KBRA Affirms Ratings for Simmons First National Corporation

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Pine Bluff, Arkansas-based Simmons First National Corporation (NASDAQ: SFNC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Simmons Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

SFNC’s ratings are supported by an experienced management team with a well demonstrated track record in executing the company’s long-term growth strategy. The company’s growth strategy, while prioritizing organic growth in more recent periods, historically included frequent, though disciplined M&A (14 deals completed since 2012 for some $14 billion of loans at the time of acquisition) and has seen SFNC evolve meaningfully from a small, Arkansas-focused community bank to a $27 billion asset institution with significant scale, a diverse product set (including durable fee income businesses), and strong geographical diversity. The company’s ratings are also supported by what we consider to be a defensively positioned balance sheet. In this regard, SFNC’s lower than peer loans-to-deposits and loans-to-earning assets ratios intuitively suggest that, all things equal, credit loss content on its balance sheet may be more contained than most and contributes to conservative RWA density of 75%. While NPA materialization certainly occurred in 2023 (related ratio of 0.52% at YE23 vs. 0.38% at YE22), NPA levels at SFNC remain lower than at any time in its history prior to 2022. Furthermore, when examining more comprehensive asset quality metrics, we find that the company’s classified loan ratio in 4Q23 was 1.9% - a level hardly inconsistent with peers’ and only modestly higher than pre-pandemic. Elsewhere, delinquent CRE loans at SFNC have declined as a percentage of loans (0.19% segment specific delinquency ratio in 4Q23), as well as by absolute dollar amounts, since YE22.

With the strengths of the company’s balance sheet noted above, we recognize that SFNC’s balance sheet composition, to some degree, comes at the cost of earnings power (FY23 adjusted ROA of 0.76%). The company’s lower than peer NIM (2.68% in 4Q23) is a function of an earning asset mix that is comprised of a comparatively larger and low-yielding securities portfolio that is a relic of pandemic-era bond purchases. Though management suggested they could be opportunistic in partially restructuring the securities book to improve future earnings in similar transactions as completed in 4Q23, we think the company’s balance sheet optimization efforts will take time to work through. That said, considering a solid capital profile (12%+ CET1 ratio), adequate reserve levels (LLR of 1.34%), and a funding base that endured the March 2023 industry liquidity crisis with essentially no disruption, we believe the company has the appropriate flexibility to navigate through the more challenging earnings environment.

Rating Sensitivities

Considering the Stable outlook, a rating upgrade is not considered likely in the near-to-medium term. Over a longer time horizon, asset quality outperformance throughout a credit cycle, if in conjunction with an improved earnings profile and capital management similar to levels reflected currently, positive ratings momentum could develop. Material degradation of asset quality metrics or more aggressive capital management could negatively impact ratings. A degradation of the company’s earnings to a point where internal, organic capital generation became stressed or limited would also be viewed unfavorably.

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Methodologies