Q4 2023 Simmons First National Corp Earnings Call

Presentation

Operator

So good morning and welcome to the Simmons First National Corporation fourth-quarter earnings conference call. All participants will be in listen only mode. (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.

Good morning, and welcome to Simmons First National Corporation's fourth-quarter 2023 earnings call. Joining me today are several members of our executive management team, including our Executive Chairman, George Makris, CEO., Bob Fehlman, President, Jay Brogdon, and CFO, Daniel hubs.
Today's call will be in a Q&A format. Before we begin, I would like to remind you that our Q4 earnings materials, including the earnings release and presentation deck, are available on our website at Simmons Bank.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 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 released Investor Presentation furnished with our Form eight K today, our Form 10-Q for the quarter ended March 31, 2023, and our Form 10-K for the year ended December 31, 2022, including the risk factors contained in that Form 10-K.
These forward looking statements speak only as of the date they are made, and Siemens assumes no obligation to update or revise any forward-looking statements or other end 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 Simmons Bank.com.
Operator, we are ready to begin the Q&A session.

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
David Feaster, Raymond James.

Hi, good morning, everybody. For David, Hi. Just wanted to maybe been actively managing the balance sheet and done a really good job screen more rate neutral today, but just wanted to clarify some of the points on them on the margin guidance. It looks like you're incorporating the forward curve into that guidance. And just wanted to make sure that that was correct.
And then just maybe some discussion on the margin trajectory over the course of the year off, there's going to be some obvious benefit from the restructuring in the fourth quarter that should help in the first quarter. But I'm just kind of looking at the rate sensitivity in the repricing schedule. It looks like you should, even with incorporating the forward curves, should see some margin expansion, Tom, over the course of the year. But just kind of wanted to get your sense of how you think about the margin trajectory and if that was kind of Jive and with the way we're thinking.
Yes, David, this is Jay. Let me take a crack at answering some of those questions. First of all, I'll talk about what our assumptions or we are probably a little more conservative than the forward curve. We're going to have three rate cuts embedded in our budgeting and forecasting right now for the year. Of course, the third of those rate cuts would be pretty late in the year. So you're not going to see a lot of impact from that in the year 2024. So that's kind of how we're looking at the rate assumptions for the year. When I think about just new home and a new trajectory factory.
To your second question there on the kind of stick with the guidance that we gave you in the third quarter, we were we were obviously pleased with some of the trends that underlie the results this quarter and that was maybe a little favorable for the fourth quarter compared to where we thought we would be. I still think those trends point, a very good direction, but there are still a lot of puts and takes on. You know, we were pleased with some of the flows and deposits this quarter, their seasonal seasonal attributes to our deposits in both the fourth quarter and early part of the year.
So again, some puts and takes there. And then again, I'll point you to some of the disclosure we have in the deck around timing of some of our cash flows of. We've still got some term deposits, a fair amount of them in Q1 that will reap price still again in Q2, but to a lot lesser degree than Q1. So again, optimistic around noon overall. But I think in the near term, we're sort of still in kind of the range that we're operating in and still need to fight some of the pressures that exist on the deposit front.+
As you move past kind of the immediate term move through the balance of the year this year, we feel good that the repricing of assets, again, assuming that the rate assumptions that are out there are good assumptions. We feel confident that the repricing of assets and continued efforts we have around optimizing the balance sheet will help us to to see some expansion in margin and the and and net interest income. So that's kind of our expectations as we look to the immediate term and then through the balance of the year as Greg.+ I think that makes sense. And then maybe just touching on the loan growth side. You talked about in the press release about demand slowing in that you guys are taking a very conservative approach.
Obviously, just looking at the new origination yields in the pipeline yields, you're doing a great job pushing pricing, but at the same time, we've seen the pipeline growth for two straight quarters. I'm just curious maybe what's driving some of the growth in the the improvement in the pipeline despite slowing demand and you continue to push pricing where you see an opportunity to gain market share? And maybe just some color on what segments and Xeon fees are kind of driving that growth?
Yes, David, one thing I want to point out, as we kind of talk about loan growth, I think it's important to remember that while we are seeing some moderating growth, we're still experiencing growth in that. I would argue that even masked a little bit in the fourth quarter, we we have a very good ag production team and he's three here at the bank and were seasonally low. You know, ag loans were down in Q4. Despite that, we still had some growth and we'll see those ag loans, you know, begin to pick back up in the early part of the year here. And so I think I think overall, we feel pretty good about the results from a loan growth perspective, particularly in light of the environment. We're staying incredibly disciplined, really on two fronts.
Of course, the credit front, all of our underwriting of staying very disciplined there on what we lead through the system and then also continuing to be relentlessly focused on pricing and profitability. So, you know, even with this, that focus we saw in the fourth quarter on some expansion in the loan pipeline and will continue to do to make a push to see that, um, you know, I think a lot of that really depends online Fed actions throughout the year this year and just kind of the macro backdrop and I'll use that same term. I used earlier where we're optimistic, but we're cautiously optimistic about that, and we'll just stay disciplined on all the fronts that are important to us.
Okay. That's helpful. Can you maybe just touching on the other side, but on the funding side of the coin and you've done a great job driving core deposits in the quarter, reduced reliance on wholesale funding. I'm curious, maybe you talked about platinum deposits being down modestly, focusing on the remixing. Just curious, where are you seeing opportunities to drive core deposit growth? How is pricing on on new core deposits since you're seeing in that interest bearing side? And then just kind of how quickly do you think you're going to be able to replace some of these if rates do get caught, like you're talking about how quickly you expect to be able to reprice some of these relationships lower?
Yes, and good questions there, David. So I'd say this on we again, we were very pleased with the results in some of the underlying trends on the deposit side. In Arby's, we're down again in the fourth quarter, but at a slower pace, a moderating pace. We hope that trend will continue here early in the year here. We'd love to see that in our bilevel troughing out. But but but you know, on the interest-bearing side, savings accounts, money market accounts, et cetera, had an incredibly strong quarter there that really bucked the trend relative to other recent quarters. I'd tell you if you unpack that, that piece of the deposit growth for the quarter, the consumer front remains very, very stable.
As candidly it has been for some period of time. You have a little bit maybe of downward pressure in the quarter, but it's very modest and it's probably nothing more than just kind of holiday spending, if you will, on the consumer side. So feel really stable there. But we saw some good growth on the commercial side. That's been a key focus for us is to continue to grow in the commercial area. So we had some we have some nice wins in that regard in the quarter. Some of that will be timing related.
Some we won't not 100% of those dollars are going to be, you know, we're going to be sticky. Some of that is commercial customers planning for some things in the first part of the year, et cetera. But again, very, very good indications and good results of strategically what we've been focused on their the result of that, combined with the you know, the portfolio sale in the quarter allowed us to really pull down some of the higher cost wholesale funding. That will continue to be a focus for us on, you know, all throughout the year.+ Here.
On your other question on kind of related to timing of interest rates down scenario, what that would look like. We do know screen a little bit liability sensitive right now, especially if you look at it on a 12 month basis, I think you'd see maybe a three month, six month period and there were more neutral to maybe even a little bit asset sensitive. But as you move past those first few months, you're going to you're going to see some liability sensitive sensitivity in our balance. He and we have some information on that.+ On page 16 of the slide deck.
That's helpful. Thanks, everybody. Great quarter.+ Thanks, Dave, and thank you, David.+
Operator

Operator

Brady Gailey, KBW.

Thank you. Good morning, guys.+ From an operating. I want to make sure I understand that the expense guidance on Slide 11. So you you're basically looking at adjusted annualized expense base of $548 million and say that you could see roughly 1% growth.
So that would translate into your expense the 2020 for expenses around that five, 55 Mark, is that the right way to think about total expenses? Brady, I think I think you're all over it. That's exactly right. And again, that's another one where there are a lot of puts and takes in 2023, particularly given some accrual adjustments and whatnot. We think you know, what we really tried to outline on slide 11 is that when we launched into the better bank initiative, our infrastructure, our run rate from a non-interest expense point of view was around $566 million.
We guided to 15 million of savings as a result of those initiatives exceeded that really throughout the year this year. And as we look at the guide that 2020 for God is sort of a two year our outlook from when we initiated the better bank initiative and we see expenses down kind of 1% to 2% on and on a two-year outlook there. So we're very proud of the progress we've made there.

Ed Bilek

Again, I don't want to call that sort of finished with a with a bow on top. We are continuing to focus on those initiatives. We've got some some as I've alluded to in prior conversations, we have some investment opportunities that will continue to evaluate, but we have a very strong continuous improvement mindset, and we think we'll be able to offset a lot of the inflationary pressures that are out there. All of this, I think, is going to result in some positive operating leverage for us as we move into the future here.
And Brady, one thing I'd add is we showed our baseline of Q4 of 22, the savings there, but the inflationary pressure was there in 23. It will be there and 24. But yet we're still showing that we're going to relatively hold the line on the expenses. So that's great to say that.

My next question on the $175 million buyback authorization, I think that if you repurchase it today would be about 7% of the company. It's a fairly notable size there. Is that something that you have in place that you know, if you could use on a rainy day in 2024? Yes, Brady, our of our prior plan was coming to the end in January of this year. So this is really just re upping it. We have no different strategy than we did last quarter and all of last year, we still think we're in some challenging times and banking is trying to fight through. And the names that as we've talked about, where's loan growth going, whereas the capital where does that need to be deployed and what levels do you need to maintain?+
So we focused on and we think it's prudent to keep a stock buyback plan in place. This is a two year plan, but our strategy is still on our capital is to use it for first for organic growth loan growth. Second is to pay cash dividends to our shareholders. We've been paying that they had for over 115 years or 15 years. We don't want to be the group mess that up a day of that. And then and then after that, it comes down, what is the best use of that capital at that point and and one of them is stock buyback.
Another is there opportunities and balance sheet optimization with bond sales like we had this quarter. And so we'll analyze it. But I would tell you in those stock buy back, our strategy is still to stay within the realm of our earnings for the quarter, less cash dividends would be the maximum that we would buy back.+ Okay.
And then finally for me, if you look at full year 2023, and if you look at the ROA on a core basis, it was running about 75 basis points. I think seventh in the past has talked about longer-term, wanted to get to an ROA of 150 basis points to about double that realized profitabilities under pressure for the entire industry. So you guys are not alone, but how do you think about the path to get sentiments towards a higher ROA and ROE level?+ Yes, Brady, I think a very first and biggest aspect of that goes back to our balance sheet optimization efforts.
George Makris
Again, we're pleased with the results in the fourth quarter and kind of chipping away at that. That's a function of rate and Tom at the end of the day. But we are incredibly proud active and will continue to be in our approach to accelerate that time line where we can and you know. So we'll continue, I think, to be to be prudent and balanced in how we and how we look at that. But when you when you think about our ability to kind of get a loan to deposit ratio in the area of 90% plus or minus, you think about our expense infrastructure and what we pencil out in terms of the results of the better bank initiatives that we've worked on in the scalability that that's put into our system. I think those are very realistic results for us to work toward the.
Bob Fehlman
Honestly, when I think about that, the biggest wildcard to me really is kind of on the fee side, the fees are under pressure. You know, there are some things that are out there and being proposed, and we'll just have to deal with and react to as an industry. But I still think that guidance that we've given in the past of, you know, optimized balance sheet at Simmons Bank and within our strategy and business model that that one 25 to 1 point the range of RONA is what we ought to be focused on when and where our goals are to be wrapped around.+ Okay, great. Thanks for the cargoes.+ Express.+
Operator
Jordan Kent, Stephens Inc.,

Good morning. Could you guys give any insight on when the restructure took place in the impact to add the 4Q 23 ENI?
And then maybe what's remaining if there is any for 1Q 24?+ So the transaction that we consummated fully past tense, nothing carries into the first quarter, albeit a good portion of the trade closed late in the quarter. So you know, what that translates to is about one basis points of net interest income margin impact in the fourth quarter. So I think margin will improve seven bps from to 61 to 68 linked quarter. You can give about one basis point of credit to that as a result of the train. Again, the reason that it's only one basis point is a lot of the trade closed in the latter part of the quarter. Perfect. Thanks.
And then maybe just one follow-up on that. And there were just to clarify, there weren't any securities repurchase with that. So it is used to pay out 100% related. I mean, we were selling securities at, you know, of 1.81% and paying off wholesale funding at north of 5%. That was the trade. And I'd just point out a couple of things on that trade for our conservative, a conservative nature for our company.
Bob Fehlman
First off, we did this in smaller sizes will continue to look at. Is there another opportunity to do another small size. We're not a rip the Band-Aid off and get it all done it once and take a big hit. It's really measured over time is number one. And the other is we thought in this case it was very prudent to reduce the balance sheet by paying off some of our noncore funding. So that's what we did here. We didn't take the money go back and buy higher rate securities to offset it. It was a better to reduce the balance sheet and take risk off the balance sheet effectively. Perfect. Thanks for the answers.+ Thanks, Jordan.+ Again, if you have a question, press star then one.

Operator

Operator
Gary Tenner, D.A. Davidson.

Thanks. Good morning. I had a couple of questions about kind of the deposit guide and thoughts around the retail and brokered CD maturities. And first quarter as you kind of looking first down deposits in 2024 and given the amount of maturities in the first quarter, should we think about kind of the runoff there being a little bit front loaded and more stable over the course of the year?+ Or do you expect to kind of renew the lion's share of maturities coming up in Q1?+ Yes, I think I think a lot of that actually will be a function of loan demand. You know, if we've got loan demand in excess of other cash flows, you'll see us you'd see us more renewing a point you back to the fourth quarter, the ability to sell some securities in the quarter as well as to have some some core deposit growth allowed us to.+ Yes, reduce a lot of the wholesale funding.

So it's not going to be straight line. Gary is kind of the answer. It's going to be a little bit dependent on factors such as seasonality, timing of cash flows, inherent in our balance sheet, loan demand, et cetera. But I wouldn't I wouldn't think the right expectation is to believe that it's all going to be front-end loaded. It's going to be, you know, us evaluating a really good profitability wins, the best opportunities to invest our capital, how we're going to fund those investments. And if that is to shrink wholesale funding, that's what we'll do is we have loan demand that we like the pricing and credit aspects of than we may that may help us or require us to stay at somewhat more elevated levels and some of those areas.+

Krish, I appreciate that on that same or similar topic as it comes to those renewals or the maturities you think about trying to shorten the duration of what's rolling over so that assuming the Fed does start to cut, you could reprice those lower sooner and we shan't versus 12 months out or something. In fact, we've already done that, and that was a decision we had made some point in the year last year. I'll go back to the fourth quarter of 2022 early in 2023, and we were actually extending liabilities at that point a little bit. And that's why you see higher volumes in the fourth quarter and first quarter of some and some repricing around some of that funding. So where we were making decisions then to extend we're making decisions now really prior to now to shorten on some of that for the reasons that you mentioned.+ Great.
Appreciate that. And I have fundamentally I apologize if I if I miss that first question. But in terms of the rate sensitivities and you provided, I think 25, 50 incentive, five basis points cuts, what are you what's the base case that you're using internally in terms of where you actually think the Fed does?+ The share three rate cuts is what we're kind of modeling everything to internally.
And as I did mention this earlier, it's all mention it again to your Gary, that third cut comes really late in the year. So for all intents and purposes, it's kind of cuts if you think of it that way.+ Okay. So effectively in line with the dot plot, is that about right?+ That's got much more aligned with our thinking is much more aligned to the dot plot for internal assumptions then to the forward curves?+ That's exactly right.
Gary Tenner
All right. Great. Thanks, guys. Appreciate it.+ Thanks.+

Operator

This concludes our question and answer session. I would like to turn the conference back over to George Makris for any closing remarks.+

Okay. Thank you very much. I hope it's understandable that we've tried to be ruled out our execution in this volatile market. And I think our results reflect our success and should want to assure you that we will continue to conservatively manage our business to create as much flat ability to react in these current market conditions. As was just mentioned, there are some discrepancy between the dot plot for curve, and we're not betting on either one of them at this point in time. So we expect the same kind of conservative management to to come to recognize at Simmons as we go forward.+ We'll look forward to having more good calls in the future.
Thanks for joining us today and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.