong, with a common equity to total assets ratio of 12.00%, tangible common equity to tangible assets of 7.22%, and Tier 1 leverage ratio of 9.23% at June 30, 2023[232] - The 'Better Bank Initiative' is on track to achieve or exceed $15 million in annual cost savings by the end of 2023, with an early retirement program expected to result in $5.1 million in annual cost savings[233] - Total nonperforming loans were $72.0 million at June 30, 2023, and non-performing assets as a percent of total assets were 0.28%[234] CRITICAL ACCOUNTING ESTIMATES This section identifies critical accounting estimates requiring significant management judgment, including allowance for credit losses, acquisition accounting, goodwill valuation, stock-based compensation, and income taxes - Critical accounting estimates include the determination of the adequacy of the allowance for credit losses, acquisition accounting and valuation of loans, valuation of goodwill and intangible assets, stock-based compensation plans, and income taxes[241] - The allowance for credit losses is inherently subjective, requiring material estimates based on reasonable and supportable forecasts, quantitative factors, and qualitative considerations[242][243] - Goodwill impairment testing relies on subjective assumptions about discounted cash flows, market and economic conditions, and peer bank pricing multiples[247] NET INTEREST INCOME This section analyzes net interest income (FTE), detailing sequential and year-over-year changes, highlighting the impact of rising interest rates on income and expense, and the resulting decrease in net interest margin | Metric (FTE, in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended March 31, 2023 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income – FTE | $169,336 | $184,146 | $353,482 | $342,403 | | Net interest margin – FTE | 2.76 % | 3.09 % | 2.92 % | 3.01 % | - Sequentially, net interest income (FTE) decreased by $14.8 million (8.0%) from Q1 2023 to Q2 2023, primarily due to a $32.7 million increase in interest expense, largely from rising deposit rates and a shift in deposit mix[254][256] - Year-over-year, net interest income (FTE) increased by $11.1 million (3.2%) for the six months ended June 30, 2023, driven by a $210.5 million increase in interest income, partially offset by a $199.5 million increase in interest expense[257][258][259] - The net interest margin (FTE) decreased by 33 basis points sequentially to 2.76% in Q2 2023 and by 9 basis points year-over-year to 2.92% for 6M 2023, reflecting increased market competition and consumer migration to higher-rate deposits[260] PROVISION FOR CREDIT LOSSES This section explains the provision for credit losses, analyzing changes for the three and six months ended June 30, 2023, attributed to loan growth, economic assumptions, and security value decreases - The provision for credit losses for the three months ended June 30, 2023, was $61,000, a significant decrease from $24.2 million in the preceding quarter (Q1 2023)[272] - The Q1 2023 provision included a $10.9 million expense related to loan growth and economic assumptions, and a $13.3 million expense for securities due to decreases in corporate bond values[272] - For the six months ended June 30, 2023, the provision for credit losses was $24.3 million, an increase from $13.9 million in the same period of 2022, reflecting the impacts described above, partially offset by a recapture of credit losses in 2022[273] NONINTEREST INCOME This section reviews noninterest income components, noting a sequential quarterly decrease due to a legal reserve recapture, but a year-over-year increase driven by the Spirit acquisition and fair value adjustments - Total noninterest income for Q2 2023 was $45.0 million, a decrease of $855,000 (1.9%) from Q1 2023[275] - The sequential decrease was primarily due to a $4.0 million legal reserve recapture in Q1 2023, partially offset by $3.5 million in fair value adjustments (SBIC investments and BOLI death benefits) in Q2 2023[275] - Noninterest income for the six months ended June 30, 2023, increased by $8.4 million (10.2%) year-over-year, primarily due to the Spirit acquisition's increased consumer base, the legal reserve recapture, and fair value adjustments[276] - Mortgage lending income decreased by $2.8 million year-over-year due to the rising interest rate environment and softening market conditions[276] NONINTEREST EXPENSE This section discusses noninterest expense, reporting a sequential quarterly decrease due to incentive accrual adjustments and seasonal payroll, partially offset by early retirement costs, with a slight year-over-year decrease in total expense - Noninterest expense for Q2 2023 was $139.7 million, a decrease of $3.5 million (2.5%) from Q1 2023, with adjusted noninterest expense decreasing by $4.9 million (3.5%)[282] - The decrease in salaries and employee benefits was due to a $3.0 million incentive accrual adjustment and seasonal payroll expenses, partially offset by $3.6 million in early retirement program costs[284] - Total noninterest expense for the six months ended June 30, 2023, decreased by $2.3 million (0.8%) year-over-year, while adjusted noninterest expense increased by $15.6 million (6.0%)[283] - Deposit insurance expense increased by $5.4 million year-over-year due to an increased base rate and deposits from the Spirit acquisition[285] INVESTMENTS AND SECURITIES This section updates on the securities portfolio, including HTM and AFS classifications, unrealized losses, and hedging strategies, with management intending to hold securities for maturity or cost recovery - HTM investment securities were $3.76 billion and AFS were $3.58 billion at June 30, 2023[290] - Unrealized losses of $136.0 million in accumulated other comprehensive income (loss) from securities transferred from AFS to HTM will be amortized over their remaining life[291] - Management intends to hold HTM securities to maturity and AFS securities for a period sufficient for cost recovery, believing unrealized losses are temporary and not credit-related (except for two nonperforming corporate bonds)[292][293] - Interest rate swaps are utilized as fair value hedges for $1.0 billion of fixed-rate callable municipal AFS securities, converting fixed rates to variable rates starting in Q3 2023[294] LOAN PORTFOLIO This section details the growth and diversification of the loan portfolio, emphasizing credit risk management through diversification, collateral monitoring, and regular reviews, and provides a breakdown of loan types - Total loans increased to $16.83 billion at June 30, 2023, up $691.5 million from December 31, 2022, driven by the Spirit acquisition and widespread organic growth[295] - Real estate loans (77.9% of total) increased by $528.8 million, with C&D loans up 14.2%, single-family residential up 3.4%, and CRE loans up 1.0%[299] - Commercial loans (16.9% of total) increased by $12.0 million, with agricultural loans up 36.4% due to seasonality, offsetting a decrease in non-real estate business loans[300] - The commercial loan pipeline was $689.1 million at June 30, 2023, down from $1.12 billion at December 31, 2022[302] ASSET QUALITY This section assesses asset quality, focusing on non-performing loans, past due loans, and foreclosed assets, noting an increase in non-performing assets but emphasizing strong metrics and a conservative credit culture - Total non-performing assets increased by $14.5 million from December 31, 2022, to June 30, 2023, primarily due to a $12.8 million increase in nonaccrual loans[305] | Metric (in thousands) | June 30, 2023 | December 31, 2022 | June 30, 2022 | | :----------------------------------- | :-------------- | :---------------- | :-------------- | | Nonaccrual loans | $71,279 | $58,434 | $62,670 | | Loans past due 90 days or more | $738 | $507 | $904 | | Total non-performing loans | $72,017 | $58,941 | $63,574 | | Foreclosed assets and other real estate owned | $3,909 | $2,887 | $4,084 | | Total non-performing assets | $76,939 | $62,472 | $69,972 | | Non-performing assets to total assets | 0.28 % | 0.23 % | 0.26 % | - The allowance for credit losses was 292% of non-performing loans at June 30, 2023, and non-performing loans equaled 0.43% of total loans[308] - Annualized net credit card charge-offs to average total credit card loans were 1.97% for the first six months of 2023, compared to 1.49% during the full year 2022[308] ALLOWANCE FOR CREDIT LOSSES This section explains the ACL methodology, based on lifetime expected losses, quantitative factors, and qualitative considerations, noting an increase due to loan growth and refreshed economic forecasts - The ACL is management's best estimate of lifetime expected losses, utilizing statistically-based models with probability-of-default, exposure-at-default, and loss-given-default parameters, adjusted for economic forecasts and qualitative factors[313] - The ACL increased by approximately $13.0 million from December 31, 2022, to June 30, 2023, primarily due to loan growth and refreshed economic forecasts[318][319] | Loan Category (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Credit cards | $6,330 | $5,140 | | Other consumer | $6,838 | $6,614 | | Real estate | $165,813 | $150,795 | | Commercial | $30,985 | $34,406 | | Total Allowance for Credit Losses | $209,966 | $196,955 | - The allowance for credit losses to period-end loans was 1.25% as of June 30, 2023, up from 1.22% at December 31, 2022[321] DEPOSITS This section discusses the deposit base, strategies for customer retention, and the impact of rising interest rates, noting a slight decrease in total deposits but a significant shift to higher-yielding time deposits - Total deposits were $22.49 billion at June 30, 2023, a slight decrease from $22.55 billion at December 31, 2022[325] - Noninterest-bearing and interest-bearing transaction/savings accounts decreased by $1.65 billion, while total time deposits increased by $1.59 billion, reflecting consumer migration to higher-rate deposits[325] - Brokered deposits increased to $3.24 billion at June 30, 2023, from $2.75 billion at December 31, 2022, as a strategic decision to extend duration and complement the core deposit base[325][326] - Core deposits comprised 78.5% of total deposits as of June 30, 2023[322] OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES This section overviews total debt, including a significant increase in FHLB advances to boost liquidity and details the terms of subordinated debt - Total debt was $1.74 billion at June 30, 2023, an increase from $1.23 billion at December 31, 2022[327] - FHLB advances increased to $1.35 billion at June 30, 2023, from $838.5 million at December 31, 2022, a strategic decision to elevate the Company's liquidity position[327] - Subordinated notes include $330.0 million issued in March 2018 (5.00% fixed-to-floating, maturing April 2028) and $37.4 million assumed from the Spirit acquisition (6.00% fixed-to-floating, maturing July 2030)[328][329] CAPITAL This section discusses the Company's capital position, including total capital, common equity to asset ratio, capital stock, stock repurchase programs, and cash dividends declared - Total capital was $3.36 billion at June 30, 2023, with a common equity to asset ratio of 12.00%, up from 11.91% at year-end 2022[330] - The number of authorized Class A common stock shares was increased to 350,000,000 in April 2022[331] - The 2022 stock repurchase program authorized up to $175.0 million of Class A common stock repurchases[334] - The Company repurchased 1,128,087 shares at an average price of $17.75 per share during the three and six months ended June 30, 2023[335] - Cash dividends on common stock were $0.40 per share for the first six months of 2023, an increase of $0.02 (5%) from $0.38 per share in the same period of 2022[337] Regulatory Capital Changes This section explains Basel III Capital Rules and CECL Transition Provision, confirming the Company's and Simmons Bank's compliance with all capital adequacy requirements as 'well capitalized' - The Company and Simmons Bank are subject to Basel III Capital Rules, which establish minimum capital ratios for total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets[339][345] - The Company elected to apply the 2020 CECL Transition Provision, delaying the estimated impact of CECL on regulatory capital[343] - As of June 30, 2023, the Company and Simmons Bank met all capital adequacy requirements, including the capital conservation buffer, and Simmons Bank was categorized as 'well capitalized'[340] | Ratio | June 30, 2023 | December 31, 2022 | Minimum Guidelines | | :----------------------------------- | :-------------- | :---------------- | :----------------- | | Common equity Tier 1 ratio (CET1) | 11.92 % | 11.90 % | 4.50 % | | Tier 1 leverage ratio | 9.23 % | 9.34 % | 4.00 % | | Tier 1 risk-based capital ratio | 11.92 % | 11.90 % | 6.00 % | | Total risk-based capital ratio | 14.17 % | 14.22 % | 8.00 % | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS This section refers to Note 1 for detailed information regarding recently issued accounting pronouncements and their expected impact on the Company's financial position and results of operations - Details on recently issued accounting pronouncements and their expected impact are provided in Note 1, 'Preparation of Interim Financial Statements'[347] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section provides a standard cautionary statement about forward-looking statements, identifying inherent risks and uncertainties that could cause actual results to differ materially from projections - Statements using terms like 'anticipate,' 'expect,' 'will,' or 'would' are forward-looking and involve inherent risks and uncertainties[348] - Factors that might affect financial results include changes in economic conditions, governmental policies, interest rates, real estate values, deposit and loan demand, cyber threats, acquisitions, litigation, and competition[349] - Past financial performance should not be relied upon as an indication of future performance, and the Company undertakes no obligation to update forward-looking statements[349][350] GAAP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES This section reconciles non-GAAP financial measures, including adjusted earnings, adjusted diluted EPS, tangible book value, and uninsured deposit coverage, used by management to assess performance | Metric (in thousands, except per share data) | 3 Months Ended June 30, 2023 | 3 Months Ended March 31, 2023 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | | Net income available to common stockholders | $58,314 | $45,589 | $103,903 | $92,549 | | Certain items, net of tax | $2,751 | $1,754 | $4,505 | $42,712 | | Adjusted earnings (non-GAAP) | $61,065 | $47,343 | $108,408 | $135,261 | | Diluted earnings per share | $0.46 | $0.36 | $0.82 | $0.77 | | Adjusted diluted earnings per share (non-GAAP) | $0.48 | $0.37 | $0.85 | $1.12 | | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Book value per common share | $26.59 | $25.73 | | Tangible book value per common share (non-GAAP) | $15.17 | $14.33 | | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Ratio of common equity to assets | 12.00 % | 11.91 % | | Ratio of tangible common equity to tangible assets (non-GAAP) | 7.22 % | 7.00 % | | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :-------------- | :---------------- | | Total uninsured deposits | $4,816,510 | $6,739,678 | | Additional liquidity sources | $11,096,000 | $10,604,000 | | Uninsured deposit coverage ratio | 2.3 | 1.6 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's management of market risk, primarily interest rate risk, through various liquidity sources and asset/liability management policies, including sensitivity projections Subsidiary Bank This subsection explains that the Company's subsidiary bank relies on net cash inflows from financing and operating activities to fund investing activities, and notes undivided profits available for dividends - Simmons Bank's undivided profits were approximately $652.1 million at June 30, 2023, with $285.9 million available for dividend payments to the parent company without regulatory approval[365] - The subsidiary bank's primary financing activities include deposit gathering, use of short-term borrowing facilities, and issuance of long-term debt, while primary investing activities include loan originations and purchases of investment securities[366] Liquidity Management This subsection outlines the Company's objective of maintaining adequate liquidity through diversified funding sources, prioritizing availability and activation time, listing seven primary and secondary liquidity sources - The Company's objective is to access adequate funding sources to satisfy demands from depositors and borrowers, managing liquidity to minimize reliance on any single source[368] - Primary liquidity sources include $540 million in federal funds lines of credit and approximately $5.35 billion in FHLB lines of credit[370][371] - Additional liquidity sources include large wholesale deposits, retail deposits, a laddered investment portfolio (48.8% AFS), downstream correspondent banks, and the Federal Reserve Bank Discount Window[371][372][373][374][375] Market Risk Management This subsection describes the Company's approach to managing market risk, primarily interest rate risk, through policies that monitor and limit exposure, utilizing simulation models and interest sensitivity gap analysis - Market risk arises from changes in interest rates, and the Company employs risk management policies to monitor and limit this exposure, aiming to minimize structural interest rate risk[377] - Simulation models are used to estimate the effects of changing interest rates and balance sheet strategies on net income and capital, incorporating assumptions about balance changes and pricing behavior[378][379] Interest Rate Sensitivity This subsection presents interest rate sensitivity projections, indicating potential negative impacts on net interest income from rate increases and positive impacts from decreases, reflecting a liability-sensitive balance sheet | Interest Rate Scenario | % Change from Base (over next 12 months) | | :----------------------------------- | :--------------------------------------- | | Up 200 basis points | (1.05)% | | Up 100 basis points | (0.29)% | | Down 100 basis points | 1.34% | | Down 200 basis points | 1.89% | - The model simulations project a negative variance in net interest income for interest rate increases (0.29% for 100 bps, 1.05% for 200 bps) and a positive variance for decreases (1.34% for 100 bps, 1.89% for 200 bps) over the next 12 months[380] - The Company's balance sheet is currently liability-sensitive, driven by changes in deposit mix and an increase in FHLB short-term advances[380] Item 4. Controls and Procedures This section reports on management's review and evaluation of the effectiveness of the Company's disclosure controls and procedures, concluding they were effective at reasonable assurance levels as of June 30, 2023 Changes in Internal Control over Financial Reporting This subsection states that there were no material changes in the Company's internal controls over financial reporting during the quarter ended June 30, 2023 - There were no changes in the Company's internal controls over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[383] Part II: Other Information This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section incorporates by reference information on contingent liabilities from Note 13 of the Condensed Notes to Consolidated Financial Statements, detailing legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 13, Contingent Liabilities, in Part I, Item 1 of this report[384] Item 1A. Risk Factors This section states that there have been no material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K for 2022 and Q1 2023 10-Q - There have been no material changes in the Company's risk factors from those disclosed in the Annual Report on Form 10-K for 2022 and the Quarterly Report on Form 10-Q for Q1 2023[385] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on the Company's stock repurchase program, including the authorization of the 2022 Program and shares repurchased during the quarter ended June 30, 2023 - The Company's Board of Directors authorized a new stock repurchase program (the '2022 Program') to repurchase up to $175.0 million of Class A common stock, replacing the prior program[387] | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :----------------------------- | :----------------------------- | | April 1, 2023 - April 30, 2023 | — | $— | | May 1, 2023 - May 31, 2023 | 200,000 | $16.66 | | June 1, 2023 - June 30, 2023 | 928,087 | $17.98 | | Total (Q2 2023) | 1,128,087 | $17.75 | Item 3. Defaults Upon Senior Securities No reportable information is provided under this item - No reportable information under this item[7] Item 4. Mine Safety Disclosures No reportable information is provided under this item - No reportable information under this item[7] Item 5. Other Information This section states that no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023 - None of the Company's directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[389] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various legal and financial documents such as merger agreements, articles of incorporation, stock plans, and certifications - The exhibits include the Agreement and Plan of Merger with Spirit of Texas Bancshares, Inc., Amended and Restated Articles of Incorporation, the 2023 Stock and Incentive Plan, and various certifications[393] Signatures This section contains the signatures of the Company's principal executive, financial, and accounting officers, certifying the accuracy and completeness of the report - The report was signed on August 4, 2023, by Robert A. Fehlman (Chief Executive Officer), James M. Brogdon (President and Chief Financial Officer), and David W. Garner (Executive Vice President and Chief Accounting Officer)[397]