Q3 2022 Simmons First National Corp Earnings Call
Good morning, and welcome to the Simmons first National Corporation third quarter third quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference with my pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask question to ask a question you May Press Star then one on your Touchtone 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 Belak Executive Vice President and director of Investor Relations. Please go ahead, good morning and.
Welcome to Simmons first National Corporation 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 Simmons Bank Dot 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.
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.
These forward looking statements speak only as of October 25th 'twenty, 'twenty, two 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 Simmons Bank dotcom.
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 Touchtone 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 K B W. Please go ahead.
Hey, Thanks, good morning, guys.
Thanks.
Loan growth was pretty impressive in the third quarter in the low double digit range I know you guys have talked about.
That moderating.
From here, but how do you think about lumber as we head into 'twenty to 'twenty three with some potential economic uncertainty.
Hey, Brian This is Matt.
I would point you back to our second quarter comments and really that what we said we started to see the fallout from the rising interest rates by the end of the second quarter. When we deliver just really impressive loan growth.
Throughout the third quarter, two fed brought two fed hikes hundred 50 basis points and it's really illustrated in our pipeline on page 12, you know where that pipeline is now a $1 6 billion.
That's really a result of staying disciplined to our relationship strategy underwriting hurdles stress test it.
And it's still a strong pipeline, but it's definitely reflective of current economic conditions, but we've had a lot of success in the construction space. So I think we'll continue to see some some some loan growth in the fourth quarter and on but just depending on what the fed does I think I'm just look back at what happened between the second and third quarter.
And what the increase in interest rates did to our pipeline and if you have another 150 basis points I think that's just something to look at as we move forward, but loan growth is going to continue through some construction, but moderate as bad as it is into rates continue to move up.
Okay, Alright, and then on the expense side.
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 linked quarter at $137 million. How are you thinking about expense creep in the 'twenty to 'twenty three.
Well I think Brian This is Jay I'll jump in on that with some initial remarks I think we will continue to fight the goodbye at that everyone's fighting on the inflation, Brian again, we've had some tailwind as it relates to our acquisitions over the last handful of quarters and we continue to identify opportunities.
<unk> and execute on sort of extracting the efficiencies from those transactions, but you look at the inflationary environment is real I think we'll have to stay focused there I'm pleased to see our efficiency ratio moving a good direction and I think we'll continue to see that throughout 'twenty three.
But you know I think I think we'll you know we'll see the same the same battle that everyone else is seeing especially on the wage inflation, Brian 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 so I don't think it's runaway expenses, but we'll stay disciplined.
There and stay focused on it.
Alright, and then finally for me the share buyback did not slow at all in the third quarter was still a pretty robust level.
Repurchasing about one 5% of the company.
How did you say your your teeth, you know has a six handle on it so how how do you think about the buyback.
Going forward.
Well Brady. This is Bob I would tell you 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 so.
So I think it'll be part of our plan in the future, but we'll evaluate where we are going forward. We look at D. C. We look also at all our regulatory capital, which are well above well capitalized and so in good shape. There. So it's just overall management, what we will say you know as you know our plan, we won't buy back any more than our current <unk>.
Earnings in the quarter payback, both cash dividends and stock buyback again, now, saying, that's what we'd do this quarter, but it is part of our management strategy.
Okay, Alright, great. Thank you.
Thanks Barry.
The next question is from David Feaster, Raymond James. Please go ahead.
Hey, good morning, everybody Hey, 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 is as you think about managing deposits. Obviously, we're much better positioned this cycle with a lower loan to deposit ratio, but curious how you and how you and your chief deposit officer or thinking about defending deposit costs.
And to lock in some funding and maybe just from a geographic perspective could you. 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 is evolving has evolved meaningfully throughout the year. This year I think the competition is you know we'll 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 are you know how we run that area of the business, but but but overall what I would tell you is you know for our experience in Q3, and really threw out kind of this tightening cycle thus for.
Where we see deposits, leaving the bank, it's really it's really customers who have excess cash. So that may be you know commercial customers with operating accounts and you know historically you haven't had a place in at least in recent history to put that 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 you know keeping some of those.
You know some of that revenue in house, Bob you know deploying our wealth group and some of those situations and moving those deposits off balance sheet and ended the wealth group, but that's really where we see it's not really customer attrition.
It's just sort of excess funds that are leaving and so we will be as aggressive as you know as we can be within reason, we're here to kind of fight and protect margin a good news as asset prices are repricing you have repriced significantly this year. So we've got some room from a margin perspective.
You know to keep some of those funds on the balance sheet, but that's really the experience I feel like we've had thus far.
Okay. That's great color. Thank you and then maybe just touching on 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.
And I guess, how do you think that plays into reserves and provision I mean do you think that the reserve ratios probably dropped here just given the likelihood for a worsening inputs and see some models.
David This is George I'll I'll touch on that and the other guys can jump in if they want to so 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-19 beginning on those hotels.
Retail restaurants student housing office space.
And during this quarter, we took a look at individual loans and we eliminated three of those categories for additional cash.
Category specific adjustments, what we did keep employees were retail and office space because those two are gonna have to tell you all of them, we just don't understand quite yet with.
With renewals of leases and whatnot and 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 and 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 of bell. So our Moody's scenario was skewed towards the downside Institutionary O.
But our quantitative.
Model spin.
Spit out a number less than 1%.
So we feel very good about where our allowance is today. We believe is some of that construction funds going forward you might 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 all your fantastic job of stress testing and evaluating our credit and you can see that over time those numbers continue to go down and I will remind you that.
Even those numbers are heavily dependent on credit we acquired from other banks and not necessarily credit. There was initially approved under Simmons underwriting standards. So I guess, what I'm, saying to you is uncertainty there's certainly some.
And that is prevalent in the market today, but based on our analysis, we're very comfortable with where we are today.
Got it that makes sense and then maybe maybe switching gears to touch on on the fee income well. This has been an emphasis for you 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 <unk>.
Market for a few of these just curious how you think about fee revenues and any other trends and and.
You know all the 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 will get no doubt. It was a good quarter of fee income for us and certainly don't want to don't want to 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 the events in the quarter in the wealth area. The.
We're a little bit timing related and so probably a quarter.
And this is going to happen from time to time, but a quarter that was maybe a little bit ahead of our of our typical run rate. That's a that's an area that is certainly a headwind area I think we're coming through some of that headwind again on kind of the customer acquisition and sales side of that business. So 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 and mortgage that's just a tough business right now, but it's one we're committed to.
It's very in footprint and customer centric focus to us.
Yeah, you know virtually all of that business in this environment is the overwhelming majority of its purchase volume so.
So we feel good about what we have you know what we have there.
And then they'll just be the typical seasonality that will impact kind of service charges and deposit related fees from time to time, we had a good quarter. There I think one of the one of the tailwind for US late in Q3, hopefully you'll stick a little bit in Q4 as well as just some of the waivers and whatnot that we did around the spirit acquisitions.
That are that are phasing off here late in Q3, and four and so that that's certainly aided us on the fee front in the late in the quarter as well.
Alright, that's great color. Thank you.
You bet.
The next question is from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, 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 that a large amount of that is in the construction bucket here can you talk about.
You know kind of.
How much is commercial versus residential and I'm really curious about any commentary around projects that are being may be delayed or terminated.
You know as the economic uncertainty you know increases.
Increases in right direction.
And this is Mac I can start on that and anyone can jump in in a couple of comments. When you think about the 5 billion unfunded commitment. That's all of our unfunded. That's our lines of credit that you know our C&I businesses. When you really look into the construction book itself. It's about 3 billion of unfunded and of that 500 millions your one to four that's your builder finance area.
And as you think about kind of your question on kind of where is it coming from a lot of that business that we as far as the last six months of originations has been in industrial and multifamily in both of those segments are holding up very very well in this environment with affordability pushing into multifamily and for supply chain industrial so like where we've put our.
Our capital in the construction and then on your question around delays were not seeing that and we have a pretty robust monitoring system outside of our daily bankers kind of a centralized function and we look at that very carefully and so far.
Outside of this one will now call it normal supply chain issues no significant delays, where we're now concerned projects are all.
One scheduled release, so so far so good and I would just also point you to our comments. We've made in Q2, we're very disappointed in this space I mean, we were not betting on interest rates I mean, we're our underwriting at well above where rates are today, and then stress and that was further plus an inflationary call.
And so when those size out you really producing a low low leveraged a construction loan it's on our books.
Yeah.
Thanks, I appreciate the comment and then.
Second question in terms of the rate sensitivity slide 16, I'm curious as you think of.
The next 100 basis points of tightening since you provide 100 basis points to 200 basis point sensitivity, what what deposit betas are embedded in that kind of next 100 basis points.
Well I'll answer your sensor sensitivity.
And I'll answer that consistent with what with how I have historically the way we the way we model this right wrong or indifferent is is based on historical basis. So it's not really a forward looking beta it's not a you know a management override.
And so when we look at that historical beta for us and for the industry, you're seeing betas and kind of the mid forty's, they're modeled into this sensitivity.
So much higher than what our beta has been year to date.
And that's total deposit beta correct not interest bearing.
Oh man, Yeah, that's right I do believe that's a total total deposit beta that's right.
Alright, thank you.
Yep.
The next question is from Matt Olney of Stephens. Please go ahead hi.
Thanks, Good morning, I want to go back to the loan growth discussion and now 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 'twenty three it just given the overall uncertainty in the economy.
Matt I think that's a reasonable assumption you can't you can't say that's for certain for sure just knowing kind of I'll repeat my comment again, when we saw a 150 basis point upward rate increases in the third quarter and seeing that maybe you don't expect it to happen again, I mean, yes, with our unfunded construction, yes, that's out there, but we're also saw.
Borrowers pay down you know in this environment. So there's a little things that we can't really anticipate but that's you know.
A reasonable expectation and just depending where the fed moves after that I'd point, you back to our pipeline graph and show you, where we're taking our yields and where the pipelines 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 I'm sure every other management team out there is doing the same thing we're spending a lot.
Tom.
Forecasting are doing a lot of sensitivity analysis here and I think the first thing we've got to acknowledge as these are these are pretty uncertain macro Tom's in terms of you know, creating conviction around those forecasts and that predictability and just listening to the mat resins comments, there I think one of the big levels of unpredictability is.
Money flows cash flows here.
Timing of some of these fund ups.
Not modeling many prepayments right now, but we see some from time to time.
And so we know what our scheduled maturities and cash flows look like but when you think about sort of deposit flows deposit re pricing.
Some of these loans and loans originate loan originations and fund ups timing of cash flows are pretty pretty interesting to look at right now and that's not going to be for us I think that's just I think that'll be industry wide.
Yep understood. Thanks for the commentary.
I guess on the betas on the on the loan balances they look pretty good in the third quarter.
Anything unusual with that from your perspective, where you think you can maintain similar ish kind of loan betas going forward from here.
I would say I'll take it personally let Jay comment, Matt, where we're being very disciplined with our pricing models still in a relationship business and we have them 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 and we remain discipline in the field.
Communication to our bankers and ultimately our clients. So I think we're one of them, we're going to fight that fight and we're hopeful that we won't let it continue to do that on deal size.
Yeah, and one thing I'd just point out to you know when you think about our loan beta or even just sort of net interest margin and we depict this on slide six.
In the materials, but you know our revenue growth our margin net interest income this quarter is really.
Through the headwind of kind of a five and a half million dollar unfavorable variance compared to Q2 from a purchase accounting accretion or PPP accretion point of view. So I think some of those underlying fundamentals are even a little bit masked in Q3 compared to Q2, and then just one other data point.
Matt I'd give you. It's also in our slides, it's all the way back on.
Oh goodness.
C 17.
No. It's a 16 yeah on 16, we've got a comment that I want to point everybody to and that's just the fact that I mentioned earlier timing of cash flows scheduled maturities.
Got $1 2 billion of fixed rate loans that are little mature over the next 12 months you know all in I think we've probably got at least probably $1 8 billion in fixed rate assets that will mature or come up for re price or reinvest over the next 12 months and so.
When I think about where we are pricing assets today, and where those yields are becoming off the books I think that continued sort of migration or optimization of our balance sheet and repricing on the asset side it'll be pretty good for us.
And Jay following up on that.
Lots of puts and takes around the margin from the third quarter and I'm thinking about the core margin ex some of the noise you've talked about it feels like there's still some some tailwind here over the next few quarters at the margin should see some are you know some improvement any any commentary or any kind of range would you point us towards well I won't 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.
But in general I think the industry has gapped up pretty nicely in Q2, and Q3 from margin perspective, and we've experienced that as well.
My expectation is that margins will be much more modest or incremental in terms of its expansion going forward I certainly think.
That's our expectation.
Over over the course of the next several quarters.
But it's 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 going to moderate itself for the industry I believe over the coming quarters, and so I think that the NIM. The NIM expansion will be more modest as well.
Okay. Thanks, guys.
Yeah.
Yeah.
The next question is from Graham <expletive> with Piper Sandler. Please go ahead.
Hey, guys good morning.
Good morning, good morning.
Most of my questions have been answered, but I just wanted to touch on the bond portfolio, a little bit obviously big step down this quarter I guess on how fund somewhat robust loan growth I'm. Just wondering if you guys got a update on the target. Maybe you guys can you just training to you and on assets over the next I don't know yet.
A year or so.
Okay.
Well I think we're certainly not act as a <unk>.
Purchasing bonds, just given given where we are.
From a from a securities.
<unk> point of view, our 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 happening.
Our underwriting standards, they just order what they order and we're still experiencing good growth.
Good pricing.
And so that's where our priority will be and what that kind of all of those statements will continue to see I think the loan to deposit ratio increase loan to asset numbers will expand.
We will fund a lot of that growth with you know with cash flows out of that securities portfolio.
Okay understood and then.
On loan growth I guess I just wanted to chime in.
Correctly spirit was growing pretty well after you guys NASA deal and then closing I'm just wondering how much of that pipeline is from spirit that commercial loan pipeline.
Yeah, Great question I'll kind of give you a couple of data points as you think about their growth as a company of our loan growth they did.
I think around $230 million since they have been a partisan starts in April so that's not that's more than the third quarter. They've also done a $1 billion of new production. So we're real proud of warehouse spirit came into our organization and hit the ground running and if you look at their overall pipeline right now there they are around $400 million of our 500 million full antibody.
Our overall pipeline.
And 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. So I think you see it both on the.
Candidly on the employee retention front, which is where it matters most.
It has been great deposit retention has been has been really strong and then matts comments on the loan and loan origination side. So yeah. We're very pleased there across the board.
Yeah.
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.
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.
This morning, he's in great spirits and we.
Just wanted to give a shout out to dean wish him all the best in his speedy recovery. Thanks again for joining us this morning.
We will 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 a forward looking statement. So 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 risks and uncertainties 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.
These forward looking statements are as of October 25, 2022, and <unk> 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, and our earnings release and in our Investor deck.
That contains the reconciling those metrics from GAAP to non-GAAP .
Thank you again for joining us and have a good day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.