Simmons First National Corp Q1 FY2022 Earnings Call

Good morning, and thank you for joining our first quarter earnings call. My name is Ed Bilek, Director of Investor Relations at Simmons First National Corporation. Joining me today are several members of our executive management team, led by our Chairman and CEO, George Makris. The purpose of our call is to discuss the information and data provided by Simmons in its quarterly earnings release issued this morning and to discuss our outlook for the remainder of 2022. We have invited institutional investors and analysts from the equity firms that provide research on Simmons to participate in the Q&A. All other guests on the conference call are in listen-only mode. A recording of today's call will be posted on our website, simmonsbank.com, under the Investor Relations page for at least 60 days. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook. I'd remind you that you should not place undue reliance on any forward-looking statement as actual results might differ materially from those projected 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 SEC filings, including, without limitation, the description of certain risk factors contained in our Form 10-K for the year ended December 31, 2021, and the forward-looking information section of our earnings release issued this morning. Simmons assumes no obligation to update or revise any forward-looking statements or other information. Finally, during this call, 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 our Investor Relations page of our website, simmonsbank.com. Operator, we are ready to begin the Q&A session.

Our first question comes from David Feaster from Raymond James.

Improved production and the increase in the closed pipeline as we head into the second quarter. I'm just curious, how do you think about the composition of that pipeline? And as we think about growth, I guess, how do you think about your growth outlook throughout '22? And what do you expect to be the key drivers of that growth, both in terms of geographically and by segment?

Yes, great question. We were excited to see positive core loan growth in the first quarter as we look ahead to 2022 and identify opportunities. Our Metro Bank shows a 3% growth, which had some large payoffs in the first quarter, and we believe that this group will be a key driver in the later half of the year for where opportunities will arise. DFW is experiencing strong opportunities in our pipeline, and Nashville is seeing similar trends. All our metro markets, including St. Louis, are experiencing good demand. The Community Bank stands out with an annualized 8% loan growth even before our crop loans begin to fund in the second and third quarters, which will further contribute to growth. In the Corporate Banking group, we had a strong quarter from our commercial finance team that joined us last summer, achieving $50 million in true net funding. Overall, every area appears to have promising opportunities. In commercial real estate, we are focusing on attractive low leverage opportunities in the current environment with rising interest rates. Additionally, we anticipate continued strong prospects in commercial finance throughout the year.

So I guess is that kind of high single-digit pace as you continue to see strong production and hopefully, the deceleration in payoffs and paydowns, is that kind of where you think you can remain?

Yes, David, I would say that earlier guidance that we kind of said over the last couple of quarters is that we're still trending that direction. Our pipelines continue to grow, approved rate to close is continuing to grow. So I think we're right on track for that guidance.

Terrific. And then just on the other side of the coin, how are new loan yields trending on your new production? Obviously, the rate hike came later in the quarter. But I just wanted to get a sense of how pricing and new loan yields are trending and where you're seeing the most opportunities?

That's a great question. I would say the first quarter presented challenges, especially as rates and economic news were released, leading to decreasing spreads on high-quality credit opportunities. Our focus remains on high quality; we aim to avoid high-yield loans that come with higher risks. Now, in April, spreads are beginning to widen. We are staying disciplined in our approach and starting to secure wins at those higher spreads. The competition is still intense, especially in certain product categories. For instance, industrial warehouse or multifamily opportunities typically show lower spreads, although those are also starting to widen. You need to explore a variety of options to achieve the desired spreads in this environment.

Okay. That makes sense. And then just maybe staying on competition and the competitive landscape. Obviously, pricing competition remains tough. But are you seeing more aggressiveness on terms or structure or standards? And then just maybe on credit more broadly, are you seeing anything that's starting to cause you any concern? Or just given the continued intense competitiveness and some macroeconomic uncertainty? Are you starting to tighten the credit box at all?

I would say we're doing well and staying true to our credit policy and culture, and we have never strayed from that. I notice that some competitors are starting to offer interest-only options, which we are not participating in, especially with five years of development opportunities. We also aren't tightening our approach, but we are focused on leverage and making sure every opportunity we consider can withstand rising interest rates and costs, particularly in construction. We're remaining disciplined and finding the right opportunities. In terms of loan-to-value, where we averaged 70% and 65%, we are now reducing it to 60% to be cautious with the increasing rates and costs.

Our next question comes from Gary Tenner with D.A. Davidson.

Just to follow up on the loan question. It looks like in the pipeline, the construction piece is a pretty sizable chunk of the pipeline. Can you talk about where you're seeing the most success in growth there? Obviously, a lot of your footprint is in very attractive growth areas, but I just wanted to drill in a little bit on where you're seeing that construction growth?

If you look at our portfolio today, DFW is definitely at the forefront of the construction development opportunities, closely followed by Nashville. However, it's important to note that we also have strong relationships that support industrial development across the country. So, while those are the main areas of demand, they are not the only ones.

And then on the expense side, with Spirit closing in early April, I wonder if you could provide any kind of guidepost for where you think second quarter operating expense models are?

Yes. So I'll jump in on that, Gary. This is Jay. First of all, I'd just say, Q1, we were close to our 2% guide. We were, I think, at 2.02% noninterest expense to average assets. I think Q2 is obviously going to be a noisy number. We'll have a period in Q2 where we have non-retained staff for a good portion of the quarter. So you're not going to see us sort of fully synergize the integration of cost savings until the back half of the year. But that same thing was true on Landmark and Triumph that we closed back in October of last year. We saw our expenses kind of come up in the fourth quarter, come back down in the first quarter guide. And I'll even give you one number, just a month of March, our noninterest expense to average assets was 1.95%. So trending right where we would want it to. So I think you're going to see that same kind of pattern develop here with Spirit over the coming quarters.

Okay. And then last question for me. On the topic of M&A, obviously, you've all been fairly active the last year. We've heard some commentary that the decline in bank stock prices has caused some ongoing M&A conversations to maybe be temporarily delayed or on pause. Can you talk about what you're seeing and hearing in terms of the M&A market?

Well, this is George. So we would expect that discussions on M&A across the country will continue. They're just not going to continue here at Simmons for a while. A little different approach now with our forward-looking growth. 10 years ago, we had an objective to access growth markets, and we've done that over this period of time with 14 acquisitions. And I think we've been straight up with the market about our intentions to adjust those acquisitions to fit the Simmons banking model. And I think we've done a great job. We have actually done that while providing record earnings to our shareholders. We're at a point now where we're ready to focus on organic growth. When you take a look at our footprint and the opportunities we have, I'm not sure if there are any other markets that are around us that we'd like to be in that give us a greater opportunity. Not that we wouldn't consider a merger partner if the financial trade was good for our shareholders, and we saw some strategic benefit, but we just don't see that right now. We believe we are well positioned to provide aggressive revenue growth over the next several years. We've developed a capital plan over 5 years where we finance our own growth. And we believe that we're well positioned to do that. So M&A was very important to us to gain access to the markets that we're in today. We've done a great job of adjusting those merger partners' balance sheets to provide opportunity that we have not seen in this bank since 2013, and we expect to take care of that over the next 3 to 5 years. We've got expansion plans across our entire footprint with regard to hiring professionals in business banking, private wealth, mortgage, business development. We've got some build-out that we've got to do because many of the banks that we acquired didn't have those products and services in those markets. We are also very focused on community banking in metro markets. The banks that we bought in metro markets were commercial banks, really focused on larger commercial deals. Our bread and butter is community banking, not to discount the importance of commercial banking. But what we do really well at Simmons is provide quality products and services in a diversified fashion for every consumer in every market. And that is really going to be our focus over the next couple of years. So M&A has gotten us where we are today. We're like the dog that caught the car, now what are we going to do with it? We believe we're going to be very, very successful. And when we talk about our loan pipeline, what we published at the end of the quarter has grown by another $1 million with the inclusion of Spirit of Texas. Our unfunded commitments are now $4.1 billion as of yesterday. So we've got great opportunity to grow our revenue organically with the team that we've built over the last 10 years. I couldn't really be more optimistic about our ability to be the go-to bank in the markets where we do business.

Our next question comes from Brad Gailey with KBW.

So it's good to see you all be active on the share buyback. I know bank stocks kind of continue to be volatile to the downside here. But maybe just talk about your appetite for continued buybacks just given where the stock is trading now?

Brady, it's Jay. I'll address that first. Our activities earlier in the quarter, specifically in January, were focused on completing our previous authorization, which we successfully finalized. Due to our pending transaction with Spirit, we weren't able to engage in the newly authorized plan that we discussed at our earnings call in January. Now that everything is in place, we have $175 million available. We remain optimistic and opportunistic regarding share buybacks. We don't want accounting rules to cloud our economic perspective. Our capital position is very robust, but we must remain mindful of our tangible common equity given the status of our available-for-sale portfolio. Our aim is to optimize the balance sheet and create real economic value over time, without allowing accounting practices to dictate our decisions. Our share buyback activities will be aligned with this goal as we work to optimize our capital.

Okay. All right. And then it sounds like there's a shift away from growing so much via bank M&A and more just on a kind of organic de novo point of view. George, it sounds like there's a decent amount of hires you want to make. Maybe just talk about the sizing and how big the hiring effort will be at Simmons going forward and the potential expense impact that could have?

Well, Brady, so we have pro formas that we have established for all production new hires. And obviously, on day 1, there's no revenue associated with those folks. But just let's take a new lender, it doesn't take them very long to pay for themselves. So we'll have some upfront expense. But just to give you an example, with investment advisers across our footprint, we have 24 positions we're looking to fill over the next 2 years. And that's just to round out our service in markets where we don't have that service available today. And if they produce at the pro forma rate that we expect and that our other new hires have proven to be reasonable, those earnback periods before they become self-sufficient are less than 12 months. And I would tell you that, that's money well spent and an investment we're going to continue to make. So we've got gaps in our mortgage origination across our footprint. We're looking to fill those gaps. I've already mentioned our investment advisers in our private wealth group; we manage $6 billion of assets today in about 10% of our territory. So you can just imagine the potential that we have with our expertise across private wealth. So we've got great opportunities to hire professionals who want to be a part of a growing team across our footprint. And we see with the disruption in the marketplace today, great opportunities to take advantage of that sooner rather than later. We don't have a scheduled development plan. If they all became available tomorrow, we'd hire.

Yes. I'll just jump in with one other comment on that as well. When I think about where we're positioned in all of George's comments earlier around organic growth and just the look of our balance sheet today, overlaying that with Matt's comments around where we're at from a loan growth point of view, we make a lot of investments on the production side, and I don't think our expenses would grow as fast as our revenue will in those scenarios. We're just so for the inflection in the growth, the inflection in margin that I think our revenue is going to outpace that expense growth in any of those events, Brady.

And then just finally for me, as you pivot to more of an organic growth story, is there a kind of longer-term ROA level and a return on tangible common equity level that you'd like to see Simmons achieve?

Yes, I believe the 50% to 55% efficiency range is suitable for a company like ours, which is focused on community banking. Our long-term goal for return on assets is between 1.25% and 1.50%. We aim for a return on tangible common equity above 15%. These are the internal targets we strive to meet consistently throughout the year.

Our next question comes from Matt Olney with Stephens.

You've talked about this high single-digit organic loan growth target for '22. But with your commentary today, it sounds like a renewed focus on organic growth or at least talking down in the near term. Is it fair to say that this high single-digit target for this year is also a longer-term goal that you hope to achieve for multiple years, not just this year?

Yes, conservatively, we believe high single digits is where we should be. The only reason it's not in double digits is due to our share in many of the community banking markets we're currently in and the lack of opportunities. However, looking at our results from the first quarter, our Community Banking Group's loans grew by 8%. I wonder if we set our expectations too low because I believe our performance in metro markets will exceed high single digits. The impact of community market growth on our overall growth percentage doesn’t seem to be a dilution at the moment. If we maintain this strong performance in our community markets, we may surpass that target. Still, I think we would all be satisfied with high single digits for the next 3 to 5 years.

Okay. And just remind me, you talked about the Commercial team, the Metro team; you talk about the Community Bank team, where does the Corporate banking team sit? Is it within that commercial? Or is it separate and distinct from those 2 teams?

So Matt, yes, this is Matt. They're a set-aside team that really handles our specialty verticals. So they're really aligned on their focus. And when you see the Metro banking team, that's your in-market Commercial banking, blocking and tackling, revenue companies, $10 million and above is where that Commercial banking team is operating, but the Corporate banking team is set aside from all that.

And Matt, following up on that, is it fair to say given the size of that Corporate banking team and some of the renewed efforts there and some of the recent hiring, is that a group that we should expect growth beyond that high single digits over the next few years?

I believe it's possible. However, for certain specific areas that we understand very well, such as our ABL unit from Triumph, we will keep a close watch and ensure we have a thorough understanding of that sector while setting some boundaries. Over time, I genuinely believe this can be a source of double-digit growth for the bank in the future.

Okay. Perfect. I guess switching gears, you gave us some good details on loan growth and expenses. What about on the fee side? Help us appreciate kind of what the outlook here is on the fees. It sounds like some of your recent hires and your planned hires are also there to help support fees. So any color you can give us on that?

Yes. Matt, it's Jay. I'll jump in with a couple of comments. First of all, when you just think about Q1, I think it was pretty well in line with our seasonal expectations. Service charges on deposits, et cetera, trend down typically in the first quarter; I think we'll see those kind of return back to normal throughout the year from a seasonal point of view. There's the obvious headwinds from a mortgage point of view and well the same way with some of the volatility and fell offs we've seen throughout the market in Q1. But we're holding the lawn in those businesses to a decent degree here. Our opportunity in all of those areas, as George was mentioning, is to round out our footprint. There are a number of markets that we're in, where we have great penetration of those fee services in those markets. And then there are markets, particularly from some of our more recent acquisitions where we have almost zero of that fee income but all of the capacity for it. And so I think we'll have both a deepening and broadening to our growth focus around fee income. Those are longer time lines than just hiring a new loan producer and having loan growth. But I think we've got a lot of initiatives and momentum in place to be able to continue to grow on the fee side.

Our next question comes from Stephen Scouten with Piper Sandler.

First, thanks for all the detail in the slide deck. It's always extremely useful in detail, so I appreciate that. I guess maybe following up first on one of David's earlier questions around loan yields. Do you guys have any numbers on the kind of the spread on the on-off yields that you saw this quarter? I know you said that did pressure the NIM somewhat.

The difference between what is currently paying off and what is coming in is significant. Matt might want to share some insights on this. However, Stephen, I believe this difference is a major factor in the challenges we faced in Q1, which affected not only us but also many in the industry. We saw a lot of 4 handle yields coming in during the quarter while we were still dealing with 3 handle yields. Unfortunately, we didn’t get much benefit from the rate hike in Q1. Now, we are beginning to see improvements in our numbers, along with Matt's comments about credit spreads widening. Matt, you can elaborate on this.

Yes, Stephen, I would say at the highest point that there was a 50 basis point difference between what is coming off our books and what we're bringing on. We track that daily, and it's definitely narrowing. We have already experienced a rate increase, and with spreads increasing, that difference is moving down to more like a 25 basis point differential. We expect this to continue evening out, although it will take some time. It's important to note that some of the loans coming off our books have high floors or higher fixed rates; we were in the mid-fours, while we're still at around 3.50% and haven't moved up to the 4% range yet. I hope that provides some clarity. The gap is getting smaller, but it still exists.

I just want to add one more comment, Stephen, and refer everyone to Page 17 in our slide deck, where we discuss our interest rate sensitivity. There's a chart on the bottom half of that page, and I'm specifically referring to the one on the bottom right. We finished the quarter with 30% of our variable rate loans at floor rates; if rates increase by another 50 basis points, that percentage will drop to 17%. This is based on what I would describe as the Simmons legacy or balance sheet. All the figures on this page improve to some extent with Spirits. Our asset sensitivity, which relates to the variable rate nature of our loan portfolio, shows pro forma improvements, but this is another perspective on our yields and the dynamics of our loan portfolio.

Yes. Yes, for sure. Helpful, Jay. And then maybe if we could touch on Slide 16 for a second around the securities book. I mean, obviously, effective duration as you guys noted, increased. I'm just kind of wondering how you're thinking about that book today, especially with additional rate hikes coming, managing the AOCI hits and kind of what you're thinking about incremental investments there within the securities book as well as if you could talk a little bit further about this match swap.

Yes. So I think as it relates to the portfolio, again, I'll go back to maybe philosophically, I struggle with accounting for the AFS portfolio different from held to maturity or really even the rest of the balance sheet from a fair value point of view. I prefer, I like the optionality, the flexibility of that AFS portfolio. We have historically been very opportunistic around investments. We'll continue to invest cash flow. We're not looking to grow the bond portfolio from here, particularly given the loan growth that we see in the pipeline. But we will continue to be able to invest cash flows here. We've got a lot of cash flow coming off of the bond portfolio quarter in and quarter out. And so we'll continue to invest throughout the rate cycle like we always have. But there's definitely not a focus to sort of grow the bond portfolio from here. I think our bigger opportunity on that Page 16, we've been saying this for several quarters, it's really that bottom left chart. Our goal is to continue to see that loan-to-deposit expand. That's really the fuel to our kind of normalizing margin, optimizing the balance sheet. Again, Spirit pulls some of that timeline forward pro forma, we're going to be a lot closer to 65% and 62% before any continued loan growth. So that's where the focus really is from a liquidity point of view.

Yes. And Jay, as you top left box, you see it's still in our cash and the variable rate securities. We still have about $3.1 billion in cash and cash equivalents.

Our next question comes from Gary Tenner with D.A. Davidson.

I just had a quick follow-up on your Slide 17 on rate sensitivity. Could you just remind us what your embedded deposit beta assumptions are as it relates to your simulation?

It's very conservative in my mind, about 45%. It's blended. It's sort of by type, by product. But if you blend it all in, the underlying assumption there is about a 45% deposit beta.

And Gary, I'd say our modeling, just like most, are conservative. #1, it doesn't take into account management interaction in the process. It's really just modeling driven. We would expect management decisions to help as best we can going forward.

Okay. And is that a total deposit beta or just interest-bearing deposit beta? Just to be clear.

Interest-bearing.

And I'm not showing any further questions at this time. I'd like to turn the call back to George Makris for any closing remarks.

Well, thank you very much. And now I'd like to take this opportunity to welcome the associates, customers and shareholders from Spirit to Texas. We are extremely proud to have them as part of the team, and I can tell you they have hit the ground running; probably the best conversion and transition we've had to date. I want to reemphasize that our focus in the near term is to build a better bank and build strong diversified organic revenue growth, focus on community banking and metro markets, the transformation of our delivery channels and our related branch network. I've mentioned the aggressive hiring of professionals, business banking, private wealth, mortgage, business development and agri-lending, which we do extremely well. We're going to continue the integration of our products and services into our digital banking suite, which continues to get recognized as one of the best products in the market today. We're going to utilize our branding assets across our footprint to help build our brand. And we're getting ready to kick off our customer experience initiative with our new partner, the Disney Institute. I would encourage each of you to go to our website, simmonsbank.com for much more detailed information about the company's performance. And I just want to close by saying that I'm extremely proud to be a part of this great Simmons team. I've said this before, and want to say it again, I've never been more optimistic about the future of this company than I am today. So thank you for joining us today. Hope you have a great weekend.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect, and have a wonderful day.