Q1 2024 Simmons First National Corp Earnings Call

Participants

Ed Bilek; Executive Vice President, Director - Investor and Media Relations; Simmons First National Corp

Jay Brogdon; President and Chief Financial Officer; Simmons First National Corp

George Makris; Executive Chairman of the Board; Simmons First National Corp

David Feaster; Analyst; Raymond James

Woody Lay; Analyst; Keefe, Bruyette, & Woods, Inc.

Thomas Wendler; Analyst; Stephens Inc.

Presentation

Operator

Good morning, and welcome to the Simmons First National Corporation first-quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Ed Bilek, Director of Investor Relations. Please go ahead.

Ed Bilek

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 Fehlman; 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 risks 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 8-K today and our Form 10-K for the year ended December 31, 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 8-K 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.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) David Feaster, Raymond James.

David Feaster

Maybe let's just start out with loan growth. That was great to see. It was above forecast driven by construction fundings, and the pipeline has 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 just any thoughts on the growth outlook would be helpful.

Jay Brogdon

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 in the fourth quarter again this week. These are sort of the seasonal unfavorable periods of time from an ag perspective. And so we should see some tailwinds from that.
Who got 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, our bucket. I'll point out some of that is funded out 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 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 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 comments up with this, David, when I think about the outlook for loan growth in the balance of the year, you know what 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 or know some fund UPS will continue to see on the construction side.
We'll see some success pulling things through the pipeline, but we expect some healthy paydowns from some of the existing projects that are out there that will hit the permanent market, et cetera. And when you think about a rate higher for longer environment, that doesn't make me more optimistic about 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.

David Feaster

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, supplementing that with higher-cost wholesale funding on the CD side. Just curious, how do you -- 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?

Jay Brogdon

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 NRB trends that the industry is facing right now. And so we think we've got some some levers we can continue to pull there to combat those trends. So we're very focused on that, and we'll continue to be to give you a glimpse, David, of some of the trends really that if I look back to throughout the quarter, think of it kind of on a monthly basis, the really the only mine worth noting of deposit.
Our NRV migration happened in January. So unfortunately, from a margin perspective, as it relates to the quarter, that event took place early in the quarter, you got appears through some seasonality both in Q4 and Q. one to really count on you get a sense of what the core trends or But when we look at February March. And even to date in April, we see a lot better friends and an Arby's than what we saw in January. So it makes me a little bit optimistic. I'm still going to be cautious again, given some of the seasonality and just say same pressures I mentioned from a rate higher for longer on the loan growth side, you know that that's going to be a threat on the deposit migration side. But you know, the last few months have been favorable toward us and hopefully we can see that kind of continue over the coming months and quarters.
David, the 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 SNAP decrease in customers. And we point this out each quarter in 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 noninterest bearing. So we're all dealing with it. As Jay said, we feel we had a little bit of optimism in February March. I don't know if that's a trend yet, but that's a hard one to control. What we can control is take care of our customers and getting new customers, and that's what we're focused on today for sure.

David Feaster

And those are some encouraging trends from maybe just putting it all together. Just curious how you think about the margin trajectory the last time we talked you 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 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.

Jay Brogdon

Yes, I'd say, David, a couple of comments on that. I tried to unpack for First of all on, you know, 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, you know, sort of being a little bit range bound from a margin perspective down a couple of basis points in the first quarters. You know, sort of within that range. In my mind, I expect that to sort of be the same case in the second quarter. If we again the majority of that headwind in the first quarter was from January and IB 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 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 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 you know that 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 some benefits when rates do start coming down.
The second thing I'd point out is if you isolate for deposit migration and IB 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 so we think that's a good setup for us throughout the balance of the year. The wildcard and the most difficult one really to predict is the level of an IP migration so that that will 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.

David Feaster

That's very helpful.

Operator

Woody Lay, KBW.

Woody Lay

Wanted to start out on deposit cost on. I know we sort of had in the first quarter had a wave of CDs maturing. Could you just talk to where the Z the price up to and have your current CD offerings changed much quarter over quarter, we'll take that in.

Jay Brogdon

Yes. So they really this is Daniel. So if you go back and look at our customer CDs over the last 30 days is that we have price that's in that three, call it three 50 to three, 60 range. And then naturally, if you look at the brokered CDs, that's going to be more of more of a wholesale wholesale level. And so if you look at on page 15, in our second quarter, we've got about $1 billion eight that's going to reprice. Now there's a piece of that that's probably going to be more than that three 50. 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 three, 75% to 4% range, um, but absent of that one customer, we have a call it a 1 billion for that's going to reprice in that one 50 range.

Woody Lay

And so three 50, right?

Jay Brogdon

Yeah, excuse me, three 50 range. And so if that new production goes online, historic production in the last 30 days, we think there's some opportunity there to the margin.

Woody Lay

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

Jay Brogdon

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. If we isolate for just repricing, not not volume or migration and looking at asset and liability repricing we think there's some there's some opportunity on both sides that are that are favorable to margin as we as we move forward.

Woody Lay

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

Jay Brogdon

So what I'd tell you appreciate that question, classifieds on a linked quarter basis or essentially flat. So when I think about leading indicators from a credit perspective, the couple of metrics are focused on our classifieds being flat linked quarter and impact to past due loans were 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 and 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 we'll be as we historically, or we will be conservative in how we deal with those classified areas. I'd maybe give you one sub bullet on the past due trends just to further shape that at 19 basis points on 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 mid single digits level of basis points of past-dues so overall, feel pretty good about the credit picture as it relates to the broader core portfolio.

Woody Lay

Okay. That's helpful.

Operator

Thomas Wendler, Stephens.

Thomas Wendler

I wanted to start off with operating expenses that came in around 2% average assets this quarter. So how we should be thinking about them moving forward?

Jay Brogdon

Hey, Thomas, this is Daniel. Yes, I think that's fair. It may be slightly slightly above that as we go for about. I'll take you back to kind of what we guided last quarter. And we told you that we'd be down 1% to 2% from our Q4 adjusted annualized number, which is about 566 million. So you can do that math and that gets you to that five, 55 to five, 60 number for the year. And then if you take the week where we came in for the quarter were at one 30, 37, one 38. And then just kind of do that math, we feel pretty good about the quarter we feel good about the forward view of that. And we have a long-term goal to get our efficiency ratio well below where it is today. And obviously, there's two components that there's revenue side if we can get some rate in 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 have in the hopper that we're looking at, although we are making investments. We 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 four one K that's generally higher. But then in the second quarter, you've got merit that's going to come in. So yes, we'll stick to that guide. But I think back to your original question, 2% is probably a fair place for us to be.

David Feaster

Yes, 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.

Thomas Wendler

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

David Feaster

Yes.
I'll just kind of reiterate kind of what our strategy is on our capital right now. First off, it's our dividend to our shareholders are in providing enough capital for organic growth. Those are number one priorities for us. The next priority right now is our balance sheet optimization. In the fourth quarter, we had a bond 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 is right, not just doomed to make it 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. So we continue to look at it. We didn't repurchase any shares in the first quarter. As you know, we're kind of in a wait and see of where we put that capital used to going forward is that balance sheet optimization? Is debt retirement? Is it stock buyback? Any of those is where we'd like to put that cash capital to use.

Jay Brogdon

All right.
Thanks.

Thomas Wendler

For answering my questions, guys.

Ed Bilek

Thank you.

Operator

Again, if you have a question, please press star then one. 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 Micrus for any closing remarks.

George Makris

Well, thank you very much for joining us this morning. And as you can tell our industry still has a lot of uncertainty and speculation associated with it, and we're looking forward to move into a more neutral interest rate environment. And 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. Appreciate all of the work of this team, and we appreciate your participation today. Thank you very much and have a great day.

Operator

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