Good morning, and welcome to the Simmons First National Corporation third quarter 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ed Bilek, Executive Vice President and Director of Investor Relations. Please go ahead.
Good morning, and welcome to Simmons First National Corporation's third quarter 2022 earnings call. Joining me today are several members of our executive management team, led by our Chairman and CEO, George Makris. Before we begin the Q&A, I would like to remind you that our third quarter earnings materials, including the 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, and net interest margin. These statements involve risks and uncertainties, and you should therefore not place undue reliance on any forward-looking statements as actual results might 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, our most recent Form 10-Qs, and our Form 10-K for the year ended December 31, 2021, including the risk factors contained in that Form 10-K. These forward-looking statements speak only as of October 25, 2022, 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 these 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 this morning with the SEC and are also available on the Investor Relations page of our website, simmonsbank.com. Operator, we are ready to begin the Q&A session.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Brady Gailey of KBW. Please go ahead.
Thanks. Good morning, guys.
Good morning.
Good morning.
Loan growth was pretty impressive in the third quarter in the low double-digit range. I know you guys have talked about, you know, that moderating from here. How do you think about loan growth as we head into, you know, 2023 with some potential economic uncertainty?
Hey, Brady, this is Matt. You know, kinda I'll point you back to our second quarter comments and really the, you know, what we said, we started to see the fallout from the rising interest rates kind of the end of the second quarter when we delivered just some really impressive loan growth. Throughout the third quarter, two Fed hikes, 150 basis points, and it's really illustrating our pipeline on page 12, you know, where that pipeline's now at $1.6 billion. You know, that's really a result of staying disciplined to our relationship strategy, underwriting hurdles, stress tests. You know, it's still a strong pipeline, but it's definitely reflective of current economic conditions.
We've had a lot of success in the construction space, so I think we'll continue to see some loan growth in the fourth quarter and on. Just depending on what the Fed does, I think I'd just look back at what happened between the second and third quarter and what the increase in interest rates did to our pipeline. If you have another 150 basis points, I think that's just something to look at as we move forward. Loan growth is gonna continue through some construction, but moderate as interest rates continue to move up.
On the expense side, if you look at kind of core expenses when you back out the one-timers, it was pretty flat. It was actually down a little bit last quarter, at $137 million. How are you thinking about expense creep into 2023?
Well, I think, Brady, this is Jay. I'll jump in on that with some initial remarks. I think we'll continue to, you know, fight the good fight that everyone's fighting on the inflation front. Again, we've had some tailwinds as it relates to acquisitions over the last handful of quarters, and we continue to identify opportunities and execute on sort of extracting the efficiencies from those transactions.
Look, the inflationary environment is real. I think we'll have to, you know, stay focused there. I'm pleased to see, you know, our efficiency ratio moving a good direction. I think we'll continue to see that throughout 2023. You know, I think we'll see the same battle that everyone else is seeing, especially on the wage inflation front.
So far, I'm pretty pleased with how we've been able to combat that. I think we've still got some opportunities to combat that. I don't think it's runaway expenses, but we'll stay disciplined there and stay focused on it.
All right. Finally for me, you know, the share buyback did not slow at all in the third quarter. It was still a pretty robust level, repurchasing about 1.5% of the company. You know, how do you think, you know, your TCE now has a six handle on it. How do you think about the buyback?
Going forward.
Well, Brady Gailey, this is Bob. I would tell you know, we continue to have the buyback as part of our capital management plan. As always, we'll evaluate each quarter as we go in. I think it'll be part of our plan in the future, but we'll evaluate where we are going forward. We look at TCE. We look also at all our regulatory capitals, which are well above well capitalized, and in good shape there. It's just overall management. What we will say, you know, is, you know, our plan, we won't buy back any more than our current earnings in a quarter, paying back both cash dividends and stock buyback. Again, not saying that's what we'd do this quarter, but it is part of our management strategy.
Okay. All right, great. Thank you.
Thanks, Brady.
The next question is from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Hey, David.
Good morning, David.
Maybe just starting on deposits. I'm just curious how you think about deposit flows near term, what you're seeing there, and your strategy as you think about managing deposits. Obviously, we're much better positioned this cycle with a lower loan-to-deposit ratio. Curious how you and how you and your chief deposit officer are thinking about defending deposit costs, continuing to lock in some funding, and maybe just from a geographic perspective, if you could touch on some of the competitive dynamics and where you're seeing the most competition and funding pressure.
Well, David, I'll jump in on that. Jay again here. So first of all, I'd say you hit it spot on. The competitive dynamic, you know, is evolving, has evolved meaningfully throughout the year this year. I think the competition is, you know, will continue to do that. I'll tell you in our, you know, in our business, we certainly do our best, and I think we're pretty good at managing our deposits by geography. That competitive landscape is different really throughout our footprint, and so we continue to keep a pretty tailored approach to how we you know how we run that area of the business.
Overall, what I'd tell you is, you know, for our experience in Q3 and really throughout kind of this tightening cycle thus far, where we see deposits leaving the bank, it's really customers who have excess cash. That may be, you know, commercial customers with operating accounts and, you know, historically haven't had a place, at least in recent history, to put that money to work or high-net-worth customers.
You know, those types of customers have options today. We're doing our best and having some success in, you know, keeping some of those, you know, some of that revenue in-house by, you know, deploying our wealth group in some of those situations and moving those deposits off balance sheet and into the wealth group.
That's really where we see it's not really customer attrition, it's just sort of excess funds that are leaving. We'll be as aggressive as, you know, as we can be within reason. We're here to kind of fight and protect margin. Good news is asset prices are repricing and have repriced significantly this year. We've got some room from a margin perspective to, you know, to keep some of those funds on the balance sheet. That's really the experience I feel like we've had thus far.
Okay. That's great color. Thank you. Maybe just touching on asset quality, you've done a great job managing credit. We've seen continued improvement in credit metrics. Maybe just as you look into your portfolio and maybe the economy more broadly, is there anything that you're seeing that's causing you any concern or that you're watching more closely? I guess, how do you think that plays into reserves and provision? I mean, do you think the reserve ratio has probably troughed here, just given the likelihood for worsening inputs in CECL models?
David, this is George. I'll touch on that and the other guys can jump in if they want to. If you recall, we said last quarter that we had five specific categories where we had qualitative adjustment factors that we had carried since COVID began. Those were hotels, retail, restaurants, student housing, office space. D uring this quarter, we took a look at individual loans, and we eliminated three of those categories for additional category-specific adjustments.
What we did keep in place were retail and office space because those two are going to have a tail on them that we just don't understand quite yet, with renewals of leases and whatnot. You probably noticed that we significantly increased our reserve for unfunded commitments, partially because that number went up, but also that's where construction resides.
We believe between retail, office space, and construction, while we have a good feeling about that, those are the three areas that we just have some additional uncertainty in the future about. Our Moody's scenario was skewed toward the downside S2 scenario, but our quantitative model spit out a number less than 1%. We feel very good about where our allowance is today. We believe as some of that construction funds going forward, you may see a migration from our reserve for unfunded commitments to our actual allowance for credit losses. But collectively, we've got $240 million of allowance set aside for our funded and unfunded loan balances.
You know, our credit guys do a fantastic job of stress testing and evaluating our credit, and you can see that over time, those numbers continue to go down. I will remind you that even those numbers are heavily dependent on credit we acquired from other banks and not necessarily credit that was initially approved under Simmons' underwriting standards. I guess what I'm saying is uncertainty is certainly something that is prevalent in the market today, but based on our analysis, we're very comfortable with where we are today.
Okay. That makes sense. Maybe switching gears to touch on fee income. Look, this has been an emphasis for y'all in the past. It's great to see the hard work showing up. Maybe if you could just touch on some of the fee income businesses, where you're having the most success and obviously we do have some headwinds in the market for a few of these. Just curious how you think about fee revenues and any other trends and you know, other puts and takes within the fee income lines would be helpful.
Yeah, I'll give a couple of remarks there as well, David. I think, look, no doubt it was a good quarter of fee income for us, and certainly don't wanna discount that at all. I will say, you know, in the wealth management area, we're having some really good success there, both on the hiring front as well as just sort of in the customer acquisition front. There were, however, in the quarter, you know, there was a couple of fee events in the quarter in the wealth area that were a little bit timing related. Probably a quarter, you know, and this is gonna happen from time to time, but a quarter that was maybe a little bit ahead of our typical run rate.
That's an area that is certainly a headwind area. I think we're cutting through some of that headwind again on kind of the customer acquisition and just sales side of that business. Feel good about that in the quarter there. It was good to see, you know, moderate albeit, but an uptick on a linked quarter basis in mortgage. That's just a tough business right now, but it's one we're committed to. It's very in footprint, customer-centric focus to us. You know, virtually all of that business in this environment is, or the overwhelming majority of it's purchase volume.
We feel good about what we have, you know, what we have there. There'll just be the typical, you know, seasonality that'll impact kind of service charges and deposit related fees from time to time. We had a good quarter there. I think one of the tailwinds for us late in Q3, hopefully it'll stick a little bit in Q4 as well, is just, you know, some of the waivers and whatnot that we did around the Spirit acquisition that are phasing off here late in Q3 and in Q4. That certainly aided us on the fee front late in the quarter as well.
All right. That's a great color. Thank you.
You bet.
The next question is from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good morning.
Good morning.
I wanted to follow up on the commentary, George, around the construction portfolio. You know, $5.1 billion of unfunded commitments this quarter. You had mentioned a large amount of that is in the construction book. Could you talk about, you know, kind of how much is commercial versus residential? I'm really curious about any commentary around projects that are being maybe delayed or terminated, you know, as the economic uncertainty, you know, increases and rates rise.
This is Matt. I can start on that and anyone can jump in. A couple comments. When you think about the $5 billion on unfunded commitments, that's all of our unfunded. That's our lines of credit. That's, you know, our C&I businesses. When you really look into the construction book itself, it's about $3 billion unfunded. Of that, you know, $500 million is your one to four, that's your builder finance area. Then if you think about kind of your question on kind of where is it coming from, a lot of that business that we've as far as the last six months of originations has been in industrial and multifamily, and both of those segments are holding up very, very well in this environment with affordability pushing into multifamily and supply chain industrial. Like where we've put our capital in the construction.
On your question around delays, we're not seeing that. We have a pretty robust monitoring system outside of our daily bankers, kind of a centralized function, and we look at that very carefully. So far, outside of this, what I'm gonna now call normal supply chain issues, no significant delays where we're now concerned. Projects are on, you know, on schedule for release. So far so good. I would just also point you to our comments we made in Q2. We're very disciplined in this space. I mean, we're not betting on interest rates. I mean, we're underwriting at well above where rates are today and then stressing those further plus inflationary costs. When those size out, you're really producing a low leveraged construction loan that's on our books.
Thanks. I appreciate the comment. Second question, in terms of the rate sensitivity slide 16, I'm curious, as you think of, you know, the next 100 basis points of tightening, since you provide 100 basis points to 200 basis point sensitivity, what deposit betas are embedded in that kind of, you know, next 100 basis points?
Well, I'll go into your sensitivity. Yep. I'll answer that consistent with how I have, you know, historically, the way we model this, right, wrong or indifferent, is based on historical betas. It's not really a forward-looking beta, it's not, you know, a management override. When we look at that historical beta for us and for the industry, you know, you're seeing betas in kind of the mid-40s that are modeled into this sensitivity. Much higher than what our beta has been year-to-date. That's total deposit beta, correct? Not interest bearing. Yeah, that's right. I do believe that's a total deposit beta. That's right. Great. Thank you. Yep.
The next question is from Matt Olney of Stephens. Please go ahead.
Hey, thanks. Good morning. I wanna go back to the loan growth discussion. Matt, you gave us some good commentary about construction balances likely to fund up in the near term. Is it fair to assume that loan growth could remain in this low double-digit range annualized as far as the growth in the fourth quarter, and then likely slow into 2023 as just given the overall uncertainty in the economy?
Matt, I think that's a reasonable assumption. Can't say that's for certain, for sure. Just knowing, kind of. I'll repeat my comment again. When we saw 150 basis points upward rate increases in the third quarter and seeing that maybe, you know, expected to happen again, I mean, yes, with our unfunded construction, yes, that's out there. But we're also seeing borrowers pay down, you know, in this environment. So there's a lot of things that we can't really anticipate, but that's, you know, a reasonable expectation. Just depending where the Fed moves after that, I point you back to our pipeline graph and show you where we're taking our yields and where the pipeline's moving in this environment.
Yeah. Yeah, and I'll just pile on to that, Matt. This is Jay here. Maybe just one additional comment. We're of course, I'm sure every other management team out there is doing the same thing. We're spending a lot of time, you know, forecasting, doing a lot of sensitivity analysis here. I think the first thing we've got to acknowledge is these are pretty uncertain macro times in terms of, you know, creating conviction around those forecasts and that predictability.
Just listening to Matt Reddin's comments there, I think one of the big levels of unpredictability is just money flows, cash flows here, timing of some of these fund ups. You know, we're not modeling many prepayments right now, but we see some from time to time. We know what our scheduled maturities and cash flows look like, but when you think about sort of deposit flows, deposit repricing, some of these loans and loan originations and fundings, timing of cash flows are pretty interesting to look at right now. That's not gonna be for us. I think that'll be industry-wide.
Yep. Understood. Thanks for the commentary.
Yep.
I guess on the betas on the loan balances, they look pretty good in the third quarter. Anything unusual with that from your perspective, or you think you can maintain similar-ish kind of loan betas going forward from here?
I would say, I'll take it first and let Jay comment. You know, Matt, we are being very disciplined with our pricing models, you know, still in the relationship business, and we have an avenue to always make sure we're taking care of core customers, but we're very sensitive to the market. I mean, we're adjusting our rates on it sometimes every two weeks. You know, we're remaining disciplined in the field with communication to our bankers and ultimately our clients. I think we're gonna fight that fight and we're hopeful that we're gonna be able to continue to do that on the yield side. On the yield side. Yeah.
One thing I'd just point out, too, you know, when you think about our loan beta or even just sort of net interest margin, and we depict this on slide 6 in the materials. You know, our revenue growth, our margin, net interest income this quarter is really you know, through the headwind of kind of a $5.5 million unfavorable variance compared to Q2 from a purchase accounting accretion or PPP accretion point of view. I think some of those underlying fundamentals are, you know, even a little bit masked in Q3 compared to Q2. Just one other data point, Matt, that I'd give you, it's also in our slides. It's all the way back on sixteen.
On 16, we've got a comment that I wanna point everybody to. That's just the fact that, you know, I mentioned earlier timing of cash flows, scheduled maturities. You know, we've got $1.2 billion of fixed rate loans that'll mature over the next 12 months. You know, all in, I think we've probably got, you know, at least probably $1.8 billion in fixed rate assets that'll mature or come up for reprice or reinvest over the next 12 months. When I think about where we're pricing assets today and where those yields will be coming off the books, I think that continued sort of migration or optimization of our balance sheet and repricing on the asset side will be pretty good for us.
Jay, following up on that, just lots of puts and takes around the margin from the third quarter.
Yep.
Thinking about the core margin, ex some of the noise you talked about. It feels like there's still some tailwinds here over the next few quarters of the margins. You see some you know, some improvement. Any commentary, any kind of range you'd point us towards?
Well, I'm gonna go back to my initial caveat, which is timing of cash flows could drive that, I think, on a quarter-to-quarter basis of exactly what margin itself might do. In general, I think the industry has gapped up pretty nicely in Q2 and Q3 from a margin perspective, and we've experienced that as well. My expectation is that, you know, margin will be much more modest or incremental in terms of its expansion going forward. I certainly think, you know, that's our expectation, you know, over the course of the next several quarters. It's, you know, I think that we've all had the good fortune of a really steep move by the Fed, with a nice lag in deposit betas, and that's just gonna moderate itself for the industry, I believe, over the coming quarters.
I think the NIM expansion will be more modest as well.
Okay. Thanks, guys.
The next question is from Graham Dick of Piper Sandler. Please go ahead.
Hey, guys. Good morning.
Good morning.
Good morning.
Most of my questions have been answered, but just wanted to touch on the bond portfolio a little bit. Obviously, big step down this quarter, I guess, on, you know, help fund some of that robust loan growth. Just wondering if you guys got, I don't know, an update on the target, maybe you guys see this trending too on assets over the next, I don't know, you know, year or so.
Well, I think, you know, we're certainly not active purchasing bonds just given where we are, you know, from a securities mix point of view or securities to assets point of view, and really given the opportunities we have in the loan portfolio right now. Our first priority from an investment point of view with our funds is always to put that to work in the loan portfolio if we have good opportunities. We underwrite through the cycle, as Matt was talking about earlier, so we're not really having to change our underwriting standards. They just are what they are, and we're still experiencing good growth and really good pricing. That's where our priority will be.
With that, kind of with all of those statements, you know, we'll continue to see, I think, the loan-to-deposit ratio increase, loan-to-asset numbers will expand and, you know, we'll fund a lot of that growth with, you know, with cash flows out of that securities portfolio.
Okay. Understood. On loan growth, if I remember correctly, Spirit was growing, you know, pretty well after you guys announced the deal and then closed on it. Just wondering how much of that pipeline is from Spirit, that commercial loan pipeline.
It's a great question. I'll kind of give you a couple of data points as you think about their growth. As a component of our loan growth, they've grown $230 million since they've been a part of Simmons. Now that's in April, so that's more than the third quarter. They've also done $1 billion of new production. We're real proud of how Spirit came into our organization and hit the ground running. If you look at their overall pipeline right now, they're around $400 million out of our $500 million overall pipeline.
Maybe just to pile on on the deposit side, one of the things we've paid real close attention to is overall deposit retention, which has been incredibly strong. I think you see it both on the, you know, candidly on the employee retention front, which is where it matters most, has been great. Deposit retention has been really strong. Then Matt's comments on the loan origination side. Yeah, we're very pleased there across the board.
Okay, great. That's all for me. Thanks, guys.
There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to George Makris for closing remarks.
Well, thanks to each of you for joining us today. I think the third quarter speaks very well to our organic fundamentals and what we're committed to going forward. I think our runway looks really, really good. Before we sign off, I'd like to give a special shout-out to one of our directors, Dean Bass, who was involved in a pretty serious car accident a few weeks ago and is recovering in the hospital today. I visited with him this morning. He's in great spirits, and we just wanna give a shout-out to Dean and wish him all the best in his speedy recovery. Thanks again for joining us this morning, and we'll do this again next quarter.
Before we end today's call, I have been advised by our legal counsel that there were some technical difficulties during our forward-looking statement. We would like to reiterate that during the call today, we did make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook, among others, our outlook regarding future economic conditions, interest rates, lending and deposit activity, and net interest margin.
These statements involve risk and uncertainty, and you should therefore not place undue reliance on any forward-looking statements as actual results could differ materially from those expressed in or implied by the forward-looking statements due to a variety of factors. Those factors are contained in our 8-K that was filed today, as well as our other SEC filings, including our Form 10-Q and Form 10-K.
These forward-looking statements are as of October 25, 2022, and Simmons assumes no obligation to update or revise any forward-looking statements or other information. We also did discuss certain GAAP and Non-GAAP metrics, and we have provided disclosures in our Form 8-K, in our earnings release, and in our investor deck that contains the reconciliations of those metrics from GAAP to Non-GAAP. Thank you again for joining us, and have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.