Q2 2023 Simmons First National Corporation Earnings Call
Good day and welcome to the Simmons first National Corporation second quarter 2023 earnings Conference 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 touchtone phone he.
She was draw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Ed Belak. Please go ahead.
Good morning, and welcome to Simmons first National Corporation second 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 Bogden.
Before we begin the Q&A I would like to remind you that our second quarter earnings materials, including the release and presentation deck are available on our website at Simmons Bank Dotcom.
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 could 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-Q, and 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 as exhibits to the form 8-K, we filed this morning with the FCC and are also available on the Investor Relations page of our website Simmons Bank Dot com.
Operator, we are ready to begin the Q&A.
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're 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.
Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question.
Comes from.
Brady Gailey with K B W. Please go ahead.
Thanks, Good morning, guys.
Great.
I wanted to start with the net interest margin, which took a step down here, which you know is kind of inline with what we're seeing from a lot of your peers. How do you think about the net interest margin as we look towards the back half of this year.
So Brady this is Jay I'll jump in on that with a few initial comments to your question you know the biggest driver to margin and kind of the trend. There. So far has really been more around migration within the deposit portfolio than it has been around.
<unk>, if you will and we've seen in June and the back half of the quarter here and really kind of holding our head so far into July sort of a slowing down of that migration and so I think that sort of encourages me from you know as I think about nearing an inflection and im looking forward.
I'll tell you that this June .
The pace of the pressure on NIM.
There's quite a bit slower in June than it has been really in any of the earlier months of the first half of the year. This year. So.
That too is kind of holding that's had a bit here in July .
So I think there's still some near term pressure in Q3, the significance of that pressure is not nearly as.
As significant as it again as it has been in the first half of the year.
You know that might mean, an inflection in the back half of the year more like in Q4, and then keep in mind too that in Q4.
You also have the benefit of the swap that'll kick in in late September So all that to say Q3 likely a little bit of pressure from what we what we see in Q2.
Q4, hopefully, we see that inflicting at some point even in the underlying trends and then and then you have the benefit of the swap as well on top of that you know Brady I'd just add too is you know obviously all banks have experienced pretty much.
Pretty big increase in cost of deposits is one of the things we're not afraid of us to defend our market share in a lot of our markets that we have a very good market presence and we don't want to give up that market share in those deposits. So we're willing to defend those and pay up for some of those and we did that in this quarter.
Or in some select markets that was really critical.
Alright, and then you know you guys have made some good progress in taking some expenses out of your infrastructure I know you're targeting a reduction of 15 million by the end of the year, which I think you guys will hit well once you get beyond that or are you happy with the expense base or do you think you'll continue to.
We look for opportunities to become more efficient.
Yeah definitely we will continue to look for opportunities there Brady I think their or in fact, I know there are more opportunities beyond that though the one thing we will be measured and deliberate just like we were on this initial round the better Bank initiative, we talked about it for a few quarters really kind of wanted to make sure we had our pencil sharpened.
Around carbon net cost save number and we'll do the same thing if there's another round of this but you know as we look into next year, while I do think there or you know incremental opportunities on the expense side I think there will also be some opportunities just put them on the investment side and we will be opportunistic in making those investments where we need to.
And where we feel like there are opportunities so more to come on that as we kind of round out the analysis of those opportunities.
What about talking about the numbers.
Alright, and then finally for me you know you repurchased about 1% of the company in the second quarter.
Is there any reason to think that that would slow or do you think that youll continue to consider the buyback in the back half of the year.
You know Brady I I'd say first off we really took advantage of our pricing for us and all bank stocks in the early part of the quarter. When most nights were trading near tangible book values very accretive to buy back at that point.
<unk> bought back $20 million in this quarter you know, we'll continue to look at it on a quarter by quarter basis based on what the market condition is and what our capital needs are the one constraint I would say in there is we would stay within if we did stock buyback it would be within our earnings less our cash dividends would be the maximum amounts. So we.
I think that's a very prudent way with where our balance sheet and growth as projected.
Okay, great. Thanks, guys.
Our next question comes from David Feaster with Raymond James. Please go ahead.
Hi, good morning, everybody.
Or David one David.
Touching on the loan yield side than just the one.
Loan growth side.
It was nice to see.
It's either growth obviously construction funding has been a key driver of that you know when we look at the pipeline slowing as we'd expect but you're you're you're really doing a great job, putting new loan yields I'm. Just curious could you touch on from your perspective, what are you hearing from your clients how is demand trending across.
Ross your footprint.
And then just where we're at.
Are you still able to get.
Good risk adjusted returns at this point I'm, just what's your appetite for loan growth.
Yeah, So David a lot of a lot of questions in there kind of you know in a roundabout way. So let me try to tackle several different elements of that topic I do think I've said this on past calls and in past meetings I think it still continues to be true that you know the rate environment, just the overall environment.
Right now as caused a fair amount of demand destruction.
And we continue to see that I think that that you know any anywhere where are our pricing discipline is showing up which I think that's pretty well across the board at this point and has been.
And in our underwriting continues to be you know very very.
Sound as it has been all the way through the cycle and so when we when we kind of couple of our underwriting standards and our pricing standards. Together you know the volume that we are seeing come into the pipeline. We feel is very very good relationship oriented business with very good borrowers and very sound structure.
And that's kind of what our appetite is right now.
We'll tell you.
You know really in the second quarter, the last month or 211 kind of positive solid potentially in terms of those top line trends because the popcorn trends been burned down and.
We've been we've been forecasting that can really continue to expect pipeline trends to kind of be an area, where they are right now, but one one kind of a positive sign as we are seeing some some borrowers. Some you know some customers that we deal with and have dealt with in the past very strong relationships who or.
It seems more willing to put a little more cash equity in the deals and with more equity in the projects that they're looking at you know and with our underwriting and strong pricing I think that's an indicator of kind of the lack of.
Financing opportunities that are out there and so we will we'll continue to look at those and be opportunistic where we can be again with very close relationships, but I think that the trend you've seen in a little bit of slowing loan growth, but still good growth.
As a trend overall that I continue to expect Paydowns, we're gonna be low and I don't expect that to change unfunded commitments will continue to see good fund ups on those over the next few quarters.
Pipeline, probably going to level off here.
In the area that its in the hopefully we can continue can continue to see some good opportunities with good borrowers.
Are there any markets or segments, where where maybe you're seeing more opportunity in that you think you can gain share just because you are open for business, though.
You know.
Theres nothing that really jumps out that I think is worth pointing to when you saw growth for us this quarter that was pretty balanced across the board and and I think that that still works.
You know, there's still the right way to think about it for us going forward one area I would call out that we continue to have a lot of momentum in and be excited about is just the agora area. We've seen some really good growth and opportunities. We've got some great talent in our bank in that area and a long history in it.
But that's not a huge portfolio for us that's the one area I would call out, but I think our focus continues to be diversified and really across the portfolio.
And you mentioned in the presentation that we're expecting fee revenue growth to slow I know this has been a big push for you all for for some time and it's going to keep growth you generated in part from these better Bank initiative I'm just curious maybe some of the trends you're seeing in the underlying B E where are you.
We see opportunity on the pizza going for cross selling across our business lines across the franchise and just any other.
Thoughts on the fee revenue side.
Yeah, well I will say in the lines of business.
That we think about out there whether it's you know well mortgage et cetera, I think there's still a lot of opportunity for us.
I was pleased to see.
An uptick this quarter on the revenue side for mortgage.
Yeah, you know recent rate you know that that's probably going to be a little more of a challenge in Q3, but I think we will still continue to do well there. We've got a lot of opportunities to grow in both of those areas in particular, just by continuing to.
Better penetrate some of the markets that we've acquired into over the past several years and so that's certainly a current an intermediate term objective and opportunity for us.
I think where we continue to really evaluate the fee side is just overall kind of.
Banking services.
Deposit charges.
Cetera, where the market environment continues to get increasingly competitive and a lot of different ways.
And so that's something that we'll continue to evaluate an insurer to Bob's earlier point.
That we're going to protect and defend and and in our markets and especially in markets, where we have great market share.
And so that's the work that we're doing now.
Right that's helpful. Thanks, everybody.
Thanks, David.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
Hum.
I want to go back to the funding strategy that was discussed I appreciate jade commentary about deposit migration trends stabilizing and in recent weeks.
Any more color on just the funding and the strategy that you executed and in in the second quarter looks like you leaned a little more heavily on the borrowings in the first part of the quarter, we'd love to just I. Appreciate the strategy as you move into the back half of the year and any kind of changes and then second part of that is with Bob's comments about defending market share.
There are in certain cases should we read into that that the deposit betas are going to be moving higher in the third quarter as compared to Q.
Thanks, Matt well I'd say that you know first and foremost just on the funding strategy saw and really throughout the quarter. I think we were just opportunistic where we needed anything whether it was you know anything in the wholesale markets.
There were a lot of ebb and flows, especially coming out of you know Tom lines back in March and the things that happen there within our industry, where we were able to just be opportunistic that men at Tom's leaning more into borrowings versus brokered Cds. So I think we'll continue to just kind of.
Evaluate those markets as we need to rely on them generally speaking I think the strategy going forward as we've talked about is more along those lines of balance sheet optimization.
And needing to rely less on that type of funding and that that should bear out as growth slows here a little bit we went from double digit loan growth the last several years to.
Still good single digit growth here, but I think we're getting back to a place where sort of our inherent in our balance sheet cash flows can hopefully find the majority of our loan growth.
And therefore laying less into any type of wholesale borrowings that that would be the figure reported I think the strategy going forward.
No the one maybe nuance or two in there this quarter.
We you know coming out of March and the early quarter, we definitely.
Yet kept a little bit higher cash balances early in the quarter than what was necessary you might even think back to sort of debt ceiling talks that were going on in the quarter. So there were some things about the.
You know the macro environment in Q2.
We felt it was just prudent to take a pretty cautious tone around.
Liquidity and what we will keep it on the balance sheet.
So those were maybe just some again some nuances for the quarter to think about.
And just to follow up on that Jay any comments or thoughts on betas in the third quarter as it relates to what we saw in two Q yeah.
Yeah, I think yeah, yeah, sorry, I missed that piece of the question yeah on the deposit beta Fry I think similar to the comments on overall in the home I think there will still I don't think betas have sort of stopped here there still.
You know overall pressure are really from the competitive environment on deposits that I think will continue and will continue to drive. Some some you know some movement in betas, but again I hope I think the larger part of the beta move has been <unk>.
Volume, if you will more than rate its been that migration in and out of lower cost deposits.
I'm hopeful.
Several weeks is not enough to really call the full trend yet, but I am optimistic in what we're seeing there and what I'm hearing from others as well so if the volume piece or the migration piece does in fact slow while there will be some continued pressure I think on on both NIM and on deposit betas that are related.
Are there I do believe that that the significance of that trend seems to be slowing down here.
Matt just one other item for that on NIM as we did have our sub debt that repriced from fixed to floating in the quarter that was a couple million dollar negative impact on our net interest income that's a onetime reset there. It may go up a little bit with the next move but not at the same level. It did in this quarter, that's a good call out.
Yeah, Thanks for that Bob and I, if I remember correctly, I think <unk> got the full impact of that reset.
April 1st get every bit of it okay perfect.
And then I guess switching over to the loan repricing opportunities.
That your your deck called out little over $1 billion of principal maturities over the next year.
Year at a lower rate would love to know just general thoughts about the repricing opportunities within that and kind of what the directives are to your production staff about where where you're targeting in terms of the sort of pricing levels.
Yeah, I think what you see in terms of trends in our pipeline would be somewhere you know that kind of trajectory as where we would expect you know re pricings to be happening on renewals, there and even higher because that pipeline is built up over over time as rates continue to move.
Current current day.
Pricing in that top lines higher than sort of the full.
Ballpark one itself. So I think our renewal opportunities are pretty significant here on that $1 billion 1 billion and one that we call out.
In the deck and.
You know Matt the other thing that throw in there that were really focused on is enhancing those relationships with those renewal opportunities.
Where we have renewables and opportunity to bring in an operating account or additional deposits or additional fee business back to a question that was asked earlier in the call.
We think these are really good opportunities, there's just not a lot of credit availability in the marketplace today for our customers and so we're trying to take full advantage of that to the to really enhance and grow our relationship even beyond just the pricing.
Our loan yield piece of that equation, we think theres a lot of other opportunity at every renewal date.
Mm Hmm okay.
I appreciate that and then I guess, just lastly for me I think the construction loan balances continue to migrate.
Higher I think your disclosure at a 99% on the C and D are kind of threshold measurements with largest appreciate kind of thoughts around those levels and.
Could could that act as a governor on the buyback or would you be willing to move over that 100% guideline for a quarter or two just any kind of thoughts on on that level.
Yeah, Matt I'll jump in on that one too.
It's certainly not our strategy to operate it at above 100 for sustained periods of time.
At the same time, you know we've got a lot of expertise in those areas of production and within our business. We're not afraid to go over 100 for a period of time, but I don't think you'd see us just sort of sustained operating above those levels.
It's really just going to be a function of Tom stabilization rates on those projects et cetera.
Okay. Thanks for taking my questions guys.
Matt Thank you Matt.
The next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning, guys.
Well a couple a couple of follow up questions I guess on the on the deposit side unless I missed it in the deck and I apologize if I did but could you give us the June 30 interest bearing spot rates, just as sort of a jumping off point into the third quarter.
I don't think we've got that in there yeah, I don't have that right off hand here Gary.
I'll get back to you with that Gary.
Alright, thank you.
And then in terms of the there's a commentary about the service charges I don't recall.
You, all making announcements about reductions in service charges or anything along those lines and I know last quarter, you guided to fee income and the 43 to 45 range, which you were at the top end this quarter does that range still hold even with some pressure on service charges or is there a larger delta there potentially.
Well I'll just start off on the service charges on all of our service charges, whether it's on deposits, whether it's in wealth or investment. We continue to look at that every every quarter to see where we are in the market and where we need to adjust for.
<unk> ability we.
Talk about our service charges in Q4 of last year and still have not made any changes we're still evaluated on a month by month basis.
So don't have any plans to announce today.
But on a go forward basis that Jay you may want to comment on the overall because we did have a couple adjustments this quarter well I think youre right. We've commented historically that low to mid Forty's is kind of where we expect.
Overall fees to be on a quarterly run rate we've been at the top end of that range really kind of exceeded that range in my mind for a couple of quarters in a row here.
Yeah, that's consistent in the last couple of quarters of some fair value adjustments and.
Well legal reserve reversal last quarter et cetera, So I still think that low to mid <unk> range.
<unk> is a good range for us here depending.
Depending on actions that we might need to take from a competitive dynamic point of view.
On the deposit service Admob put me more toward the bottom of the middle of that range, whereas we've been hitting the top end of that range for a couple of quarters here.
Okay. Thanks, I, just want to make sure I didn't miss any announcements about reductions in deposit service charge side. So I appreciate the color.
And then I can.
The discount accretion for the quarter as purchase accounting adjustments for the quarter could you give us what that number was.
I think we have that in here.
Oh, it's on page 17.
17 remaining that's what remains.
This is about 300000.
Panama.
What's the number of years.
$3 million about $3 million for the quarter at seven a little over $17 million left okay. Okay. Yeah. I know you had flagged kind of adult versus the first quarter I want to make sure I had that number accurately.
And then last for me in terms of those fair value hedges on the securities portfolio.
We get a hike this.
We you know then they're even more in the money just you've talked in the past about the potential to unwind pardon Raul and I think you've kind of note that in the slide deck, just overall thoughts on that I use as the working plan to keep them in place or.
How are you evaluating that.
Well, that's what we continue to evaluate those hedges as well as any other opportunities hedging rates candidly in either direction. So that's just a continuous exercise for us.
Think theres anything in sort of what I would call immediate plans to <unk>.
Unwind that hedge right now.
But it is absolutely something that will continue and to your point, we would expect those to be further in the money.
Even as soon as tomorrow.
Alright, Thanks, guys appreciate it.
Thank you.
Yeah.
This concludes.
Yeah.
Actually there's one more question here Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, I appreciate it.
Hey, guys I.
I was just curious on the progress of the $15 million how much of that in the expense saves and yachts expense states was already in the run rate or if that 15 million would kind of be incremental to the levels today.
No Steven I still think that we made progress this quarter.
Very good progress I feel like Oh, no I'm.
I'm not sure that we had any of our initiatives fully achieved in the quarter from a full kind of 90 day period, if you will will.
Certainly have full benefit of some of those initiatives here in the third quarter.
There are other things underway that we'll have partial benefit here and full benefit in Q4. So I think we'll continue to chip away at that the guidance that we've given is to sort of be able to fully hit that number net.
You know in Q4 and have that kind of out of the run rate as we go into next year still feel very good about our ability to meet that Oh hope to even exceed that number by a little bit as we kind of turned the year next year and as we mentioned earlier on the call. We hope Theres more and expect there are more opportunities beyond that.
But we also believe there'll be some opportunities for us to make some investments whether that's.
Talent acquisition or otherwise.
That will further enhance our business enhance our growth profile enhance our scalability. So it will be balanced as to how we think about that net cost save expectation moving beyond this first 15 million and will continue to inform you all of our progress around that as we move forward.
Okay, Great. That's really good and then just last thing for me I'm curious, how you think about an average earning asset growth from here.
Sounds like working down some of the borrowings and maybe.
You know loan growth in the low low mid single digits.
I heard your answer to Brady's question.
Appropriately maybe a couple more basis points of NIM compression in the third quarter. So just how do you think about the direction of the balance sheet and average, earning assets and with that compression on the NIM. What do you think the path is for overall NII dollars for the rest of this year.
Yeah, well I think that speaking to the growth piece of it Steven.
As we've said now for several quarters the.
The strategy more than anything is balance sheet optimization. So its remixing, the earning assets kind of day in and day out every month every quarter that we move through we're having success with that I think we can continue to have success with that as we move forward certainly expect to be able to rely less on.
Wholesale funding is there.
That continues as well and that should be pretty attractive for us from an from a NIM point of view as we as we kind of move out from there.
Absolute dollars of N a.
I don't have a great guide for you there.
I don't want to be that specific with but I think that as we remix the balance sheet, you think about earning asset mix kind of risk weighted asset density I think theres, a good opportunity for us to grow in our as we move forward.
Got it thanks, Bill I appreciate the time guys.
Thank you.
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 I appreciate all of you joining us today I think what you are seeing at Simmons is what you should have expected.
Based on the history of our company and that is a conservative diverse markets product and risk profile and that's playing out well in today's market.
We're certainly committed to our community banking philosophy and relationship banking and Fortunately for us and some of the markets that we enter through acquisition.
Our customer base is starting to really understand.
Whose simmons is and what our philosophy is and.
The meaning of relationship banking.
Take a pause in M&A and different start better Bank initiative is certainly timely.
And we will be very beneficial in the long term.
We appreciate you joining us today.
And we look forward to doing this again three months from now have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.