Simmons First National Corporation

Moat: 1.5/5

Understandability: 2/5

Balance Sheet Health: 4/5

Simmons First National Corporation is a regional financial holding company headquartered in Pine Bluff, Arkansas, primarily engaged in providing banking, financial, and insurance services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Revenue Distribution: Simmons First National Corporation (SFNC), a diversified financial institution, operates primarily through its subsidiary, Simmons Bank. The company’s revenue streams can be broken down into the following key areas:

Net Interest Income (NII): This forms the largest portion of revenue and is the difference between the interest income earned on loans, securities, and other interest-earning assets and the interest expense paid on deposits, borrowings, and other funding sources. Changes in interest rates significantly impact NII.
Non-Interest Income: This includes a variety of fee-based services, such as service charges on deposit accounts, wealth management and trust income, brokerage, interchange fees, card revenue, and insurance commissions.
Non-Interest Expense: This comprises all operational costs and employee expenses as well as the amortizations of intangible assets acquired through acquisitions.

The company’s primary geographic areas of operation are Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas. Given its primary operations are regional in nature, it has exposure to geographical economic fluctuations.

Industry Trends and Competitive Landscape: The banking industry in the US is characterized by several trends:

Rising interest rates: The Federal Reserve’s tightening monetary policy has resulted in rising interest rates, creating more competition for deposits and potentially increasing credit risk for banks.
Increased regulations: Regulatory changes such as those stemming from the Basel Accords, are altering banks’ capital requirements and operations.
Technological advancements: Fintech companies and digital banking are changing how customers interact with financial services, forcing banks to invest in innovation and technology.
Consolidation: There is a continuing trend of consolidation in the banking industry through mergers and acquisitions. While this can help some firms achieve scale and efficiency, it also makes competition much more intense.

In this competitive landscape, regional banks such as Simmons First National compete with national banks, credit unions, online lenders and even fintech companies.

What Sets SFNC Apart? SFNC has primarily grown through M&A of other community banks and strategic acquisitions of other non-bank businesses. The management describes it as a “disciplined acquirer” and has a “relationship-driven” operating style. The company seeks out targets that have strong local franchises and offers complimentary products and services.

The company’s focus is on core banking operations as well as wealth management, trust, and insurance products. Diversification gives them some edge over more traditional banks that do not have these revenue streams.

Recent News and Concerns

Net interest income declines in recent quarters: The bank is experiencing pressure on its net interest income (NII) due to increased borrowing costs, while also slowing loan growth.
Credit Risk: They are experiencing increases in their allowance for credit losses, particularly in the real estate book. Given the uncertainty around the economy and the future path of interest rates, there is a risk of worsening credit quality.
Interest Rate Risk: Higher interest rates, while generally good for bank margins, may lead to increased costs of funding or deposit outflow from the bank.

Financial Deep Dive

Income Statement: The Company reported a significant decrease in net interest income in the last 2 quarters of 2022 and first 2 quarters of 2023, due to increase in borrowing costs and slower loan growth. Non-interest income has stayed relatively stable and has been a source of consistency, with wealth management and service fees being the primary contributors.
Profitability: There has been a downward trend in net profits due to increased credit costs, operating costs and decreasing NII.
Balance Sheet: At its core, the company is a bank that earns a return on its invested assets using leverage. So, its balance sheet has significant amounts of loans, deposits, and securities as assets and other liabilities on the balance sheet. Equity at the bank is at about $2.6 billion as of June 2023, against total assets at around $27 billion. They have a Tier 1 ratio of 12.5%.

Moat Assessment: 1.5 / 5 SFNC has a very weak moat. While it is a fairly large player in its region, the banking industry is highly competitive. The company does not display any significant competitive advantages that would protect it from competition. The company is susceptible to any change in interest rates or general economic slowdown that might hurt demand for loans. Some of the few things they have going for them are scale and a diversified revenue stream (banking, wealth management, insurance). Its strategy is primarily focused on acquisition. Without a significant competitive advantage, competition will almost certainly erode their margins in the future. Their long-term returns on capital has been very low as well, which is another indication of their lack of a moat.

Intangible Assets: SFNC’s brand recognition is primarily limited to its regional footprint and the brand does not command any premium to its services, creating a weak moat.
Switching Costs: There are relatively low switching costs for customers in the banking industry, as it is fairly easy to switch banks. Many banks offer the same banking products and services. Furthermore, there are no switching costs for insurance or other services it provides.
Network Effect: The company does not exhibit the benefits of a network effect in its operations.
Cost Advantages: Being a regional bank, SFNC does not have a strong cost advantage over other national banks or regional competitors. Smaller fintech companies can often beat it on cost.

Risks to the Moat and Business Resilience:

Economic Sensitivity: As a regional bank, SFNC is highly susceptible to changes in the local economy, such as fluctuations in unemployment and real estate values, which could impact loan growth and increase defaults.
Interest Rate Sensitivity: Changes in interest rates will have a significant effect on the bank’s NII and profitability. Rising rates can force banks to raise their costs of funding. Falling rates can lower their NII.
Competition: SFNC operates in a competitive environment with larger national banks, local banks, and fintech players. This will pressure margins and require constant investment in improving technology and services.
Credit Quality Deterioration: A deteriorating economy or a change in interest rates could lead to higher defaults on loans. A large portion of their loan book is tied to real estate, which adds more risk. They must also constantly write down the values of their acquired assets, which reduces value.
Integration Challenges: The acquisition strategy has many challenges, which is integrating the operations and culture of disparate firms and realizing cost synergies, and failing to do this successfully will create inefficiencies and erode returns.
Regional Focus: It’s geographical concentration makes it more sensitive to any specific local issues.
Regulatory Oversight: The banking industry is highly regulated which can be a huge cost to the company and may stifle expansion and innovation.

SFNC’s resilience depends primarily on its ability to manage credit risk and maintain a strong capital base. If the bank experiences significant loan losses or fails to control costs it may have a harder time recovering from economic downturns.

Understandability Rating: 2 / 5 SFNC’s business model is fairly standard for a regional bank: collecting deposits and making loans, while also offering other services such as insurance and wealth management. It is not a difficult concept to understand. However, the underlying mechanics of a bank are complex, including various accounting practices, the use of leverage, and risk management. For this reason, we give it a 2/5 on understandability.

Balance Sheet Health: 4 / 5 SFNC shows a good level of financial health. It has a decent capital ratio and adequate liquidity. However, rising interest rates, could lead to problems in the short-term. Still, the business seems positioned to weather any short-term economic difficulty. Their capital levels are also sufficient to make acquisitions should they choose to do so.

Tier 1 ratio of 12.5% - shows it is well capitalized.
Relatively low debt to equity levels