Strong Lending And Deposit Trends Will Secure Stable Banking Prospects

Key Takeaways

• Increased commercial loan pipeline and deposit trends suggest potential revenue growth and improved net interest margins, supporting future earnings.
  
• Diversified income streams and solid credit management strategies enhance revenue opportunities and protect against credit losses, leading to improved efficiency.
  
• Internal control weaknesses, loan instability, macroeconomic uncertainty, and competitive deposit challenges could pressure Simmons First National's future margins and profitability.

Catalysts

Operates as the bank holding company for Simmons Bank that provides banking and other financial products and services to individuals and businesses.

• Simmons First National's commercial loan pipeline is up 43% from the previous quarter and is at its highest level since mid-2022, indicating potential future revenue growth from increased lending activities.
  
• Recent positive trends in customer deposits, particularly with a favorable remix into lower-cost transaction accounts, could lead to an improvement in net interest margins. This is expected to climb above 3% sooner than anticipated, bolstering future earnings.
  
• The expansion of noninterest income by 6% linked quarter, driven by strong swap fee income and diversification across fee-based businesses, suggests continued revenue growth opportunities beyond traditional interest income.
  
• The company's conservative approach to credit, including moving troubled credits to nonperforming status and increasing specific reserves, enhances its overall credit quality, potentially reducing future credit losses and protecting net margins.
  
• Due to robust cost management and expense optimization strategies, despite a one-time fraud-related expense, Simmons maintains a favorable expense outlook, which could contribute to future earnings growth through improved operating efficiency and positive operating leverage.

Simmons First National Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simmons First National's revenue will grow by 16.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.1% today to 27.3% in 3 years time.
• Analysts expect earnings to reach $314.8 million (and earnings per share of $2.55) by about April 2028, up from $146.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Simmons First National Future Earnings Per Share Growth

Risks

• The company acknowledged a customer deposit fraud event involving entities affiliated with a borrower, resulting in a $4.3 million charge. This incident affects noninterest expenses and could indicate weaknesses in internal controls, impacting future net margins.
  
• Two specific credit relationships were moved to nonperforming, involving a hotel property and a fast food franchise operator. Additional provision expenses of $15.6 million were recorded, impacting earnings and suggesting potential financial instability.
  
• The macroeconomic environment is considered uncertain, with management expressing caution regarding loan growth, especially given potential future economic downturns that could negatively affect revenue and credit quality.
  
• The company has increased specific reserves for troubled loan relationships to approximately 60% due to further deterioration, signaling potential concerns about asset quality and future earnings as unexpected losses might arise.
  
• The competitive deposit environment remains challenging, requiring ongoing efforts to remix deposits and reduce brokered funding, which could pressure net interest margins and overall profitability if core deposit growth does not meet expectations.

Valuation

• The analysts have a consensus price target of $21.6 for Simmons First National based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $314.8 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $18.76, the analyst price target of $21.6 is 13.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.