Good day, welcome to the Simmons First National Corporation 1st quarter 2023 earnings 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ed Bilek. Please go ahead.
Good morning and welcome to Simmons First National Corporation's first quarter 2023 earnings call. Joining me today are several members of our executive management team, including our Executive Chairman, George Makris, CEO, Bob Fehlman, and President and CFO, Jay Brogdon. Before we begin the Q&A, I would like to remind you that our first 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, credit quality, liquidity, and net interest margin.
These statements involve risks and uncertainties. You should therefore not place undue reliance on any forward-looking statement 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, as well as our Form 10-K for the year ended December 31st, 2022, including the risk factors contained in that Form 10-K. These forward-looking statements speak only as of the date they are made. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good morning, guys.
Morning, Brady.
I wanted to start with the piece of the provision expense that was related to the corporate bonds. Could you just give us a little more color as far as what happened there and any remaining exposure within those corporate bonds?
Hey, Brady, this is Jay. The corporate bond portfolio, as a reminder, represents, I think, a little less than 7% of our total bond portfolio. You know, the overwhelming majority of that is, you know, sort of Fortune 500 type companies. We've done a review of the portfolio. We think that this is, you know, very isolated bonds in there that relate to some events that took place with the issuers of those bonds in the first quarter that were, you know, unique to those companies. We were, you know, I would say, very aggressive in how we provisioned for those in terms of, you know, really trying to carve that out. I think probably blended all in.
There is a little bit of exposure left on those bonds, but, it's nothing that we don't think we've already provided for.
Okay. All right. Then, you know, I saw the $50 million cost save plan. Can you just talk about, you know, the components of where that, where that came for and, you know, what would you anticipate? I feel like you guys have, you know, looked at the expense base often over time and continued to get more efficient there. I mean, is this just kind of a part of the ongoing focus on, you know, increasing profitability?
It is. I mean, I really tie this back, Brady, to the Better Bank Initiative overall. We've been telegraphing this for a few quarters. There are certainly some specific initiatives we have on within the bank that have been, you know, months-long initiatives. As we've sort of been able to execute through those, we've been able to identify some specific cost saves. We've also had in the, you know, late in the first quarter and early in the second quarter here, a very successful early retirement program. We do that periodically every couple of years. We had good uptake there. Those are the types of initiatives. One that we've spoken about before as an example, just sort of anecdotally, is our credit optimization process.
As we've worked through that, we've been able to identify a number of redundancies in our processes. We've sort of standardized and centralized a number of those activities. These are things that both allow for efficiencies to be identified, but also lead to a much.
Sort of better end-to-end process for us, better standardization of those processes across the entire footprint. Those things should be revenue-enhancing as well. That's not a part of the $15 million cost save initiative, but when you think about, you know, sort of improved timelines, you know, better customer experience, better associate experience related to those types of activities, those are sort of the things that, again, are kind of examples of the types of initiatives that we have leading to that figure.
Yeah. Brady, this is Bob. Just to kind of add on to Jay's comments. As we've said, we've been talking about the Better Bank Initiative, the people, processes, and systems for the last six months or so. We've been working on some of this, as Jay said, on the credit optimization more than a year now. This is just kind of as we indicated in prior quarters, when we felt comfortable we could firm up the numbers, we would share it with the market. That's what we're doing today, is sharing that. As Jay said, our early retirement program, we've done multiple times over the years. It was well received by some of our associates, and it exceeded our expectations, and we'll be able to absorb that within the system pretty well.
All right. Then, you know, the margin has been expanding quite nicely over the last year or so, but, you know, it did take a step back in the first quarter, which, you know, the industry is seeing as a whole. Thoughts on, you know, where the net interest margin trends for the rest of the year?
You know, again, Brady, I'll take the first shot at this. You know, I wanna remind you, I think the most important thing to remember is the baseline here. Last quarter, we sort of back-end loaded some moves on the funding side. You know, talked about that in the last call. We expected sort of the full quarter impact of that this quarter. I think that, sort of coupled with the continued migration within the portfolio itself, is really kind of the main contributing factors to where we see, you know, the margin, compressing in the quarter. I don't expect that level of compression to sort of continue, 'cause again, we had that back-end loaded. If you looked at Q4 to Q1, a lot of that Q4 was back-end loaded.
You shouldn't see that kind of dynamic from Q1 to Q2. I do expect there'll continue to be some migration within the portfolio like what we're seeing. That'll be the ongoing headwind on the extent side. On the asset side, we'll continue to have a lot of you know, good repricing dynamics, there as well. I think they're, you know, near term, next quarter or two, you know, margins should be much more stable, than what you saw Q4 to Q1.
Just a reminder that in the fourth quarter of this year, you know, when we look toward the back half of the year, look at the cash flows we expect overall, across all of our portfolios and the repricing of those cash flows, and then the interest rate swap that kicks in late September, and we'll have all of that in the fourth quarter. I think all those fundamentals kind of continue to be in place for us as we look out toward the horizon here.
All right. Then just the last one for me. I, you know, I know a lot has changed from when y'all gave guidance 90 days ago, you know, you guided to mid-single digit loan growth. You did a little better than that in Q1. How are you thinking about loan growth from here on out?
Hey, hey, Brady, it's Matt. I would say that's still in line. I mean, I think we said in our last quarter that, you know, it was going to be a front-end loaded loan growth for 2023 based on those unfunded commercial construction fundings. I would when you look at our investor deck and look at page 21, that really illustrates that. At the same time, I'd point you to our pipeline. You know, as of this deck, it was right at $1 billion, and even since that point, it's come down even more so. I think it's trending that direction right now on the loan growth side.
All right. Great. Thanks for the color, guys.
Thanks, Brady.
Our next question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Hey, David.
Morning, David.
Maybe just following up on that last question. Could you just maybe give us some detail on how demand is trending? you know, just where from a geographic and segment perspective, where are you still seeing good risk-adjusted returns? It's nice to see the pipeline yields improve. I'm just curious, you know, where are new loan yields at today? So just any other detail into the loan growth and the pipelines and all that.
Hey, David, it's Matt. Great, great question. I'll give you kind of a high level kind of comment that around where loan rates are coming in. You know, that $800 million pipeline today that we're seeing is at now at a weighted average rate of 7.92. I think we're pushing through that kind of this current yield curve versus in how steep it got so quickly that we're kind of now cresting over that, moving more into where we can catch those higher yields and still take, you know, really, you know, our asset quality's right where it will always be. Your question around where we're still seeing demand is definitely moderating in every market. There's no doubt with, you know, interest rates where you're seeing it right now, but there's still demand.
Clearly in each one of our metro markets, we're seeing opportunities. We're being very selective in this environment. We're making sure that we're getting a full relationship and we're hurdling the yields that we need to and really, you know, widening the credit spreads where we need to in this environment.
Yeah, that's helpful. Maybe switching to the deposit side. Obviously, a lot of uncertainty in the market, you know, and, you know, banking turmoil in March. You know, if I look at, like, the non-interest-bearing average and period and balances, it looked like a lot of this happened relatively early in the quarter. I'm just curious, as you dig into the trends, how much do you think of the deposit, the core deposit flows was really more normal business activity and clients maybe migrating to higher yielding accounts versus true impacts of that banking turmoil? Then just from, you know, since quarter end, have you seen core deposits stabilize, or would you expect, you know, more migration or outflows going forward?
David, I'd tell you that we've spent a lot of time this quarter dissecting everything you just asked about. You know, we're having trouble convincing ourselves that anything that we're seeing is anything other than just sort of normal course activities. We're still opening a tremendous volume of accounts all across, you know, our footprint. Everything feels very normal course. Even when we look at, you know, larger commercial moves, overwhelmingly, those are also normal course payments, and we're seeing the typical activity that we've seen with those accounts historically. Absolutely, we continue to see you know, migration to a degree within those accounts out of NIBs, as an example, you know, in the higher rate accounts.
You're right, we saw a lot of that really all throughout the quarter, but including early in the quarter. I'll go back in time, not very far, we grew NIBs in the third quarter of last year, and really had a pretty stable amount of NIBs even throughout October and early November. That trend really has picked up. That migration has picked up very late in the fourth quarter, continued in the first quarter. I'd like to think that that's, you know, gonna stabilize here sooner rather than later, but it's hard to have a perfect crystal ball on, you know, on those migration trends.
We're certainly getting to a point on a lot of accounts where you're just sort of the normal operating accounts or normal, you know, customer checking account top balances, which I think is more flourish than anything when you see that type of level within the, you know, within the customer base. You know, that's some color around what we're seeing in the portfolio for the quarter.
David, this is Bob. I'd add, you know, if you go as Jay said, we saw this begin in December of last year in Q4. We kind of talked about it on our first quarter or fourth quarter call. We saw all this migrate just like most other banks early on in the quarter. When the bank turmoil hit in the beginning of March, we were looking at and analyzing every day. We really did not see much change after that period of time. Most all of our change was related to this deposit mix that we've seen in the industry, and it's mostly in the commercial side. The consumer side has been really relative stable all quarter.
Yeah, that makes sense. Appreciate the color that you guys put in the slide deck on the loan portfolio and credit. You know, credit obviously remains solid, you know, but we did see a modest uptick in NPAs. I'm just curious what you're seeing on the credit front more broadly, and what you're watching and what drove that. Any color, there's obviously a hyper focus on office. Just curious what you're seeing there, how your conversations with those clients are going, and just any thoughts on the overall portfolio in that office segment.
First, kind of on your first question on the, you know, a rise in NPAs, it was really one specific loan that was an acquisition relationship, you know, as a syndication that we acquired was a part of, so it really isolated what that drove that number up. You know, what we're seeing today from a, you know, our asset quality is, you know, really holding up very, very strongly. We're getting a lot of attention. As you can imagine, we're focused on that every day. I would say the only thing where we're seeing any type of challenges are the ones similar to COVID.
They were challenged before rates started moving up, and so we're blocking and tackling harder on those relationships, but we're not seeing anything systemic in the portfolio or any specific industry or to that amount. On your, I would really point you as it relates to office in our deck, if you look at page 20 around office and really all of our major buckets in CRE. Now, if you look at that office category at $1 billion, that's 6% of our portfolio with an average loan size of $2 million, weighted average loan rate of 49%. Really that is the continued story of who Simmons is. Our office portfolio is very granular.
It's community and you know, it's CPAs, it's the insurance company, in our community markets. We don't have any large office towers or office parks where that are kind of, which we're also seeing the East and West Coast versus what we're seeing is, you know, stability in our office sector versus kind of what the coasts are seeing.
Yeah. That's helpful color. Thanks, everybody.
Our next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Good morning, everyone. Thanks. I guess maybe, if I could start just around the construction growth you guys saw this quarter. Could you give me a feel for what type of projects you're seeing there and kind of how you feel about your construction exposure currently?
Steve, it's Matt. Yeah, I'll give you know, what the growth we're seeing in our portfolio is in two specific categories in multifamily and industrial. Those are the segments that we have some proven developers, proven operators that we have had recurring business with and that's where those fund ups are happening.
All on time. You know, we have a pretty robust monitoring system over that today, and we look at that very carefully. So far, those two segments are doing very, very well. Underneath that, really you're gonna move into, you know, 1- 4, you know, construction category and then, you know, owner-occupied construction, which we, which we love. You know, overall that portfolio is funding up just like we expected it to.
Okay, very helpful. You guys know, I think it was in the presentation that the $330 million of sub-debt will go adjustable here this quarter. Can you give the margin impact of that? Also within margin, do you have any color around kind of where the marginal cost deposits is coming on or the margin for the month of March potentially, or anything like that would give us a feel for late in the quarter trends?
I can tell you on the sub-debt there, Stephen, that I think the rate on that for the second quarter is at 7.32%. you know, you could calculate the margin impact from there.
5%-7%.
Yeah. It's going from 5% to 7.32%.
Okay, that's perfect. Anything on kinda where the margin was in March maybe, or where cost of deposits ended the quarter at? Just kinda an idea of where those marginal deposits are coming on today.
Yeah. I don't have a spot margin for you readily available here, Stephen, I mean, it's gonna be a little bit lower than the full quarter's margin. Again, I go back to the comment I made earlier. When you look at the trend in margin from Q4 to Q1, that trend you can't really extrapolate because of the back-end loaded nature of what we did in Q4.
Again, reminder of that commentary, there was some extension of some of the liabilities when we did that. I think we've absorbed a fair amount of that in terms of what that looks like. You know, even if you look at our interest rate sensitivity that we include in the deck, we're much more rate neutral than anything right now, kind of either direction with 25 basis point top moves either direction. I think that should give you some sense of how we think about sort of marginal rates at this point in time.
Okay, very helpful. Then just last thing for me. You guys lay out here in slide 10, a pretty aggressive, long-term ROA target, which is, you know, phenomenal. I guess I'm curious how you think you can get there. Again, it feels like a pretty aggressive jump from where returns have been. Then I guess within that is your guys', kinda long-term executive comp tied to achieving that 150+ ROA in any way?
Yeah. Stephen, I'll tell you, our long-term comp is tied to ROA. Our short term is tied to efficiency ratio and pre-tax pre-provision. We're all in on these numbers. You know, what we're trying to do, as we've talked about at the end of last year and even today some, is this Better Bank Initiative focusing on people, processes and systems. We spent the last 10 years really building our company and diversifying our geography into six different states in Middle America into some really good MSAs and some really good rural areas. We think we have a really good footprint. We have a really good franchise. We focused the last 10 years on M&A and growing to be able to diversify our geography and also increase in size to be able to make the investments we need to.
Well, right now we're focused on becoming a better bank, and it's part of the process we're going through. We're all in the middle of this rate environment we're at with cost of funds going up on deposits and trying to go through that challenge. What we're focused on every day is these initiatives we're working on. What we're focused on is becoming a better bank, and that's gonna be building up to a 150 ROA on a year-over-year basis, efficiency ratio in the low 50%. As you can see, as our first numbers we gave out at this year is the $15 million annual cost save. That's leg one of it.
We've got several more 12, 18, 24 months of working on this project to get us where we really wanna be to set up a good foundation.
The only other thing I'd add in there, Steven, is just keep in mind the importance of just the optimization of the balance sheet that'll take place naturally throughout that period of time. When I think about where assets are coming off of the books and where they're repricing back into the books, there's gonna be a lot of natural lift in profitability. Our loan-to-deposit ratio last three quarters has gone from 70% to 72% to 74%.
As we continue to expand that, and as, you know, whatever happens with the rate environment, we're in this moment in time, where things are level setting. As all that level sets and we think about those fundamentals, I think it all points to, that type of profitability.
That's perfect. Great answer, guys, and impressed to hear, like you said, you putting your money where your mouth is on that. Appreciate that color.
Thanks, Steve.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks. Good morning, everybody.
Morning, Matt.
Want to go back to the funding discussion, and like most of your peers, the overall level of borrowings were higher at March 31st compared to the average levels. Not surprising given the turmoil we had late in the quarter. I'm curious if you still hold this high level of borrowing. If so, what are the current thoughts on how long you wanna keep this? Thanks.
I mean, Matt, there's just a small pickup in borrowings there in my mind. We have increased the amount of you know, cash at the Fed, but it's nothing that's sort of a material driver in my mind to margin.
We thought it was a prudent thing to do, you know, as we saw things transpire in March. I don't think there's sort of any major strategy around that. When I look at our borrowings overall, I think they're, you know, something like 6% of total liabilities. That's really right where they were last quarter as well. I just don't see a major shift there unless it becomes more advantageous from a rate perspective to do that relative to, you know, other opportunities, whether it's brokered CDs or other types of deposits. I think we'll be pretty capitalistic in how we think about that, but nothing beyond that mindset.
Well, let me ask it this way. As far as just the need for incremental funding from here, because, I mean, it sounds like loan growth is gonna slow a little bit from where it's been. You've got some pretty good cash flows coming off the securities portfolio. Incremental funding costs are still pretty high. I'm just curious how much incremental deposit growth you need from current levels.
I mean, I don't think it's a lot. We've talked about timing of cash flows, I think every quarter for the last couple of quarters, and that's still where we are. We saw the loan growth, we were experiencing it late last year. We continue to expect, you know, good activity with our fund ups over the coming quarters. So, you know, is there a moment in time here in the next quarter or two where we have fund ups that exceed sort of self-generated cash flows? That could be to some, you know, more minor degree than what we've experienced in recent quarters. Again, as you look out, as we look at the pipeline, you know, Matt commented on it a while ago.
We were at $1 billion at quarter end, we're closer to $800 million at today's pipeline. The yield continues to do exactly what we want it to do there. I if I think about prepayment speeds, our existing book, I think about fund ups of unfunded commitments, those are all kind of what they are. We can measure those pretty accurately. We see what's happening in the pipeline. I think all that leads to, you know, much lower need for incremental growth and more sort of optimization of the balance sheet, like we mentioned a question or two ago.
Okay. Then going back to the discussion around expenses and kind of the, you know, targeting the $50 million of incremental savings over the next few quarters. If I just assume some, you know, normal annual merit increases, expense increase of, call it, 5% per year, and then kind of layer this on, is the goal just to keep the expense levels relatively flat from where they're at now over the next few quarters from a forecasted standpoint? Is the right way to think about this?
No, Matt, I actually would say that you ought to look at the, you know, kind of our current run rate of expenses, sort of Q4, Q1. Look at our sort of adjusted non-interest expense level. We're the $15 million we're saying would be, you know, $15 million in annualized run rate expenses off of that number. Again, we were specific in the slides. I wanna emphasize here, we're not gonna achieve 100% of that in the second quarter. We will achieve some of that in the second quarter, no doubt, and we'll achieve a little more in the third. We expect we should have that fully in by the end of the year.
You know, Matt, just a little more color for your modeling is in Q1, we had our payroll tax, 401(k), you know, the timing difference for payouts in the first quarter. That's about two and a half some million, two and a half to three million. merit increases went in on April first. That's pretty much a push for each quarter thereafter. I think you have the baseline in the numbers in Q1 for the merit increase.
Yep, agreed.
Got it. Okay, that's helpful. Thank you, guys.
Thanks, Matt.
Thanks, Matt.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. A lot of my questions have been, have been answered or asked and answered already. In terms of capital, you know, your stock unfortunately is getting ever closer to tangible book. You guys have kind of held off on, you know, using your buyback recently. Just thoughts on how you might be thinking about that over the kinda near term with the stock where it is?
You know, Gary, I tell you, first off, we're committed to building our shareholder value. That's through tangible book value and EPS over time. You know, while we haven't bought back stock in the last six months or so, it's always on the table for us. You'd love to be able to do it in this environment. We look at it every day. I can't tell you today we're gonna do it. I can't tell you we're not gonna do it. We're gonna look at it. It's really this environment we're in with the banking environment we had starting in March, maintaining those capital levels.
It really is a good time, so I would tell you it's on the table for us to be looking at of what is the best use of our dollars for investment for our shareholders.
Okay. I know, Jay, I don't think you had a spot margin available for a question that was asked earlier, and I apologize if I missed it, did you mention the kind of spot deposit rates? I didn't catch it in the deck at all. I don't know if you mentioned it otherwise.
Yeah, you know, I mean, honestly, our spot deposit rates by product are, you know, pretty widely varied at the moment. I don't have sort of a blended spot deposit rate. The best way I think to think about the overall equation there is. You know, the trend in margin will likely continue in Q2, just at a much slower pace than what you saw from Q4.
Okay. All right, last question. I just noticed it's a small number, the held-to-maturity securities number went up by a few million in the quarter. I know that Did you add anything to held-to-maturity in the quarter, or was it just some other sort of accounting item that impacted that?
Yeah. It's really just, it's natural sorta amortization of some of the marks in that held-to-maturity portfolio. There's no adds into that portfolio in the quarter.
Yeah, Gary, we're really not buying any securities at this point. We're maturing, unless it's a CRA-type investment, negligible amount.
Correct.
Okay. Yeah, I wouldn't have thought so, that's why I just wanted to clarify. All right, thank you very much.
Thanks, Gary.
This concludes our question-and-answer session. I would like to turn the conference over to George Makris for any closing remarks.
Thank you very much. Thanks for joining us today. I think you can see, in these uncertain times in the banking industry, the diversification of our company has played out really well. When you take a look at our liquidity, our capital, our asset quality, the basis of who we are as a community banking organization, I would hope that you would recognize that all three of those are outstanding, especially, compared to some industry peers. We are very optimistic about the way we have established our company on the go forward. I think you heard Jay and Bob talk about repricing of our loan portfolio, some additional income based on swaps that will kick in later this year, rebalancing of our balance sheet, expense initiatives.
I hope that's exactly what you would expect from us based on what we have said over the last six months, and the fact that we have spent the last 10 years diversifying our company to get to this point in uncertain times. While our net income did not quite meet expectations, we believe that primarily that's a result of our conservative nature and our provision for the uncertain times to come. I think we're well positioned, regardless of what happens in the marketplace today, to react, and still take care of our customers.
We are still, depended on in the communities we serve, and I think we've done an excellent job over the last six months, taking care of particularly the smaller communities where we are a significant portion of the capital available for those communities to thrive and grow. Thanks again for joining us today. I hope you have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.