Simmons First National Corporation Q1 2023 Earnings Call
[music].
Good day and welcome to the Simmons.
Both National Corporation first 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.
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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 Belak. Please go ahead.
Good morning, and welcome to Simmons first National Corporation's first quarter 'twenty twenty-three 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.
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 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 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.
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 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 which are <unk>.
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.
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 K B W. Please go ahead.
Hey, Thanks, good morning, guys.
Okay great.
So 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 the corporate bonds.
Yeah, Hey, Brady this is Jay so.
The corporate bond portfolio as a reminder, represents I think a little less than 7% of our total bond portfolio.
Overwhelming majority of that is as you know.
That's one of the Fortune 500 type companies.
We've done a review of the portfolio. We think that 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.
We were I would say very aggressive in how we.
Our provision for those and 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 Alright.
Alright, and then I saw the 50 million dollar our cost save plan can you just talk about the components of where that where that came for and what would you anticipate I feel like you guys have you looked at the expense base.
Often overtime and continue to get more efficient there right. That's just kind of a part of the ongoing focus on 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 some specifics.
Initiatives, we have one within the banks that have been months long initiatives.
As we've sort of been able to execute through those we've been able to identify some some specific cost saves are we've also had in the 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.
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.
As 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 a 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 improve Tom launch.
Yeah, 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 to that figure and Brady. This is Bob just to kind of add to Jay's comments as we've said we've been 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. So this is just kind of as we indicated in prior quarters. When we felt comfortable we could get firm up the numbers, we would share it with the market and that's what we're doing today is Sharon that in and as Jay said, our early retirement program. We've done multiple times over the years. It was well received by some of our.
Our associates and it exceeded our expectation and we will be able to absorb that within the system pretty well.
Alright, 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 you know the industry has seen as a whole but thoughts on you know where the net interest margin trends for the rest of the year.
So you know again Brady I'll I'll take a first shot at this.
Want to remind you I think the most important thing to remember is the baseline here last quarter, we sort of backend loaded some moves on the funding side. So you talked about that in the last call.
So we expected sort of a full quarter impact of that this quarter I think that.
Sort of coupled with the continued migration within the portfolio itself.
It's 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 backend loaded you looked at Q4 to Q1, a lot of that Q4 was backend loaded. So you shouldn't see that kind of dynamic from Q1 to Q2.
But I do expect they'll continue to be some migration within the portfolio like what we're seeing so that'll be the ongoing headwind on the expense side.
But on the asset SOG will continue to have a lot of good repricing dynamics.
There as well.
So I think the near term next quarter or two you know margin should be much more stable.
Then what you saw Q4 to Q1 and then just a reminder that in the fourth quarter of this year you know when we 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 will have all of that in the fourth quarter. I think all of those fundamentals kind of continue to be in place for us as we look out toward the horizon here.
Alright.
Just the last one for me I, you know I know.
A lot has changed from when you all gave guidance 90 days ago, but yeah, you guided to mid single digit loan growth you did a little better than that.
In Q1, but how are you thinking about loan growth from here on out.
Hi, Matt.
I would say that that's still a lot I mean, I think we said in the last quarter that it was going to be a front end loaded.
Our loan growth for 2023 based on those unfair unfunded.
Commercial construction fundings and I remember when you look at our Investor deck and look at page 21 that really illustrates that but then at the same time I point you to our pipeline you know as of this deck. It was right at $1 billion in even since that point has come down even more so so I think it's trending that direction.
Yeah.
Right now on the loan growth side.
Alright, great. Thanks for the color guys.
Thanks Brady.
Our next question comes from David <unk> with Raymond James. Please go ahead.
Hey, good morning, everybody.
Hey, David Good morning, David.
Just following up on 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 you're still seeing good risk adjusted returns and it's it's it's nice.
To see the pipeline yields improve I'm, just curious you know where new loan yields at today. So just any any other detail into oh, the loan growth in the pipelines and all that.
Hey, David Matt Great. Great question, I'll give you a 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 weighted average rate of seven night too. So I think we're pushing through that kind of this.
This current yield curve barstool, and how al steep it got so quickly that we're kind of now cresting over over that kind of moving more into where we can catch those higher yields and she'll take you know 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 that I think there clearly are at 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 really wanting to credit spreads where we need to in this environment.
Okay. That's helpful and maybe just maybe switching to the deposit side, obviously a lot of uncertainty in the market you know and you know banking turmoil and in March but you know 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.
Just curious as you dig into the trends how how much do you think of the deposit 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 a you know since quarter end have you seen core deposit stable.
Or would you expect you know more and more migration or our outflows going forward.
So David I'd tell you that we've spent a lot of time this quarter dissecting everything you just asked about and you know, we're having trouble convincing ourselves that it's any anything that we're seeing is anything other than just sort of normal course activities. We're still opening a tremendous volume of account of accounts all across.
Footprint so there.
Everything feels very normal course.
Even when we look at a.
Larger commercial moves overwhelmingly those or 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 the migration to a degree within those accounts out of in hobbies as an example.
And the higher higher rate accounts, so youre 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 in all of these in the third quarter of last year.
And really had a pretty stable amount of N hobbies, even throughout October and early November and 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 you know on those migration trends, we're certainly getting to a point on a lot of accounts, where youre just sort of in a normal operating accounts or normal customer checking account top balances, which I think is more flourish than anything.
When you see that type of level within the within the customer base.
But those are that's some color around what we're seeing in the portfolio for the quarter.
David This is Bob I would add if you go as Jay said, we started we saw this began in December of last year in Q4, we kind of talked about it on our first quarter.
Fourth quarter call.
We saw all this migrate just like most other banks there early on in the quarter and when the bank turmoil here 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 <unk>.
Mix that we've seen in the industry and it's mostly in the commercial side. The consumer side has been really relatively stable quarter.
Yeah that makes sense and then I appreciate the color that you guys put in the slide deck on the loan portfolio and credit.
Uh huh.
Credit, obviously remains solid, but we did see a modest uptick in M. P. As I'm just curious what you're seeing on the credit front more broadly than what's your what's you're watching and what drove that and then any color you know, there's obviously a hyperfocus on office I'm just curious what's your what's your seeing there how are your conversations with those clients are.
Our are going and just any thoughts on the overall portfolio in that office segment.
Hey, Thanks, Matt Yeah. So your first guide you on your first question on the Rosin empty agent. It was really one specific loan that was an acquisition relationship.
Syndication that.
Our our apparel that we acquired as a part of so it's really isolated that drove that number up now what we're seeing today.
Quality is really holding up very very strongly when we get a lot of attention as you can imagine we're focused on that.
Every day, but I would say the only thing where we're seeing any type of challenges are the ones somewhere to COVID-19. They were challenged before rates started moving up and so we're blocking and tackling harder on those relationships, but we're not seeing systemic.
The portfolio or any specific industry or.
To that to that amount, but on your I would really point you as it relates to office.
In our deck, if you look at page Ah.
Page 20 around office and really all of our major buckets in our CRE. If you look at that office category at $1 billion at 6% of our portfolio with an average loan size of 2 million weighted average loan rate of 49%. So really that that debt is a continued story of Simmons as we while we.
Our office portfolio is very granular its community and orphan.
CPA as the insurance company and our community markets. We don't have any large office tower at our office parks, where and that are kind of which we're also seeing the east and west coast versus what we're seeing is.
Stability in our Opex office sector versus kind of what the coast are seeing.
Okay. That's helpful color. Thanks, everybody.
Our next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Okay.
Hey, good morning, everyone. Thanks.
I guess, maybe if I could start just around the construction growth you guys saw this quarter and 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.
Davis, Matt Yeah, I'll give you.
What the growth we're seeing in our portfolios in two specific categories in multifamily and industrial.
Segments that we have some proven developers proven operators that we have had reoccurring business with an.
And that's where those fund ups are happening all on time, we have a pretty robust monitoring system over that today and we look at that very carefully and so far those two segments are doing very very well.
Underneath that really youre going to move into our one to four construction category and then owner occupied construction, which we love, but overall that that portfolio is funding up just like we.
We expected it to.
Okay.
Okay very helpful.
And then you guys know I think it was in the presentation that the $330 million sub debt sub debt will go.
We'll hear this quarter can you give the margin impact of that and then also within margin can you do you have any color around kind of where the marginal cost deposits coming on or for the margin for the month of March potentially or anything like that that would give us a feel for late.
Late in the quarter trends.
I can tell you on the sub debt there. Stephen then I think the rate on that for the second quarter.
<unk> is at 732%. So you can calculate the margin impact from from there I think pretty 5% going from five to $7 32.
Okay. That's perfect and then anything on kind of where the margin was in March maybe or where cost of deposits ended the quarter at or just kind of an idea of where those marginal deposits are coming on today.
Yeah, I don't have a spot margin for Ya readily available here, Stephen but I mean, it is it's going to be a little bit lower than the full quarter's margin, but again I go back to the comment I made earlier when you look at the trend in margin from Q4 to Q1 and that trend you can't really extrapolate because.
The backend loaded nature of what we did in Q4.
A reminder, that commentary there was some extension of some of the liabilities when we did that and so I think we've absorbed a fair amount of that in terms of what that looks like even if you look at our interest rate.
Sensitivity that we include in the deck, where much more rate neutral than anything right now kind of either direction with 25 basis point type moves either direction. So I think that gives you should give you some sense.
Of how we think about sort of marginal heightens at this point in time.
Okay very helpful. And then just last thing for me you guys lay out here on slide 10.
A pretty aggressive long term ROA target, which is.
You know phenomenon I guess I, just 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 and then I guess within that.
Kind of long term executive comp tied to achieving that 150, plus ROA in any way.
Yeah, Stephen I'd say, our long term comp is tied to our ROA or short term is tied to efficiency ratio and pre tax pre provision. So we're all in on these numbers.
What we're trying to do as we've talked about at the end of last year and even today.
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 and Middle America into some really good msas and some really good rural areas. So we think we have a really good footprint we have.
Really good franchise, but we focused the last 10 years on M&A and growing to be able to diversify our geography and also increase the size to be able to make the investments we need to well right now we're focused on becoming a better bank and its 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, but what we're focused on every day as these initiatives we're working on.
What we're focused on is becoming better bank and that's going to be building up to a 150 ROA on a year over year over year basis efficiency ratio below 50% and 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.
<unk> 18, 24 months of working on this project to get us to where we really wanted to be to set up a good foundation. The only other thing I'd add in there Stephen is just keep them on the importance of just the optimization of the balance sheet that will take place naturally throughout that period of time and so when I think about where assets are.
Coming off of the books and where they are repricing back into the books, there's going to 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 are in this moment in time.
Where things are level setting, but it is all of that level sets. When 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're putting your money where your mouth is on that so I appreciate that color.
Thanks, Dave.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
Good morning, Matt.
When I go back to the funding discussion and and like most of your peers. The overall level of borrowings were higher at March 31, compared to the average levels.
Not surprising given the turmoil we had.
Late in the quarter I'm curious if you still hold this higher level of borrowing.
And if so what are the current thoughts on how long do you want to keep this thanks.
I mean, Matt there is just a small pickup in borrowings there in my mind, we have increased the amount of cash at the fed.
But its nothing thats sort of a material driver in my mind the margin we thought it was a prudent thing to do.
As we saw things transpire in March.
I don't think there are sort of major strategy around that when I look at our borrowings overall I think you know something like 6% of total liabilities, that's really right, where they were last quarter as well.
Just don't see a major a major shift there unless it becomes more advantageous from a rate perspective to do that relative to.
Other opportunities, whether it's brokered Cds or other types of deposits I think will be will be free capitalistic in how we think about that but nothing nothing beyond that mindset.
Well, let me ask it this way as far as just the need for incremental funding from here.
I mean, it sounds like loan growth is going to slow a little bit from where it's been you've got some pretty good cash flow coming off the securities portfolio incremental funding costs or are still pretty high I'm. Just curious how much incremental deposit growth you would need from current levels.
Yeah.
I don't think it's a law 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 or we saw the loan growth. We were experiencing at late last year, we continue to expect.
Good activity with our fund up over the coming quarters.
So.
Is there a moment in time here in the next quarter or two.
Where we have fund ups, the exceed sort of self generated cash flows that could be to some.
More monitor degree.
And what we've experienced in recent quarters, but again as you as you look out as we look at the pipeline.
<unk> commented on a while ago, we were at $1 billion at quarter end were at closer to 800 million at today's pipeline.
The yield continues to do exactly what we wanted to do.
There and so.
But 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.
And then we see what's happening in the pipeline I think all of that leads to much lower need for incremental growth in <unk>.
More sort of.
Optimization of the balance sheet like we mentioned a question or two ago.
Okay.
And then going back to the discussion around expenses and it kind of targeting the $15 million of incremental savings of next few quarters. If I just assume citizen you know normal annual merit increases our expense increase of call. It 5% per year, and then kind of layer. This on is the goal just to keep the.
The expense levels are relatively flat from where they're at now over the next few quarters from a forecasting standpoint is it the right way to think about this.
No, Matt I actually would say that you ought to look.
Kind of our current run rate of expenses sort of Q4 Q1.
Look at our sort of adjusted noninterest expense level.
And then the 15 million were saying would be 15 million in annualized run rate expenses off of that number again, we were specific in the slides I want to be I want to emphasize here, we're not going to 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.
Matt just a little more color for your modeling is in Q1, we had our payroll tax 401, K the timing difference for payouts in the first quarter is about two and a half some two and a half to $3 million.
Merit increases went in in April one that's pretty much a push for the core each quarter. Thereafter. So I think you have the baseline in the numbers in Q1 for the Merit increase.
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 had been had been answered or asked and answered already but.
In terms of capital.
Your stock Unfortunately is getting ever closer to tangible book you guys have kind of held off on using or buyback recently.
Just thoughts on how you might be.
To be thinking about that over the kind of near term with the stock where it is.
You know Gary I would tell you first off we're committed to building our shareholder value and thats through tangible book value and EPS over time.
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 going to do it or can't tell you, we're not going to do it but we're going to look at it and it's really this environment we're in.
With the.
The banking environment, we had starting in March maintaining those capital levels, but it really is a good time. So I would tell you is on the table for us to be looking at of what is the best use of our <unk>.
For investment for our shareholders.
Okay, and then I know a J I don't think you had a.
Spot margin available for question I was asked earlier and I apologize if I missed it but did you mentioned.
You mentioned the kind.
Spot deposit rates I didn't I didn't catch it in the in the deck at all I don't know if you had mentioned on another one.
Yes.
Honestly, our spot deposit rates by product or.
We named pretty widely vary at the moment, so I don't have sort of a blended spot deposit rate again, the best way I think to think about the overall equation there is.
Yes, the trend in margin will likely continue in Q2, just at a much slower pace than what you saw from Q for the quarter in Spain.
Yes.
Okay.
Alright, and then last question I just noticed it's a small number but the held to maturity securities number went up by a few million dollars in the quarter. I know that was did you add anything to help hold to maturity in the quarter or is it just some other sort of accounting item.
Item that impacted that.
Yeah, its really just its natural sort of amortization of some of the marks and that held to maturity portfolio Theres no adds into that portfolio in the quarter, Gary we're really not buying any securities at this point.
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 alright. Thank you very much. Thanks.
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 and thanks for joining US today I think you can see in these uncertain times and the banking industry is diversification of our company.
Laid out really well when you take a look at our liquidity our capital our asset quality devices.
We are a community banking organization.
Hope to see you would recognize that all three of those are outstanding, especially.
Compared to some industry peers.
So we are very optimistic about the way we have established our company on the go forward.
Thank 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, a rebalancing of our balance sheet.
Expense initiatives.
Hope that's exactly what you would expect from US based on what we have said over the last six months.
The fact that we have spent the last 10 years diversifying our company to get to this point in uncertain times. So.
Okay.
While our net income.
Did not quite meet expectations.
We believe that primarily that is a result of our conservative nature and our provision for uncertain times to come.
And 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.
Taken care of particularly the smaller communities, where we are a significant portion.
The capital available for those communities to thrive and grow.
So thanks again for joining us today.
And I hope you have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.