Simmons First shrinks its loan book to lift its margin

Simmons First National let its loan book shrink last quarter, partly by choice. Loans at Simmons Bank fell by $597 million, or 3.3%, in the September 2026 quarter, which undid the growth of the first half: the book ended slightly below where it stood at the start of the year. For a bank whose income is built mainly on the interest its loans earn, that is the development a holder needs to weigh.

The decline reverses the tone of July, when management said loans were growing at about 7% annualised, placing the bank at the top of its outlook for low to mid-single-digit growth this year. This time the chief executive, Jay Brogdon, acknowledged some risk to that outlook and said: "I'm less optimistic about growth in the immediate term, by Q4 or Q1".

The company describes the decline as partly timing and partly choice. Its results put it down to heavier paydowns and early payoffs, and to letting lower-yielding loans to borrowers with little other business at the bank run off. Mr Brogdon said lenders elsewhere were pricing away the extra return for risk, and the bank chose not to follow. The finance chief, Daniel Hobbs, said more than $1 billion of the larger paydowns came from borrowers who kept very little in deposits with the bank.

Shrinking that way lifts profitability per dollar of assets. Net interest margin, the gap between what the bank earns on its loans and securities and what it pays for funding, measured against those assets, rose to 3.92% from 3.84% in the previous quarter. The results credit both higher loan yields and the runoff of low-yielding loans along with the costlier funding behind them. Mr Hobbs estimated that about half of the gain came from the shrinking itself and about half from its wider push on profitability, including older fixed-rate loans repricing higher.

That split explains why income grew more slowly than the margin. Net interest income rose 1.7%, calculated from the reported figures, and the results note that one extra day in the quarter helped. The funding mix changed as well: brokered deposits, money raised through intermediaries, roughly halved, while short-term advances from the Federal Home Loan Bank system rose. Mr Brogdon said growing net interest income gets harder in the fourth quarter if competitors keep pricing loans thinly, though Mr Hobbs said management remains confident of the high end of its guidance range for the year.

Repricing still has room to run. Mr Hobbs said about $2.1 billion of fixed-rate loans still carry an average rate below 4%. The other lever is cost. The quarter absorbed $43.1 million of charges for branch and property rightsizing, severance, professional services and prepaid expenses written off early, which cut net income to $47.1 million, well below the company's adjusted earnings figure. Excluding those items, noninterest expense was slightly lower than in the quarter before, and the full-time workforce shrank.

The savings from those charges are mostly still ahead. Mr Hobbs said expenses for the year, which management had guided to grow 2% to 3%, now had a real chance of coming in flat or slightly lower, depending on the fourth quarter. Some savings are already showing, but many are not yet in the expense run rate. Mr Brogdon said the programme should add about $40 million a year to pre-provision net revenue, income before loan-loss provisions and taxes, some of which will be reinvested; Mr Hobbs would not give a new expense run rate before its investor day in December.

Two other lines move as the book contracts. Nonperforming loans rose to $179.9 million from the end of June, which the results attribute to normal credit migration, while the reserve for credit losses barely changed; the reserve now covers 133% of nonperforming loans, less than at the end of June. Regulatory capital, meanwhile, is building: the common equity tier 1 ratio rose in the quarter, though higher long-term rates cut tangible book value per share. The bank bought back no shares in the quarter and still has authorisation left under its current programme, and Mr Brogdon said: "Our appetite to repurchase in the sort of environment that we see evolving right now is increasing."

Taken together, the quarter shifts what next year's earnings depend on: less on a growing loan book, more on older loans repricing, on costs falling and on what the bank does with the capital a smaller balance sheet frees.