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spk02: Ladies and gentlemen, thank you for standing by and welcome to the Simmons First National Corporation first quarter 2022 earnings call and webcast. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would like to turn the call over to your host, Ed Billick. You may begin.
spk01: Good morning, and thank you for joining our first quarter earnings call. My name is Ed Billick, Director of Investor Relations at Simmons First National Corporation. Joining me today are several members of our executive management team, led by our Chairman and CEO, George Makris. The purpose of our call is to discuss the information and data provided by Simmons in his quarterly earnings release issued this morning, and to discuss our outlook for the remainder of 2022. We have invited institutional investors and analysts from the equity firms that provide research on Simmons to participate in in the Q&A. All other guests on the conference call are in listen-only mode. A recording of today's call will be posted on our website, SimmonsBank.com, under the Investor Relations page for at least 60 days. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook. I'd remind you that you should not place undue reliance on any forward-looking statement, as actual results might differ materially from those projected in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors is contained in our SEC filings, including, without limitation, the description of certain risk factors contained in our Form 10-K for the year ended December 31, 2021, and the forward-looking information section of our earnings release issued this morning. Simmons assumes no obligation to update or revise any forward-looking statements or other information. Finally, during this call, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Additional disclosures regarding non-GAAP metrics, including the reconciliations of these non-GAAP metrics to GAAP, are contained in our earnings release and investor presentation, which are included as exhibits to the Form 8K we filed this morning with the SEC and are also available on our investor relations page of our website, SimmonsBank.com. Operator, we are ready to begin the Q&A session.
spk02: Ladies and gentlemen, if you have a question or a comment at this time, please star than the one key on your touchstone telephones. If your question has been answered or you wish to move yourself from the key, please press the pound key. Our first question comes from David Feasterman James.
spk05: Hey, good morning, everybody.
spk00: Morning, David.
spk05: It's great to see the improved production and the increase in the closed pipeline as we head to the second quarter. I'm just curious, how do you think about the composition of that pipeline and And as we think about growth, I guess, how do you think about your growth outlook throughout 22, and what do you expect to be the key drivers of that growth, both in terms of geographically and by segment?
spk06: Hey, Dave, it's Matt Redden. So, yeah, great question. Yeah, we were excited to see that real, you know, that positive core loan growth in the first quarter as we think about 2022 and where we're seeing those opportunities continue. Well diversified, as we show on page 12, our Metro Bank, it grew 3%. It had some larger payoffs in the first quarter. We think that 3%, but that group will be a real driver in the back half on where the opportunities come from. DFW has seen real strong opportunity in our pipeline, Nashville as well, but really all of our Metro markets, even in St. Louis, back to good demand today. But one of our real stars is the community bank being up annualized 8% loan growth even before our crop loans start to fund in the second and third quarter. That's going to be another nice intercourse. And then the corporate banking group, we had a really nice quarter from our commercial finance team that we brought on last summer. They had $50 million in true net funding. So really every area right now feels pretty good as far as the type of opportunities that Commercial real estate, right now there's definitely some nice low leverage opportunities in this environment that we're very focused on the right opportunities with a rising interest rate environment. But I think also you're going to continue to see that commercial finance have some strong opportunities as well kind of throughout the rest of the year.
spk05: So I guess is that kind of that high single-digit pace as you continue to see strong production and hopefully deceleration and payoffs and paydowns? Is that kind of where you think you can remain?
spk06: Yes, David, I would say that earlier guidance that we kind of said over the last couple of quarters, we're still trending that direction. Our pipelines continue to grow. Approved rate of close is continuing to grow. So I think we're right on track for that guidance.
spk05: Terrific. And then just on the other side of the coin, how are new loan yields trending on your new production? Obviously, the rate hike came later in the quarter. We just wanted to get a sense of how pricing and new loan yields are trending and where you're seeing the most opportunities.
spk06: So that's a really good question. I would say the first quarter was a challenging one that when rates and the economic news started coming out, we actually saw decreasing spreads on loans. you know, very high quality credit opportunities. We're always going to be, you know, on the high quality. We're going to not go for a high yielding loan, you know, high risk. But now I would say now where we're at, you know, April, spreads are starting to widen. And so we're just remaining disciplined to where we can, and we're starting to pick up those wins at higher spreads. I'm not saying it's not still very, very competitive. It is, especially in specific product types. I mean, if you're looking at an industrial warehouse opportunity or multifamily, you're going to see lower spreads, but they are starting to widen. But you need to be, you need to have your fishing in a lot of different ponds to make sure you can get the spreads you're looking for in this environment. Okay, that makes sense.
spk05: And then just maybe staying on competition and the competitive landscape, obviously pricing competition remains tough, but are you seeing more aggressiveness on terms or structure or standards? And then just maybe on credit more broadly, are you seeing anything that's starting to cause you any concern or just given the continued intense competitiveness and some macroeconomic uncertainty, are you starting to tighten the credit box at all?
spk06: I would say we're staying right to our fundamentals on our credit policy, credit culture. We've never deviated from that. Where I'd see maybe competitors starting to bend is on the interest only. That definitely is something we see out there that we're not playing in. You're seeing five years I.O. on development opportunities. We're not going to be in that box. But I would also say on where we're – I wouldn't say we're tightening – But we're very focused on leverage and making sure every opportunity that we bring on can withstand rising interest rate and rising costs, especially on the construction side. We're just remaining very disciplined there. And we're finding those opportunities. But I would say where we were at, you know, on average, you know, 70% loan-to-value, 65%. Now we're pushing it down to 60% just to be prudent with rising rates and rising costs, David.
spk05: That makes sense.
spk06: All right. Thank you.
spk05: David.
spk02: Our next question comes from Gary Templer with DA Davidson.
spk10: Thanks. Good morning. Just to follow up on the loan question, it looks like, you know, in the pipeline, the construction piece is a pretty sizable chunk of the pipeline. Can you talk about where you were seeing the most success in growth there? Obviously, a lot of your footprint is in very attractive growth areas, but just wanted to drill in a little bit on where you're seeing that construction growth.
spk06: Well, if you look at our book today and our footprint, DFW is definitely, I would say, leading the way on the opportunities from the construction side development, but also I'd say national in a real close second. But not to say we're not getting – we have some strong relationships that – do industrial development nationwide. So I wouldn't just pinpoint that those are the only places those are coming from, but if you ask me to say where there's a strong demand, those are the markets.
spk10: All right, thank you. And then on the expense side, you know, with Spirit closing in early April, I wonder if you could provide any kind of guideposts for where you think second quarter operating expense levels are.
spk07: Yeah, so I'll jump in on that, Gary. This is Jay. First of all, I'd just say Q1, we were close to our 2% guide. We were, I think, at 202 non-interest expense to average assets. I think Q2 is obviously going to be a noisy number. We'll have a period in Q2 where we have non-retains on staff for a good portion of the quarter, so you're not going to see us sort of fully synergize the integration and the cost savings until the back half of the year. But that same thing was true on Landmark and Triumph that we closed back in October of last year. You saw our expenses kind of come up in the fourth quarter, come back down in the first quarter toward our guide. And I'll even give you one number. Just a month of March, our non-interest expense to average assets was 195. So trending right where we would want it to. So I think you're going to see that same kind of pattern develop here, you know, with Spirit over the coming quarters.
spk10: Okay. And then thank you for that. Last question for me on the topic of M&A. Obviously, you all have been fairly active the last year. You know, we've heard some commentary that the decline in Bank stock prices has caused some ongoing M&A conversations to maybe be temporarily delayed or on pause. Can you talk about what you're seeing and hearing in terms of the M&A market?
spk00: Well, this is George. So, you know, we would expect that discussions on M&A across the country will continue. They're just not going to continue here at Simmons for a while. A little different approach now with our forward-looking growth. You know, 10 years ago, we had an objective to access growth markets, and we've done that over this period of time with 14 acquisitions. And I think we've been straight up with the market about our intentions to adjust those acquisitions to fit the Simmons banking model, and I think we've done a great job, and we have actually done that while providing record earnings to our shareholders. We're at the point now where we're ready to focus on organic growth. When you take a look at our footprint and the opportunities we have, I'm not sure there are any other markets that are around us that we'd like to be in that give us a greater opportunity. Not that we wouldn't consider a merger partner if the financial trade was good for our shareholders and we saw some strategic benefit, but we just don't see that right now. We believe we are well positioned to provide aggressive revenue growth over the next several years. We've developed a capital plan over five years. where we finance our own growth. And we believe that we're well positioned to do that. So M&A was very important to us to gain access to the markets that we're in today. We've done a great job of adjusting those merger partners balance sheets to provide opportunity that we have not seen in this bank since 2013, and we expect to take care of that over the next three to five years. We've got expansion plans across our entire footprint with regard to hiring professionals in business banking, private wealth, mortgage, business development. We've got some build-out that we've got to do because many of the banks that we acquired didn't have those products and services in those markets. We are also very focused on community banking in metro markets. The banks that we bought in metro markets were commercial banks, really focused on larger commercial deals. Our bread and butter is community banking. not to discount the importance of commercial banking. But what we do really well at Simmons is provide quality products and services in a diversified fashion for every consumer in every market. And that is really gonna be our focus over the next couple of years. So M&A, has gotten us where we are today. We're like the dog that caught the car. Now what are we going to do with it? We believe we're going to be very, very successful. And when we talk about our loan pipeline, what we published at the end of the quarter has grown by another million dollars with the inclusion of Spirit of Texas. Our unfunded commitments are now $4.1 billion. as of yesterday. So we've got great opportunity to grow our revenue organically with the team that we've built over the last 10 years. I couldn't really be more optimistic about our ability to be the go-to bank in the markets where we do business.
spk10: Great, George. I appreciate your thoughts.
spk02: Thanks for taking my questions.
spk08: Thanks, Gary.
spk02: Our next question. Our next question comes from Brad Gailey with KBW. Yeah, it's Brady. Good morning, guys.
spk09: Good morning, Brady. So it's good to see you all be active on the share buyback. I know bank stocks kind of continue to be volatile to the downside here, but maybe just talk about your appetite for continued buybacks just given where the stock's trading now.
spk07: Yeah, hey, Brady, it's Jay. I'll respond to that initially here. So our activity in the quarter was really early in the quarter back in January as we rounded out our previous authorization, which we did fully complete in January. Where we were in the pending transaction throughout the quarter with Spirit, we were really unable to be active on the newly authorized plan that we authorized, I think, at earnings back in January. So, you know, that's sort of fully loaded and in place at this point with 175 million available. And I think we'll continue to be very optimistic around or very opportunistic around the share buybacks. I never want an accounting, you know, rule or policy to drive sort of our economic view of things. We have incredibly strong capital. But given where the AFS portfolio is, we do have to be mindful of our TCE. But we're going to continue to be, you know, our goal will be to optimize the balance sheet, you know, and deliver sort of real economic value over time and not let sort of the accounting tail wag the dog here. And I think our share buyback activity will be a function of that as well as we continue to optimize around our balance sheet and around our capital.
spk09: Okay. All right. And then it sounds like there's a shift. you know, away from growing so much via Bank M&A and more just on a kind of organic de novo point of view. You know, George, it sounds like there's a decent amount of hires you want to make. Maybe just talk about, you know, the sizing and how big the hiring effort will be at Simmons going forward and the potential expense impact that could have.
spk00: Well, Brady, so... We have pro formas that we have established for all production new hires. And obviously on day one, there's no revenue associated with those folks, but just let's take a new lender. It doesn't take them very long to pay for themselves. So we'll have some upfront expense. But just to give you an example, with investment advisors across our footprint, we have 24 positions we're looking to fill over the next two years. And that's just to round out our service in markets where we don't have that service available today. And if they produce at the pro forma rate that we expect and that our other new hires have proven to be reasonable, those earn back periods before they become self-sufficient are less than 12 months. And I would tell you that that's, you know, that's money well spent and investment we're going to continue to make. So, you know, we've got gaps in our mortgage origination across our footprint. We're looking to fill those gaps. I've already mentioned our investment advisors in our private wealth group. We manage $6 billion of assets today in about 10% of our territory. So you can just imagine the potential that we have with our expertise across private wealth. So we've got great opportunities to hire professionals who want to be a part of a growing team across our footprint. And we see, with the disruption in the marketplace today, great opportunities to take advantage of that sooner rather than later. We don't have a scheduled development plan, if they all became available tomorrow, we'd hire them.
spk07: Yeah, and I'd just jump in with one other comment on that as well. When I think about where we're positioned and all of George's comments earlier around organic growth and just the look of our balance sheet today, overlaying that with Matt's comments around where we're at from a loan growth point of view, we can make a lot of investments on the production side And I don't think our expenses would grow as fast as our revenue will in those scenarios. We're just so poised for the inflection in the growth, the inflection in margin, that I think our revenue is going to outpace that expense growth in any of those events, Brady.
spk09: Okay. And then just finally for me, as you pivot to more of an organic growth story, Is there a kind of longer-term ROA level and a return on tangible common equity level that you'd like to see Simmons achieve?
spk08: Yeah, Brady, this is Bob. I would say, I mean, we think first on efficiency, you know, the 50 to 55 range is good for a company like us that's really focused on community banking. Our long-term goal on ROA would be the 125 to 150 range is where we think long-term we should be. Return on tangible common equity would be north of 15%. So those are our internal targets that we want to strive to on day in and day out throughout the year.
spk09: Okay, great. Thanks for the color, guys.
spk02: Our next question comes from Matt Olney with Stevens.
spk04: Thanks. Good morning, guys. You've talked about this high single-digit organic long-growth target for 2022, but with your commentary today, it sounds like a renewed focus on organic growth or at least talking down in your term. Is it fair to say that this high single-digit target for this year is also a longer-term goal that you hope to achieve for multiple years, not just this year?
spk03: Yes, sir.
spk00: Matt, I would tell you this. Yes, you know, conservatively, high single digits is where we think we should be. And that's, you know, the only reason it's not in double digits is because of our share in a lot of the community banking markets where we are today and the lack of opportunity. However, when I look at our results in the first quarter in our community banking groups, loans were up 8%. I'm sitting here scratching my head going, hey, have we sort of set the bar too low? Because I think in our metro markets, we'll blow high single digits out. It's just how much are our community market growth gonna dilute that overall growth percentage? Doesn't look like they're diluting it at all right now. So assuming we can keep up that good work in our community markets, you know, we might achieve greater than that. But I think we would all be happy with high single digits for the next three to five years.
spk04: Okay. Thanks for that, George. And just remind me, you talk about the commercial team, the metro team, you talk about the community bank team. Where does the corporate banking team sit? Is it within that commercial or is it separate and distinct from those two teams?
spk06: So, Matt, yeah, this is Matt. They're a distinct set-aside team that really, you know, handle our specialty vertical. So they're really gets them aligned on their focus. And when you see the metro banking team, that's your in-market commercial banking, blocking, tackling, you know, revenue companies, $10 million and above is where that commercial banking team is operating. But the corporate banking team is set aside from all that.
spk04: And, Matt, following up on that, is it fair to say, given – the size of that corporate banking team and some of the renewed efforts there and some of the recent hiring, is that a group that we should expect growth beyond that high single digits over the next few years?
spk06: I think we'll be – yes, I think that's possible. But, you know, with some of those specialties we know very, very well, but like our ABL unit that came from Triumph, you know, we're going to monitor that, make sure we really know that space well, set some limits, But over time, I think this is absolutely an engine that can be double-digit growth into the future for the bank.
spk04: Okay, perfect. I guess switching gears, you gave us some good details on loan growth and expenses. What about on the fee side? Help us appreciate kind of what the outlook here is on the fees. It sounds like some of your recent hires and your planned hires are also there to help support fees. So any call you can give us on that?
spk07: Yeah. Hey, Matt, it's Jay. I'll jump in with a couple of comments. You know, first of all, when you just think about Q1, I think it was pretty well in line with our seasonal expectations, you know, service charges on deposits, et cetera, trend down typically in the first quarter. I think we'll see those kind of return back to normal throughout the year from a seasonal point of view. There's the obvious headwinds from a mortgage point of view, you know, and wealth the same way with some of the volatility and sell-offs we've seen. throughout the market in Q1. But we're holding the line in those businesses to a decent degree here. Our opportunity in all of those areas, as George was mentioning, is to round out our footprint. There are a number of markets that we're in where we have great penetration of those fee services in those markets. And then there are markets, particularly from some of our more recent acquisitions, where we have almost zero of that fee income, but all the capacity for it. And so I think we'll have both a deepening and a broadening to our growth focus around fee income. Those are longer timelines than just hiring a new loan producer and having loan growth. But I think we've got a lot of initiatives and momentum in place to be able to continue to grow on the fee side.
spk04: Perfect. Thanks, guys.
spk02: Thanks, Matt. Our next question comes from Steven Scouten with Piper Sandler.
spk03: Hey, good morning, everyone. Thanks for the time. First, thanks for all the detail in the slide deck. It's always extremely useful and detailed, so I appreciate that. I guess maybe following up first on one of David's earlier questions around loan yields. Do you guys have any numbers on the kind of the spread on the on-off yields that you saw this quarter? I know you said that did pressure the NIM somewhat.
spk07: So, rolling off. Delta between kind of what's paying off is what's coming on. I mean, that's That's really, Matt will chime in maybe with some comments, but Stephen, I mean, that's really what I think is a big part of the inflection here, made Q1 difficult for, I think, not just us, but a lot of folks in the industry here. It's just that delta between what's rolling off for us, a lot of that with the four-handle yields coming on throughout the quarter with the three-handle. We didn't really have much of the benefit, if any, in Q1 of the rate hike. So we've got a lot of that coming back into the numbers now. plus Matt's comments on just credit spreads widening to some degree. So Matt, you can kind of take that from there.
spk06: Yeah, Stephen, I'd say at the high point, that delta, I want to say, speaking in generalities here, don't hold me to the number itself, but there was a 50 basis point type delta on what's coming off our books versus what we're bringing on. And I would say we track that day over day. I track it day over day, and it's definitely compressing. And for sure, we get the rate increase that we've gotten already, but with spreads coming up, that's moving down to more like a 25 basis point, you know, type of differential. But we see it continuing to even out, but it's going to be a little bit still. I mean, you got to remember some of the loans coming off our books with high floors or higher fixed rates, we were in the mid fours. So you're bringing on, you know, we're still at 350 prime, you know, we haven't got an uptick yet to the 4% range. So hopefully that gives you a little color. It's getting narrow, but it's still there.
spk07: And just one other comment, Steven, just to jump back in, and I'd point you and everybody to page 17 in our slide deck where we talk about some of our interest rate sensitivity. But there's a chart, kind of all of the charts on the bottom half of that page, but I'll point you to the one on the bottom right in particular. You know, we ended the quarter with 30% of our variable rate loans at floors. Another, you know, 50 basis points up, that goes down to 17%. And that's based on sort of, I'll call it Simmons Legacy or the Simmons 331 balance sheet. All of the numbers on this page improve to some degree with SPIRITS. Our asset sensitivity, if you will, the variable rate nature of our loan portfolio, all of that improves pro forma, but this is just another spin on where we're at as it relates to yields and what's happening in the dynamics of the loan portfolio.
spk03: Yeah, yeah, for sure. Helpful, Jay. And then maybe if we could touch on slide 16 for a second around the securities book. I mean, obviously, the effective duration, as you guys noted, increased. I'm just kind of wondering how you're thinking about that book today, especially with additional rate hikes coming, managing the AOCI hits, and kind of what you're thinking about incremental investments there within the securities book, as well as if you could talk a little bit further about this match swap.
spk07: Yeah, so I think as it relates to the portfolio, again, I'll go back to, you know, maybe philosophically I struggle with, you know, accounting for the AFS portfolio different from held to maturity or really even the rest of the balance sheet from a fair value point of view. I prefer, I like the optionality, the flexibility of that AFS portfolio. We have historically been very opportunistic around investments We'll continue to invest cash flow. We're not looking to grow the bond portfolio from here, particularly given the loan growth that we see in the pipeline. But we will continue to be able to invest cash flows here. We've got a lot of cash flow coming off of the bond portfolio. you know, quarter in and quarter out, and so we'll continue to invest throughout the rate cycle like we always have, but there's definitely not a focus to sort of grow the bond portfolio from here. I think our bigger opportunity on that page 16, we've been saying this for several quarters, it's really that bottom left chart, you know, with our goal is to continue to see that loan to deposit ratio expand. That's really the fuel to our, you know, kind of normalizing margin, optimizing the balance sheet. Again, Spirit pulls some of that timeline forward. Proforma, we're going to be a lot closer to 65% and 62% before any continued loan growth. So that's where the focus really is from a liquidity deployment point of view.
spk08: Yeah, and Jay, at the top left box, you see it's still in our cash and the variable rate securities. We still have about $3.1 billion in cash and cash equivalents.
spk02: Thank you. Our next question comes from Gary Tenner with DA Davidson.
spk10: Hey, guys, I just had a quick follow-up on your slide 17 on rate sensitivity. Could you just remind us what your embedded deposit beta assumptions are as it relates to your simulation?
spk07: It's a very conservative, in my mind, about 45%. It's blended. It's sort of by type, by product, but if you blend it all in, the underlying assumption there is about a 45% deposit beta.
spk08: Gary, I'd say our modeling, just like most are conservative, number one. Number two is it doesn't take into account management interaction in the process. It's really just modeling driven. We would expect management decisions to help as best we can going forward.
spk10: Okay. And is that a total deposit beta or just interest-bearing deposit beta, just to be clear?
spk07: Interest-bearing.
spk10: Interest-bearing. Thank you.
spk02: And I'm not showing any further questions at this time. I'd like to turn the call back to George Macris for any closing remarks.
spk00: Well, thank you very much. And I'd like to take this opportunity to welcome the associates, customers, and shareholders from Spirit of Texas. We are extremely proud to have them as part of the team and And I can tell you they have hit the ground running, probably the best conversion and transition we've had to date. I want to reemphasize that our focus in the near term is to build a better bank and build strong, diversified organic revenue growth, focus on community banking and metro markets, the transformation of our delivery channels and our related branch network. I've mentioned aggressive hiring of professionals, business banking, private wealth, mortgage, business development, and agri-lending, which we do extremely well. We're going to continue the integration of our products and services into our digital banking suite, which continues to get recognized as one of the best products in the market today. We're going to utilize our branding assets across our footprint to help build our brand And we're getting ready to kick off our customer experience initiative with our new partner, the Disney Institute. I would encourage each of you to go to our website, SimmonsBank.com, for much more detailed information about the company's performance. And I just want to close by saying that I'm extremely proud to be a part of this great Simmons team. I've said this before, and I want to say it again. I've never been more optimistic. about the future of this company than I am today. So thank you for joining us today. Hope you have a great weekend.
spk02: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.
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