Simmons First National Corporation

Good morning and welcome to the Simmons First National Corporation first quarter 2025 earnings conference call and webcast. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star then 2. Please note this event is being recorded. I would 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 2025 earnings call. Joining me today are several members of our executive management team, including Chairman and CEO George Makris, President Jay Brogdon, and CFO Daniel Hobbs. Today's call will begin with opening remarks followed by a Q&A session. Before we begin, I would like to remind you that our first quarter earnings materials, including the earnings release and 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 yesterday. and our Form 10-K for the year ended December 31st, 2024, 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 furnished as exhibits to the Form 8K we filed yesterday with the SEC and are also available on the investor relations page of our website, SimmonsBank.com. Before we begin the Q&A, I'd like to turn the call over to our president, Jay Brogdon, for some opening remarks.

Thanks, Ed. I appreciate everyone joining us on the call this morning. I know we typically go right into Q&A, but I think it's important to provide clarity regarding certain asset quality actions we undertook in the quarter, as well as to highlight the underlying strength of our top line results. My comments will be relatively brief and will touch on trends within three broad categories, balance sheet, earnings, and credit. Starting with the balance sheet, total period end loans were up 2% on a linked quarter annualized basis. This level of growth was consistent with our outlook, however, average loans were down for the quarter as most of our funded growth was back-end loaded. Our commercial loan pipeline was up 43% linked quarter and is at its highest level since the second quarter of 2022. We remain cautious about loan growth in the current macro backdrop but we're pleased with the ability of our borrowers to lock in attractive economics and move forward with planned investments throughout Q1. Shifting to the right-hand side of the balance sheet, total deposits were down slightly on a linked quarter basis due to reductions in brokered funding. Customer deposits grew $183 million during the quarter, roughly 4% linked quarter annualized, as we continued to see a positive remixing into lower-cost transaction accounts. One non-financial metric we monitor closely as a measure of the health of our deposit franchise is the growth in the number of consumer checking accounts. This metric grew by 1.5% year over year. Overall, we are very pleased with loan and deposit trends for the quarter. Moving to earnings, from a top-line perspective, total revenue was up $1.1 million linked quarter despite fewer days in the first quarter of 2025. This was our fourth consecutive quarter delivering top line adjusted revenue growth and net interest margin expansion. First quarter net interest margin was 2.95%, up 8 bps linked quarter and up 29 bps year over year, primarily driven by 19 bps decline in total funding cost linked quarter. We continue to benefit from fixed rate loan repricing and expect this to be an ongoing tailwind. Non-interest income grew 6% length quarter. We delivered strong swap fee income in our Q1 loan production, as well as diversified growth from our other fee-based businesses. Adjusted non-interest expense increased 4.3 million length quarter, including a customer deposit fraud event that involved entities affiliated with a borrower whose credit relationship was placed on non-accrual this quarter. Excluding this item, Adjusted non-interest expense would have totaled $139.3 million, down slightly from fourth quarter 2024 levels, and reflective of our continued expense management discipline. For some time now, you've heard us say that our focus is on soundness, profitability, and growth, and in that order. This first quarter reflected our continued commitment to soundness, as well as Simmons conservative nature when we have historically tackled potential challenge credits early and aggressively. To that end, and moving to credit, we migrated two specific credit relationships to non-performing in the quarter and boosted our level of specific reserves associated with each credit. These relationships have been on our classified list for some time. Given further deterioration in the quarter in each relationship, we chose to take action and expedite our path toward resolution. The first credit was originated pre-pandemic and relates to a hotel property in downtown St. Louis, and it represents our only credit in the downtown area. This is a $27 million loan that has been in our classified total since early 2021, primarily due to the pandemic and subsequent deterioration of business and consumer activity in downtown St. Louis. The property securing the credit remains open and operating and we believe is entering seasonally stronger occupancy and financial performance with spring and summer months ahead. We have recourse to the operator and continue discussions on appropriate resolution strategies. Based on current conditions and market valuations, we believe the level of specific reserves we have in place represents a very conservative mark against any possible exposure. The second credit is to a borrower that is a fast food franchise operator and it was primarily an acquired relationship from our most recent acquisition. The relationship totals $23 million and has been in our classified total since June 2024. The borrower is part of a larger franchise operation that involves multiple entities with multiple brands across a broad geography. Late in the quarter, we discovered activity in deposit accounts of entities affiliated with our borrower that gave us concern. Upon further investigation, we determined there was a fraudulent activity occurring in those accounts, and as a result, we recorded a $4.3 million fraud, the fraud charges and non-interest expense this quarter. We are exploring our rights and remedies with respect to this situation, including potential opportunities for some level of recovery in future periods. The loan relationship with our borrower, though, remains current as of the end of Q1. However, considering the fraud event and the global cash flow challenges experienced by the borrower, we moved the relationship to non-accrual and increased our reserve levels as of 3-31. We have personal recourse to the principle and we are in active discussions regarding the best possible outcome for the bank. In prior quarters, we carried roughly 30% specific reserves on each of these two relationships. Due to recent developments, we increased our specific reserves to approximately 60% for each relationship, which resulted in additional provision expense of $15.6 million in the quarter. As a result, total provision expense for the quarter was $26.8 million, and our ACL ratio increased to 1.48%. In both cases, we believe we are exercising a proactive and conservative approach to address these two situations. Importantly, and not to overlook the serious nature of credit deterioration, we believe these situations are unique to these particular borrowers and we believe our overall loan portfolio remains healthy. To illustrate this point further, I will outline a few portfolio statistics. Past due loans were 21 basis points as of 3-31, down from 22 BIPs at 12-31. NPLs increased 89 BIPs in the quarter. However, absent the two specific relationships, non-performing loans declined 5 BIPs linked quarter to 60 basis points. Net charge-offs for the quarter were 23 BIPs compared to 27 BIPs in Q4 of 2024. As I reflect on recent weeks, it seems like the word of the day is uncertainty. Amidst this challenging backdrop, I will conclude my remarks this morning with three things we believe about Simmons as we look to the rest of 2025. Number one, our original 2025 outlook that calls for 3% plus positive operating leverage and implies mid-teens year-over-year growth in PPNR remains intact. Number two, our net interest margin could cross 3% sooner than originally anticipated given positive trends in customer deposits and favorable asset repricing. I will also remind you that our 2025 outlook contemplated only one rate cut in Q4 of this year. Number three, we feel very good about our asset quality outlook for the remainder of the year. We're confident in our level of reserves based on today's circumstances. In March, our bank celebrated its 122nd year. Our focus on soundness, profitability, and growth remains unwavering, and we believe we are well positioned to navigate even the uncertain times with a high level of confidence in the future of Simmons. I will now turn the call back to the operator, and we look forward to answering your questions.