Simmons First National : 4Q22 Earnings Call and Webcast Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

SFNC.OQ - Q4 2022 Simmons First National Corp Earnings Call

EVENT DATE/TIME: JANUARY 24, 2023 / 3:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JANUARY 24, 2023 / 3:00PM, SFNC.OQ - Q4 2022 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 & Treasurer

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 morning, and welcome to the Simmons First National Corporation Fourth Quarter 2022 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.

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

Good morning, and welcome to Simmons First National Corporation's Fourth Quarter 2022 Earnings Call. Joining me today are several members of our executive management team, including our Executive Chairman, George Makris, and our CEO, Bob Fehlman. Before we begin the Q&A, I would like to remind you that our fourth 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 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 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 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 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.

2

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JANUARY 24, 2023 / 3:00PM, SFNC.OQ - Q4 2022 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) The first question is from Brady Gailey of KBW.

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

I wanted to start with the tax rate. The tax rate has been a little volatile this year, and it was abnormally low in the fourth quarter. Where should we expect kind of the forward tax rate to be? Any color on why it was lower in 4Q?

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

Brady, this is Jay. Let me jump in on that and give a couple of initial remarks. First of all, you're exactly right. The effective tax rate came in low in the fourth quarter. I'll speak to that latter question first. A couple of drivers there. But really, the biggest one we call it out in our materials is a tax credit that we were able to sort of complete the project and recognize in the fourth quarter.

As a result, we're able to take a full year of that credit. The way that works from an accounting perspective is you get the tax benefit sort of grossed up down in the tax line item and then there's an amortization of that tax credit up in the noninterest expense area. And we call both those out there. So sort of that full year benefit recorded in the fourth quarter was the biggest driver to the tax rate sort of being below expectation in the quarter. I think going forward, to your initial question, I think I would think of 2023 tax rate sort of ranging in that 18% to 19% area.

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

Okay. That's helpful. And then I noticed you guys were pretty active in the share buyback for the first 3 quarters of the year, but no buybacks in the fourth quarter. So any color there? And how we should think about you guys potentially repurchasing stock in 2023?

Robert A. Fehlman - Simmons First National Corporation - CEO

Brady, this is Bob. I'll go ahead and take that one. You're right. Early in the year, we did a lot of stock buyback. Our focus really right now is growing tangible book value per share through EPS and organic growth. It doesn't mean we won't do stock buyback if the timing is right. But right now, we're really focused on building our capital position going into '23.

So, as you saw, we really did -- we did very little to no purchases in Q3. And in Q4, we did none at all. We're going to be very selective going forward in this environment we're in. Just uncertainty of just holding on to capital and building tangible book value per share.

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

All right. And then another good quarter of double-digit loan growth, which I know you guys kind of messaged on the conference call last quarter. But I think I remember after that, you guys expect loan growth to really slow down in 2023. Is that still the right way to think about that? And where do you expect loan growth to be this year?

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

Brady, this is Matt. I'll jump in first. Yes, we had a nice fourth quarter, good diversified loan growth throughout our footprint. As you can see in the material in our pipeline just economic conditions. The rates are in the pipeline is slowing. We still see moderate loan growth. A lot of that is through

3

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JANUARY 24, 2023 / 3:00PM, SFNC.OQ - Q4 2022 Simmons First National Corp Earnings Call

our unfunded commitment. Still seeing demand, But kind of that mid-single digits is what we're seeing 2023 so far, but it is an uncertain kind of an economic environment.

Robert A. Fehlman - Simmons First National Corporation - CEO

Also, Brady, just like the rest of the industry, we have slower paydowns in this environment with rates going up. So you have less cash flows going out on paydowns and refinancing. And so that helps all of us in the industry build there, but it really bodes well for the unfunded commitment pipeline we had earlier in the year, too, that we're still funding those over a period of time.

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

All right. And then finally for me, the net interest margin was stable, if not down, a few basis points linked quarter. How are you thinking about the trajectory of the net interest margin into 2023?

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

So Brady, Jay, again here. Let me jump in with some initial remarks there as well. I think the thing to point to here for Q4, we had some deposit leakage, I'll call it late in the quarter. We've had what I felt like was a good third quarter on the deposit side and candidly, early in the fourth quarter as well. You may recall in Q3, [NIBs] actually grew. We gave some of that back in the fourth quarter, kind of fell more in line with the industry in the fourth quarter.

You couple that with some strong loan growth continued in the fourth quarter, and we increased the reliance on wholesale funding. I think that's sort of cash flow timing as much as anything. I sort of think that the thesis for us from a margin perspective, from an NII perspective remains fully intact candidly.

So when I think about sort of go-forward expectation for margin, some of that wholesale funding reliance, in fact, came late in the fourth quarter. That will be a bit of a headwind early in 2023 for us from a margin perspective. But as we continue to expand our loan-to-deposit ratio, sort of reinvestment of investment and other cash flows back into loans, which we think we've got plenty of loan demand in the foreseeable future to do. Some of that moderation in loan growth that Matt spoke to that we expect that will help sort of reduce any reliance on wholesale funding going forward.

And so I think that all is kind of sort of tailwinds for us in 2023 from sort of a built-in margin perspective as time moves on. I'm going to mention one other item. We called this out in our slides, but just one thing that is important as we move later into 2023, I remind you all that we have about $1 billion of our bond portfolio fixed rate that is swapped. And that was on a 2-year forward contract, and that will come into play in September of this year, sort of late September.

And so that basically goes from fixed to variable late in the year and the current rates would certainly be a boost to margin at that point as well.

Operator

The next question is from David Feaster of Raymond James.

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

I was hoping that maybe we could touch on the deposits that we were just talking about. Maybe talk about some of the competitive dynamics and some of the drivers of the core outflows, I mean how much do you think is surge deposits versus seasonal dynamics versus clients just using excess

4

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JANUARY 24, 2023 / 3:00PM, SFNC.OQ - Q4 2022 Simmons First National Corp Earnings Call

cash to pay down higher cost debt? And are you seeing any differences from a geographic or regional perspective where competition is more intense? And do you think most of the surge deposits, if you will, are out at this point?

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

So let me again jump in, David, on that, and Bob or Matt may also or others may have some comments here. But I do think that there is likely some seasonal impact for us in Q4. I don't think there's any doubt about that. And again, we saw some of the outflows pretty late in the quarter, which would kind of sync up with that outcome or that expectation. When I think about -- and I've spoken about this in prior quarterly calls. We -- when I think about excess funds, that surge deposits, funds that we're laying around, whether they're consumer or commercial or otherwise, I think most of that moved out of the bank earlier in the year last year.

What it feels to me like when I'm looking at our data sort of daily, weekly, monthly right now, it feels more like just an overall competitive dynamic. That's why I used the word leakage earlier. I don't see sort of wholesale shifts out of deposits, certainly I don't see sort of customer loss. It's really just more kind of that retail leakage out there across the footprint from a competitive dynamic or alternative opportunity for funds. So those are some perspectives I have. But Matt, if you've got anything or Bob, you'd like to layer in, you may have some additional comments there.

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

No, Jay, you hit that right on. I think we're -- the only anecdotal piece I'd add to that just on the retail linkages, what we're seeing also alternative opportunities, money markets with Smith Barney or somebody to that affect Charles Swab. But also we're seeing in the small community markets, rural markets, that is getting very competitive and seeing some really irrational pricing, and that's where we're also seeing small retail customers kind of leak out. Not customer loss, as Jay said, but just real competitive especially on the time positive.

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

Okay. And then I guess if we -- how do we think about funding loan growth? And if there are additional pressures, I guess, how do you think about funding that? I mean it looks like this quarter was primarily CDs. But how do you think about CDs versus borrowings and even potential securities sales? And if you could just remind us of the cash flows off the securities book that would be helpful as well.

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

Yes. So on the cash flow piece, David, we've -- I think we've guided to $160 million to $180 million per quarter of principal roll-off. I'll tell you, Q4 that statistic was $185 million, so sort of toward the high end, slightly above that guide. So I think that guide kind of rings true as we go forward in terms of quarterly cash flow. Not a lot of appetite to sort of do a broader balance sheet restructure in my mind right now with the securities portfolio or otherwise.

I think we've got adequate cash flow, particularly relative to what we expect is moderating, again continued loan growth, but moderating loan growth throughout the year. And so that's sort of the expectation from a funding perspective. You asked a bit about just sort of alternative funding out there. To us, right now, the most advantageous funding from a cost perspective to the extent we're relying on wholesale has been in the brokered CD market or brokered market, a little more advantageous rates there than FHLBs or otherwise.

We've got plenty of capacity there, certainly not our first option. We can fund it off our own balance sheet. That's what we'll do. But those are sort of the relative opportunities and costs that are out there right now.

5

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.