Simmons First National Corporation

Good morning, and welcome to the Simmons First National Corporation First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to Ed Billick, Director of Investor Relations. Please go ahead.

Good morning and welcome to Simmons First National Corporation's first quarter 2024 earnings call. Joining me today are several members of our executive management team, including our executive chairman, George Makris, CEO, Bob Fellman, President, Jay Brogdon, and CFO, Daniel Hobbs. Today's call will be in a Q&A format. Before we begin, I would like to remind you that our first quarter earnings materials, including the earnings release and the presentation deck, are available on our website at SimmonsBank.com under the Investor Relations tab. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook, including, among others, our outlook regarding future economic conditions, interest rates, lending and deposit activity, credit quality, liquidity, and net interest margin. These statements involve risk and uncertainties, and you should therefore not place undue reliance on any forward-looking statement, as actual results could differ materially from those expressed 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 earnings release and investor presentation furnished with our Form 8K today, and our Form 10-K for the year ended December 31st, 2023, including the risk factors contained in that Form 10-K. These forward-looking statements speak only as of the date they are made, and Simmons assumes no obligation to update or revise any forward-looking statements or other information. Finally, in this presentation, 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 those 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 with the SEC this morning and are also available on the investor relations page of our website, SimmonsBank.com. Operator, we are ready to begin the Q&A session.

Thank you. We will now begin the question and answer session. To ask a question, you may press star and one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. Our first question comes from David Feaster from Raymond James. Please go ahead.

Hey, good morning, everybody.

Morning, David. Morning, David. Good morning.

Maybe let's just start out with loan growth. That was great to see. It was above forecast, driven by construction funding, and the pipeline's grown. I'm just curious, how do you think about loan growth? What's the pulse of your clients? I'm just trying to get a sense of whether the increase in the pipeline is driven by increasing demand, whether it's increased appetite for credit on your end, or just any thoughts on the growth outlook would be helpful.

Yeah, David, this is Jay. I'll jump in with some initial remarks on that. We were pleased with the loan growth in the quarter. And in particular, I'll call out, you know, in the fourth quarter and again this quarter, these are sort of seasonal, unfavorable periods of time from an ag perspective. And so we should see some tailwinds from that throughout the next couple of quarters. So to see some loan growth in the first quarter, you hit it on. I mean, a lot of it came from the construction side. bucket, I'll point out some of that is fund ups of unfunded commitments, right? And so keep that in mind. Our pipeline, I'd say, is not a change in our outlook from a credit perspective. We are seeking loan growth. We are being incredibly disciplined, both from a credit and from a pricing point of view. So I'm pleased to see some expansion in the pipeline given that discipline. but it's really not indicative of a change in our outlook or optimism or aggressiveness around loan growth. I just put it more toward the category of disciplined execution at this point. When I think about, I'll kind of wrap my comment up with this, David. When I think about the outlook for loan growth and the balance of the year, it's a balanced outlook. We continue to sort of think in that that low single-digit kind of range is, we think, the right range. There are some fund-ups we'll continue to see on the construction side. We'll see some success pulling things through the pipeline. But we expect some healthy pay-downs from some of the existing projects that are out there that'll hit the permanent market, et cetera. And when you think about a rate higher for a longer environment, That doesn't make me more optimistic about loan growth. Again, we're seeing borrower demand out there, but we put all that together and continue to think that we'll need to stay focused to deliver on the loan growth that we expect in the balance of the year.

Okay, great. That's helpful. And then maybe touching on the other side, the funding side, just curious how you think about deposit growth. You've been pretty successful, especially in the money market and savings account side. higher cost wholesale funding on the CDE side. Just curious, what's your deposit growth strategy today? And then just any thoughts on NIB trends that you're seeing and how you think about funding loan growth going forward?

Yeah, I think we have seen some success in the interest bearing side of the equation. And so that's a good thing. We'll continue to stay focused there. We have considerable efforts around combating the NIB trends that the industry is facing right now. And so we think we've got some levers we can continue to pull there to combat those trends. So we're very focused on that and will continue to be. To give you a glimpse, David, of some of the trends, really, if I look back throughout the quarter, think of it kind of on a monthly basis, Really the only month worth noting of deposit or NIB migration happened in January. So unfortunately from a NII or margin perspective as it relates to the quarter, that event took place early in the quarter. You've got to pierce through some seasonality both in Q4 and Q1 to really kind of get a sense of what the core trends are. When we look at February, March, and even to date in April, we see a lot better trends in NIBs than what we saw in January. So that makes me a little bit optimistic. I'm still going to be cautious, again, given some of the seasonality and just same pressures I mentioned from a rates higher for longer on the loan growth side. That's going to be a threat on the deposit migration side. But the last few months have been favorable toward us. And, you know, hopefully we can see that kind of continue over the coming months and quarters.

You know, David, one thing I'd point out too, we track number of customers and we're seeing a continual increase in our number of customers. So it's not decreasing customers. And we point this out each quarter. You know, our customers, just like across the country, everybody has less money in their accounts, number one, from inflation. And number two, they're looking at moving their money to higher rates out of non-interest bearing. So we're all dealing with it. As Jay said, we had a little bit of optimism in February, March. Don't know if that's a trend yet, but that's a hard one to control. What we can control is taking care of our customers and getting new customers, and that's what we're focused on today.

For sure, and those are some encouraging trends. Maybe just putting it all together, just curious, how do you think about the margin trajectory? I mean, last time we talked, we were kind of expecting a modest improvement over the course of the year. I'm curious how you think about the margin trajectory as we look forward. And then how do you think about managing the balance sheet? I mean, you're structurally well positioned for a higher for longer environment, just given the core deposit base and the earning asset repricing side. So just curious how you think about managing the asset sensitivity at this point, given we're pretty rate neutral.

Yeah, I'd say, David, a couple of comments on that to try to unpack. First of all, I think the guidance or the outlook that we sort of gave back in January is generally still intact. We talked about the first couple of quarters this year sort of being a little bit range-bound from a margin perspective, down a couple of basis points in the first quarters, sort of within that range in my mind. I expect that to sort of be the same case in the second quarter. You know, if we, again, the majority of that headwind in the first quarter was from January NIV declines. We haven't seen as much of that since then. So we're doing our best to kind of hold the line in the first part of the year here. And the expectation for, you know, margin expansion throughout the balance of the year, the second half of the year, and sort of increasing expansion into next year is still our expectation here. A couple of things that I would sort of footnote to all of that. One is we have some liability sensitivity in the balance sheet. And so that is going to be a macro factor that we don't have full control over. what the Fed's going to do nor when the Fed's going to do it. But we do expect to have some benefits when rates do start coming down. The second thing I'd point out is if you isolate for deposit migration, NIB migration in particular, and just look at the repricing of assets and liabilities throughout the year this year, that would naturally lead toward, as we look at all of that, toward margin expansion. And so we think that's a good setup for us throughout the balance of the year. The wild card and the most difficult one really to predict is the level of NIB migration. So that'll be the one I think that really helps further shape that inflection and how steep or not that inflection is over the balance of the year.

That's very helpful. Thank you.

Thank you. The next question comes from Woody Lay from KBW. Please go ahead.

Hey, good morning, guys. Morning. Morning. I wanted to start out on deposit costs. I know we sort of in the first quarter had a wave of CDs maturing. Could you just talk to where those CDs priced up to and have your current CD offerings changed much quarter over quarter?

You want to take that, Daniel? Yeah. So, hey, Willie, this is Daniel. So if you go back and look at our customer CDs over the last 30 days-ish that we have priced, that's in that 350 to 360 range. And then naturally, if you look at the brokered CDs, that's going to be more of a wholesale level. And so if you look at on page 15 in our second quarter, we've got about $1.8 billion that's going to reprice. Now, there's a piece of that that's probably going to be more than that $350 million. There's one particular customer in there that's a public customer that's going to be higher than that. So I would tell you that group is probably going to reprice in that 375 to 4% range. But absent of that one customer, we have, you know, call it a billion four. That's going to reprice in that 150 range. 350 range. Yes, excuse me, 350 range. And so if that new production goes on like historic production in the last 30 days, we think there's some opportunity there to the margin.

Yeah, so do you think it's fair to assume that, you know, the pace of the deposit cost increases begins to moderate in the second quarter?

I would say so, yeah. I'll jump in on that. I think that's fair. I think we're actually seeing that, and it kind of goes back to my comment Just a couple of minutes ago to David's question, you know, if we isolate for just repricing, not volume or migration, and look at asset and liability repricing, we think there's some opportunity on both sides that are favorable to margin as we move forward.

Got it. And then last for me, I just wanted to shift over to credit. I appreciate all the details you break out on the MPA segment, but I was just curious on any trends you're seeing in the criticized or classified segments in the quarter.

So what I'd tell you, appreciate that question, classifieds on a linked quarter basis are essentially flat. So when I think about leading indicators from a credit perspective, The couple of metrics I focus on are classifieds being flat, linked quarter, and then past due loans are actually down linked quarter. And we were pleased with our level of past due loans at 24 basis points in the fourth quarter. Those came down to 19 basis points in the first quarter. So overall, credit feels very stable to us. We're certainly focused on a couple of pockets within the classified portfolio and will be, as we historically or we will be conservative in how we deal with those classified areas. You know, I'd maybe give you one sub-bullet on the past due trends just to further shape that. At 19 basis points where we ended the quarter of that within the commercial portfolio, which is obviously the much larger dollar volume of our total portfolio, we're at a kind of mid-single digits level of basis points of past dues. So overall, I feel pretty good about the credit picture as it relates to the broader core portfolio.

All right, that's helpful. Thanks for taking my question.

The next question comes from Thomas Wendler from Stevens. Please go ahead.

Hey, good morning, everyone. Good morning. Good morning. I wanted to start off with operating expenses that came in around 2% of average assets this quarter. Is that how we should be thinking about them moving forward?

Yeah. Hey, Thomas, this is Daniel. Yeah, I think that's fair. You know, it may be, you know, slightly above that as we go forward, but I'll take you back to kind of what we guided last quarter. We told you that we'd be down 1% to 2% from our Q4 earnings. adjusted annualized number, which is about $566 million. So you can do that math, and that'll get you to that $555 to $560 number for the year. And then if you take where we came in for the quarter, we're at $137, $138. You can just kind of do that math. So we feel pretty good about the quarter. We feel good about the forward view of that. You know, and, you know, we have a long-term goal to get our efficiency ratio well below where it is today. And obviously there's two components to that. There's the revenue side, if we can get some rate and time to help us there. And then on the expense side, we feel really good about our ability to manage expenses. I think we've proven that over time with the Better Bank Initiative. And we've got a number of things that we're still having to hopper that we're looking at, although we are making investments. I don't want to be lost on that. we're making investments in people, process, and tools across the bank. So I would tell you our guide doesn't change. There may be a little bit of seasonality. The first quarter had some payroll taxes and 401K. That's generally higher. But then in the second quarter, you've got merit that's going to come in. So we'll stick to that guide. But I think back to your original question, 2%-ish is probably a fair place for us to be.

Yeah, and the only thing I want to further emphasize there, Daniel hit it, but we're making investments all across the bank. Our focus right now is pretty relentless in self-funding those investments where we can, and we've had good success with that last year and into this year, and we'll continue to be very, very focused on that as well.

Great. I appreciate the color there. And then... Just kind of shifting gears here, can you give us an idea of your appetite for repurchasing shares at current levels?

Yeah, I'll just kind of reiterate kind of what our strategy is on our capital right now. You know, first off, it's our dividend to our shareholders and providing enough capital for organic growth. Those are number one priorities for us. The next priority right now is our balance sheet optimization. You know, in the fourth quarter, we had a bombed sale. we would have liked to have had another bond sale in Q1. The rates kind of moved against us as the 10-year moved up. We're going to time those when it's right to do it, not just do them to make them happen. We could what we call rip the Band-Aid off today, but we think there's a lot of analysis that we go through that shows it's better to be prudent and do it balanced over a period of time. We continue to look at it. We didn't repurchase any shares in the first quarter. We're we're kind of in a wait and see of where we put that capital use going forward. Is it, you know, balance sheet optimization? Is it debt retirement? Is it stock buyback? Any of those is where we'd like to put that cash and capital to use.

All right. Thanks for answering my questions, guys.

Thank you. Again, if you have a question, please press start, then 1. There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to George Makris for any closing remarks.

Well, thank you very much for joining us this morning. As you can tell, our industry still has a lot of uncertainty and speculation associated with it, and we're looking forward to moving to a more neutral interest rate environment in the meantime. As we wait for this normalization, our focus is still on our solid principles of asset quality, capital growth, and flexibility. I think you've seen that in our performance and I think you can see that going forward. I appreciate all of the work of this team and we appreciate your participation today. Thank you very much and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.