Simmons First National : 1Q23 Earnings Call Webcast Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

SFNC.OQ - Q1 2023 Simmons First National Corp Earnings Call

EVENT DATE/TIME: APRIL 25, 2023 / 2:00PM GMT

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APRIL 25, 2023 / 2:00PM, SFNC.OQ - Q1 2023 Simmons First National Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Edward J. Bilek Simmons First National Corporation - Executive VP & Director of IR

George A. Makris Simmons First National Corporation - Executive Chairman

James M. Brogdon Simmons First National Corporation - President & CFO

Matthew Steven Reddin Simmons First National Corporation - Executive VP & Chief Banking Officer of Simmons Bank

Robert A. Fehlman Simmons First National Corporation - CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brady Matthew Gailey Keefe, Bruyette, & Woods, Inc., Research Division - MD

David Pipkin Feaster Raymond James & Associates, Inc., Research Division - VP & Research Analyst

Gary Peter Tenner D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

Matthew Covington Olney Stephens Inc., Research Division - MD & Analyst

Stephen Kendall Scouten Piper Sandler & Co., Research Division - MD & Senior Research Analyst

P R E S E N T A T I O N

Operator

Good day, and welcome to the Simmons First National Corporation First Quarter 2023 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ed Bilek. Please go ahead.

Edward J. Bilek - Simmons First National Corporation - Executive VP & Director of IR

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, 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 as well as our Form 10-K for the year ended December 31, 2022, 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 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.

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APRIL 25, 2023 / 2:00PM, SFNC.OQ - Q1 2023 Simmons First National Corp Earnings Call

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Our first question comes from Brady Gailey with KBW.

Brady Matthew Gailey - Keefe, Bruyette, & Woods, Inc., Research Division - MD

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 these corporate bonds?

James M. Brogdon - Simmons First National Corporation - President & CFO

Yes. Brady, this is Jay. So the corporate bond portfolio, as a remainder, represents, I think, a little less than 7% of our total bond portfolio. The overwhelming majority of that is sort of Fortune 500 type companies. We've done a review of the portfolio. We think this is very isolated bonds in there. It relates to some events that took place with the issuers of those bonds in the first quarter that were unique to those companies. We were, I would say, very aggressive in how we provision for those in terms of really trying to carve that out, I think, probably blend it 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.

Brady Matthew Gailey - Keefe, Bruyette, & Woods, Inc., Research Division - MD

Okay. All right. And then I saw the $15 million cost save plan. Can you just talk about the components of where that came for? And would you anticipate -- I feel like you guys have looked at the expense base often over time and continue to get more efficient there. I mean, is this just kind of a part of the ongoing focus on increasing profitability?

James M. Brogdon - Simmons First National Corporation - President & CFO

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 within the bank that have been 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 -- late in the first quarter and into -- early in the second quarter here, a very successful early retirement program. We do that periodically every couple of years. So we had good uptake there. So 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 sort of standardized and centralized a number of those activities.

So 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. And so those things should be revenue enhancing as well. That's not a part of the $15 million cost save initiatives. But when you think about sort of improved timelines, 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.

Robert A. Fehlman - Simmons First National Corporation - CEO

And 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 6 months or so. We've been working on some of this, as Jay said, on the credit optimization more than a year now. So 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

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APRIL 25, 2023 / 2:00PM, SFNC.OQ - Q1 2023 Simmons First National Corp Earnings Call

market, and that's what we're doing today is sharing that. And 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 expectation, and we'll be able to absorb that within the system pretty well.

Brady Matthew Gailey - Keefe, Bruyette, & Woods, Inc., Research Division - MD

All right. And then the margin has been expanding quite nicely over the last year or so, but it did take a step back in the first quarter, which the industry has seen as a whole. But the thoughts on where the net interest margin trends for the rest of the year?

James M. Brogdon - Simmons First National Corporation - President & CFO

So again, Brady, I'll take a first shot at this. I want to 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. So I talked about that in the last call. So 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 the margin compressing in the quarter. I don't expect that level of compression to sort of continue because, again, we had that back-end loaded. If you look at Q4 to Q1, a lot of that Q4 was back-end loaded so you shouldn't see that kind of dynamic from Q1 to Q2. But I do expect there'll continue to be some migration within the portfolio, like what we're seeing. So that will be the ongoing headwind on the expense side.

But, on the asset side, we'll continue to have a lot of good repricing dynamics there as well. So I think, near term, next quarter or two, margins should be much more stable than what you saw in Q4 to Q1. And then just a reminder that in the fourth quarter of this year, 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, 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.

Brady Matthew Gailey - Keefe, Bruyette, & Woods, Inc., Research Division - MD

All right. And then just the last one for me. I know a lot has changed from when you all gave guidance 90 days ago, but 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 now?

Matthew Steven Reddin - Simmons First National Corporation - Executive VP & Chief Banking Officer of Simmons Bank

Brady, it's Matt. I would say that's still in line. I think we said in our last quarter that it's going to be a front-end loaded loan growth for 2023 based on those unfunded commercial construction fundings. And when you look at our investor deck and look at Page 21, that really illustrates that. But then at the same time, I'd point you to our pipeline, as of this deck, it was right at $1 billion, and even since that point has come down even more so. So I think it's trending that direction right now on the loan growth side.

Operator

Our next question comes from David Feaster with Raymond James.

David Pipkin Feaster - Raymond James & Associates, Inc., Research Division - VP & Research Analyst

Maybe just following up on that last question, could you just maybe give us some detail on how demand is trending? Just where -- from a geographic and segment perspective, where are you still seeing good risk-adjusted returns? And it's nice to see the pipeline yields improve. I'm just curious where new loan yields at today? So just any other detail into the loan growth and the pipelines and all that.

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APRIL 25, 2023 / 2:00PM, SFNC.OQ - Q1 2023 Simmons First National Corp Earnings Call

Matthew Steven Reddin - Simmons First National Corporation - Executive VP & Chief Banking Officer of Simmons Bank

Dave, it's Matt. Great question. I'll give you kind of a high-level kind of comment around where loan rates are coming in. That $800 million pipeline today that we're seeing is now at a (inaudible) of [792]. So I think we're pushing through that kind of this current yield curve versus and how steep it gets so quickly that we're kind of now cresting over that, kind of moving more into where we can catch those higher yields and still take really -- our asset quality is right where it will always be.

Your question around where we're still seeing demand? Demand is definitely moderating in every market. There's no doubt with interest rates where you're seeing it right now, but there's still demand. And I think there -- clearly, each one of our metro markets, we're seeing opportunities, but 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 widening the credit spreads where we need to in this environment.

David Pipkin Feaster - Raymond James & Associates, Inc., Research Division - VP & Research Analyst

That's helpful. And maybe switching to the deposit side. Obviously, a lot of uncertainty in the market and banking turmoil in March. But if I look at like the noninterest-bearing average and period end 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 may be migrating to higher-yielding accounts versus true impacts of that banking turmoil?

And then just from -- since quarter end, have you seen core deposits stabilize? Or would you expect more migration or outflows going forward?

James M. Brogdon - Simmons First National Corporation - President & CFO

So David, I'd tell you that we've spent a lot of time this quarter dissecting everything you just asked about. And we're having trouble convincing ourselves that it's 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 our footprint. So everything feels very normal course. Even when we look at 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. But absolutely, we continue to see migration to a degree within those accounts. Out of [NIVs] as an example, into higher-rate accounts. And so 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 NIVs in the third quarter of last year and really had a pretty stable amount of NIVs 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 going to stabilize here sooner rather than later. But it's hard to have a perfect crystal ball 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 customer checking account type balances, which I think is more flourish than anything when you see that type of level within the customer base. But those are -- that's some color around what we're seeing in the portfolio for the quarter.

Robert A. Fehlman - Simmons First National Corporation - CEO

And David, this Bob, I'd add, if you go -- as Jay said, we started -- 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 are early on in the quarter. And 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 chains 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 relatively stable all the quarter.

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