Simmons First National (SFNC) - 2021 Q4 - Annual Report

Part I Business Simmons First National Corporation is a financial holding company operating Simmons Bank across six states, providing diverse financial services with a growth strategy focused on acquisitions Company Overview Simmons First National Corporation operates Simmons Bank through approximately 199 financial centers across six states, providing comprehensive commercial and consumer banking services Consolidated Financial Highlights (as of December 31, 2021) | Metric | Amount (Billions) | | :--- | :--- | | Total Consolidated Assets | $24.7 | | Total Consolidated Loans | $12.0 | | Total Consolidated Deposits | $19.4 | | Equity Capital | $3.2 | - The company's business philosophy centers on building strong customer relationships through excellent service and integrity, maintaining a community-based mindset with local decision-making supported by centralized functions[17] - Simmons Bank operates through a network of approximately 199 financial centers, offering a wide range of products including commercial loans, SBA loans, consumer banking services, trust services, and insurance[19][20][21] Growth Strategy The company's growth strategy primarily relies on mergers and acquisitions, with 20 whole bank acquisitions since 1990, focusing on expanding its footprint in growth markets - Since 1990, the company has completed 20 whole bank acquisitions, five bank branch acquisitions, and four FDIC failed bank acquisitions, demonstrating a long history of growth through M&A[24] - In October 2021, the company completed two acquisitions in Tennessee: Landmark Community Bank ($968.5 million assets) and Triumph Bancshares ($848.2 million assets), enhancing its scale in the Memphis and Nashville markets[37] - The company announced an agreement to merge with Spirit of Texas Bancshares, Inc. in November 2021, a move intended to further expand its Texas footprint[38] - The M&A strategy targets banks in growth markets within its existing footprint (AR, KS, MO, OK, TN, TX) and specialty financial service companies, leveraging management's integration experience[39][40][41] Human Capital As of December 31, 2021, the company employed approximately 2,877 associates, focusing on attracting and retaining talent through competitive compensation, professional development, and a values-based culture - The company employed approximately 2,877 full-time equivalent associates as of year-end 2021, with no union representation and good associate relations[57] - The company's culture is defined by five "Culture Cornerstones": Better Together, Integrity, Passion, High Performance, and Pursue Growth[55] - Inclusion programs like "We Are Simmons" and the introduction of Employee Resource Groups for veterans, women, African Americans, and LGBTQIA+ associates highlight a commitment to diversity[56] Supervision and Regulation The company operates under a complex regulatory framework, supervised by the FRB, FDIC, and state authorities, subject to Basel III capital rules and heightened standards due to its asset size - The company is a financial holding company regulated by the FRB and must act as a source of financial and managerial strength for its subsidiary bank[58][61] - The company and Simmons Bank are subject to Basel III Capital Rules, requiring minimum ratios for Common Equity Tier 1 (CET1), Tier 1, and Total Capital, plus a 2.5% capital conservation buffer[77][83] - Exceeding $10 billion in assets subjects the company to heightened regulations, including the Durbin Amendment's cap on debit card interchange fees and supervision by the CFPB[115][116][119] - The EGRRCPA of 2018 provided some regulatory relief, exempting the company (with assets under $100 billion) from certain enhanced prudential standards like resolution planning and enhanced liquidity requirements[94][118] Risk Factors The company faces various risks including the COVID-19 pandemic's economic impact, credit risk, interest rate fluctuations, operational challenges, and significant legal and regulatory exposures Risks Related to the COVID-19 Pandemic The COVID-19 pandemic continues to pose significant risks, potentially leading to deteriorating credit quality, increased charge-offs, and operational challenges, with government programs possibly masking underlying weaknesses - The pandemic has adversely impacted the business and may continue to do so, with risks of financial losses from deteriorating credit quality, particularly in the hospitality, retail, and restaurant sectors[123][125] - Loan deferral and government assistance programs like the PPP may obscure true credit deterioration, potentially leading to future declines in credit quality and an increased allowance for credit losses[125] Risks Related to the Company's Lending Activities The company's lending activities face inherent credit risks, including potential mismanagement, vulnerability of the consumer credit card portfolio to downturns, and the adequacy of the allowance for credit losses - The allowance for credit losses is highly subjective and requires significant estimates; if the methodology is flawed or market conditions change, the allowance may become inadequate, negatively impacting earnings[130] - The consumer credit card portfolio's net charge-offs were 1.40% in 2021; economic downturns could increase unemployment and prevent customers from repaying balances, leading to higher charge-offs[129] - Participation in the Paycheck Protection Program (PPP) carries risk, as SBA denial of guarantees due to origination or servicing deficiencies could expose the company to losses[134] Risks Related to Market Interest Rates The company's profitability is highly sensitive to interest rate changes, with potential adverse effects on net interest income from repricing mismatches and significant risks from the LIBOR discontinuation after June 2023 - Net income is significantly dependent on the net interest spread, and changes in monetary policy by the Federal Reserve could impact this spread and adversely affect profitability[135] - The discontinuation of LIBOR presents a major risk, as the company has numerous LIBOR-based contracts extending beyond 2021, and the transition to alternative rates could lead to operational, legal, and financial challenges[136][137][138] Risks Related to Our Business, Industry, and Markets The company's performance is vulnerable to local economic downturns in its six operating states, faces intense competition, carries integration risks from its acquisition strategy, and has significant goodwill subject to impairment - The company's concentration in six states makes it vulnerable to adverse local economic conditions, which could affect loan repayment and collateral values[145] - The company faces strong competition from other banks and non-bank financial institutions, including FinTech companies that may not be subject to the same extensive regulations[148][149] - As of December 31, 2021, the company had $1.1 billion of goodwill; a significant decline in expected future cash flows or adverse business changes could necessitate an impairment charge, materially affecting results[153] Properties The company operates its principal executive offices in Pine Bluff, Arkansas, and conducts financial operations from approximately 199 owned or leased financial centers across six states - The company operates from approximately 199 financial centers located in Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas[192] - Principal offices are in Pine Bluff, Arkansas, with additional corporate offices in Little Rock, Arkansas[191] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 22 of the Notes to Consolidated Financial Statements, detailing contingent liabilities - Information regarding legal proceedings is incorporated by reference from Note 22, Contingent Liabilities[193] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "SFNC," with an active stock repurchase program that saw $78 million in repurchases in Q4 2021 and a new $175 million program announced in January 2022 - The company's stock repurchase program was amended in July 2021 to increase the authorized amount to $276.5 million, which was nearly exhausted by January 2022[198] - A new stock repurchase program was announced on January 27, 2022, authorizing up to $175 million in repurchases of Class A Common Stock[199] Common Stock Purchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 2021 | 457,687 | $30.47 | | November 2021 | 325,000 | $29.23 | | December 2021 | 1,842,661 | $29.58 | | Total Q4 2021 | 2,625,348 | $29.69 | Management's Discussion and Analysis of Financial Condition and Results of Operations For 2021, net income available to common shareholders was $271.1 million, influenced by acquisitions, branch sales, and the pandemic, with decreased net interest income and non-interest income, but improved credit quality and strong capital ratios 2021 Overview In 2021, the company reported $271.1 million in net income, completed two acquisitions, sold branches, announced another acquisition, increased digital banking, and saw total loans decrease due to PPP forgiveness 2021 vs. 2020 Performance | Metric | 2021 (Millions) | 2020 (Millions) | | :--- | :--- | :--- | | Net Income (Common) | $271.1 | $254.9 | | Diluted EPS | $2.46 | $2.31 | | Core Earnings (Non-GAAP) | $278.3 | $264.3 | | Core Diluted EPS (Non-GAAP) | $2.53 | $2.40 | - Completed the acquisitions of Landmark Community Bank and Triumph Bancshares in October 2021, and announced an agreement to acquire Spirit of Texas Bancshares in November 2021[220][221] PPP Loan Activity in 2021 (Thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2021) | $904,673 | | PPP Loan Originations | $318,919 | | Acquired PPP Loans | $15,573 | | PPP Loan Forgiveness/Repayments | ($1,122,506) | | Ending Balance (Dec 31, 2021) | $116,659 | Net Interest Income For 2021, net interest income (FTE) decreased by 6.1% to $610.8 million, driven by lower loan volumes and yields, resulting in a 49 basis point compression of the net interest margin to 2.89% Net Interest Income and Margin (FTE) | Metric | 2021 (Millions) | 2020 (Millions) | | :--- | :--- | :--- | | Net Interest Income (FTE) | $610.8 | $650.7 | | Net Interest Margin (FTE) | 2.89% | 3.38% | | Core Net Interest Margin (Non-GAAP) | 2.79% | 3.16% | - The decrease in net interest income was primarily caused by a $132.9 million drop in interest income on loans, partially offset by a $55.5 million increase in interest income from investment securities[238] - Yield accretion from acquired loans contributed $22.1 million to interest income in 2021, down from $41.5 million in 2020[239] Provision for Credit Losses In 2021, the company recorded a $32.7 million recapture of its provision for credit losses, a reversal from 2020's expense, driven by improved credit quality and a more favorable macroeconomic forecast under the CECL model - The company recaptured $32.7 million of its provision for credit losses in 2021, compared to a $75.0 million provision expense in 2020[253] - The recapture was driven by improved credit quality and macroeconomic factors, partially offset by a $22.7 million provision for non-PCD loans from the Landmark and Triumph acquisitions[253] - The CECL model's economic forecast weighting shifted slightly, with the baseline scenario weighted at 65% in December 2021 compared to 68% in December 2020, reflecting management's sentiment on economic recovery[252] Non-Interest Income Total non-interest income for 2021 decreased by 20.0% to $191.8 million, primarily due to lower gains on securities sales and mortgage lending income, despite a 5.3% increase in recurring fee income Non-Interest Income Breakdown (Millions) | Category | 2021 (Millions) | 2020 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Total Non-Interest Income | $191.8 | $239.8 | ($48.0) | | Gain on sale of securities, net | $15.5 | $54.8 | ($39.3) | | Mortgage lending income | $21.8 | $34.5 | ($12.7) | | Recurring Fee Income | $110.3 | $104.8 | $5.5 | - The significant drop in gains on securities sales reflects the high level of sales in 2020 undertaken to build liquidity during the early stages of the COVID-19 pandemic[258] Non-Interest Expense Non-interest expense for 2021 was $483.6 million, a slight decrease of 0.2%, including $15.9 million in merger-related costs, with core non-interest expense increasing by 1.1% Non-Interest Expense Breakdown (Millions) | Category | 2021 (Millions) | 2020 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Total Non-Interest Expense | $483.6 | $484.7 | ($1.1) | | Salaries and employee benefits | $246.3 | $239.6 | $6.7 | | Merger related costs | $15.9 | $4.5 | $11.4 | | Branch right sizing expense | ($0.5) | $14.1 | ($14.6) | - Marketing costs in 2021 included a $2.5 million donation to the Simmons First Foundation[267] Loan Portfolio As of December 31, 2021, total loans decreased by 6.9% to $12.01 billion, primarily due to PPP loan forgiveness, though the commercial loan pipeline showed strong recovery to $2.31 billion Loan Portfolio Composition (as of Dec 31, 2021) | Loan Category | Amount (Billions) | % of Total | | :--- | :--- | :--- | | Real Estate | $9.17 | 76.3% | | Commercial | $2.16 | 18.0% | | Consumer | $0.36 | 3.0% | | Other | $0.33 | 2.7% | | Total Loans | $12.01 | 100.0% | - The total loan balance decreased by $888.4 million (6.9%) in 2021, largely due to $1.12 billion in PPP loan forgiveness and repayments[275][281] - The loan pipeline grew significantly to $2.31 billion at the end of 2021, compared to $673.7 million at the end of 2020, signaling a return to more normalized loan demand[282] Asset Quality Asset quality improved significantly in 2021, with total non-performing assets decreasing to $76.3 million, and the allowance for credit losses providing 300% coverage of non-performing loans Asset Quality Metrics | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Non-performing Assets | $76.3M | $143.9M | | Non-performing Loans to Total Loans | 0.57% | 0.96% | | Non-performing Assets to Total Assets | 0.31% | 0.64% | | Allowance for Credit Losses to NPLs | 300% | 193% | - The decrease in non-performing assets was driven by a $54.7 million reduction in nonaccrual loans and a $12.4 million decrease in foreclosed assets[289] - As of December 31, 2021, outstanding COVID-19 related loan modifications had decreased to 51 loans totaling $8.6 million, down from 3,729 loans totaling $2.99 billion at year-end 2020[300] Allowance for Credit Losses The allowance for credit losses (ACL) on loans was $205.3 million at December 31, 2021, a decrease of $32.7 million from the prior year, reflecting economic recovery and improved credit quality Allowance for Credit Losses on Loans | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | ACL on Loans | $205.3M | $238.1M | | ACL as % of Total Loans | 1.71% | 1.85% | - The decrease in the ACL during 2021 was primarily due to economic recovery from COVID-19 effects and a decline in the loan portfolio, despite continued uncertainty in industries like restaurants, retail, and hotels[317] - Net charge-offs for 2021 were $15.0 million, or 0.13% of average loans, a significant improvement from $64.1 million, or 0.45% of average loans, in 2020[313] Investments and Securities The securities portfolio increased substantially to $8.6 billion at year-end 2021 from $3.8 billion in 2020, driven by PPP loan repayments and excess liquidity deployment, with the company also using interest rate swaps to hedge fair value risk Securities Portfolio Breakdown (Billions) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Held-to-Maturity (HTM) | $1.53 | $0.33 | | Available-for-Sale (AFS) | $7.10 | $3.47 | | Total Securities | $8.63 | $3.80 | - The securities portfolio grew significantly as the company purchased $5.27 billion of investment securities during 2021 to deploy excess cash[329] - The company began using interest rate swaps as fair value hedges on $1.0 billion of fixed-rate callable municipal securities in the AFS portfolio[330] Deposits Deposits, the primary funding source, grew to $19.37 billion at December 31, 2021, an increase of $2.38 billion, with acquisitions contributing $1.52 billion and core deposits comprising 93.5% of the total Deposit Composition (Billions) | Deposit Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Non-interest bearing | $5.33 | $4.48 | | Interest bearing transaction/savings | $11.59 | $9.67 | | Time deposits | $2.45 | $2.83 | | Total Deposits | $19.37 | $16.99 | - Total deposits increased by $2.38 billion, with $1.52 billion attributable to the Landmark and Triumph acquisitions[346] - Core deposits represented 93.5% of total deposits, highlighting a stable funding base[342] Capital As of December 31, 2021, total capital was $3.25 billion, with strong regulatory capital ratios significantly exceeding minimums, and the company actively managed capital through share repurchases and increased common stock dividends Regulatory Capital Ratios (Company) | Ratio | Dec 31, 2021 | Dec 31, 2020 | Minimum Guideline | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 13.82% | 13.41% | 4.50% | | Tier 1 Risk-Based Capital | 13.82% | 13.41% | 6.00% | | Total Risk-Based Capital | 16.75% | 16.78% | 8.00% | | Tier 1 Leverage | 9.08% | 9.08% | 4.00% | - The company repurchased 4,562,469 shares of common stock at an average price of $29.03 per share during 2021[366] - Cash dividends on common stock were increased by 6% to $0.72 per share for the twelve months ended December 31, 2021[369] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through simulation models, projecting a 1.86% increase in net interest income over 12 months with a 100 basis point rate increase, while liquidity is ensured through diverse funding sources - The company's primary sources of liquidity include federal funds lines of credit ($415.0 million), FHLB lines of credit (approx. $2.9 billion available), wholesale and retail deposits, and a laddered investment portfolio[416][417][418][419] Net Interest Income Sensitivity (as of Dec 31, 2021) | Interest Rate Scenario | % Change from Base (12-month) | | :--- | :--- | | Up 200 basis points | +5.20% | | Up 100 basis points | +1.86% | | Down 25 basis points | -1.53% | Consolidated Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2021, including balance sheets, income statements, cash flows, and comprehensive notes, along with management's and auditor's reports on internal control Consolidated Financial Statements The consolidated financial statements present the financial position and results of operations for Simmons First National Corporation, reporting total assets of $24.7 billion and net income available to common stockholders of $271.1 million for 2021 Key Financial Statement Data (Year Ended Dec 31, 2021) | Metric | Amount (Thousands) | | :--- | :--- | | Balance Sheet: | | | Total Assets | $24,724,759 | | Net Loans | $11,807,171 | | Total Deposits | $19,366,548 | | Total Stockholders' Equity | $3,248,841 | | Income Statement: | | | Net Interest Income | $591,532 | | Provision for Credit Losses | ($32,704) | | Non-Interest Income | $191,815 | | Non-Interest Expense | $483,589 | | Net Income (Common) | $271,109 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies and financial activities, covering acquisitions, investment securities, loans, allowance for credit losses, goodwill, and capital adequacy, highlighting key changes and balances - The company adopted the CECL methodology for credit losses on January 1, 2020, resulting in a $151.4 million increase to the allowance for credit losses on loans and a $128.1 million after-tax reduction to retained earnings[736] - In 2021, the company acquired Landmark Community Bank and Triumph Bancshares, adding a combined $70.7 million in goodwill[533][538] - The allowance for credit losses on loans decreased from $238.1 million at year-end 2020 to $205.3 million at year-end 2021, reflecting improved economic conditions and credit quality[635] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during Q4 2021 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2021[785] - No changes in internal control over financial reporting occurred during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, these controls[786] Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10 through 14, covering directors, executive compensation, corporate governance, security ownership, and accounting fees, is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Details regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accounting Fees and Services are incorporated by reference from the forthcoming 2022 Proxy Statement[791][792][793][794][795] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed as part of the Form 10-K report, including key corporate documents, merger agreements, and executive compensation plans - This section contains a comprehensive list of all exhibits filed with the Form 10-K, including key corporate documents, merger agreements, and executive compensation plans[798][801]