Good morning and welcome to the Simmons First National Corporation Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. 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 Hobbs. Today's call will be in a Q&A format. Before we begin, I would like to remind you that our fourth quarter earnings materials, including the earnings release and presentation deck are available on our website at simmonsbank.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 statement 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 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 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 with the SEC and are also available on the Investor Relations page of our website simmonsbank.com. Operator, we are ready to begin the Q&A session.

We will now begin the question-and-answer session. The first question comes from David Feaster with Raymond James. Please go ahead.

Hey. Good morning, everybody.

Good morning, David.

Good morning, David.

I wanted to start by discussing the margin. You've done a commendable job managing the balance sheet and maintaining a rate-neutral position. However, I would like to clarify some aspects of the margin guidance. It appears that you are factoring in the forward curve for that guidance, and I want to confirm if that's accurate. Additionally, can we talk about the margin trajectory for the year? It seems that the restructuring benefits in the fourth quarter will positively impact the first quarter. Considering the rate sensitivity and repricing schedule, even with the forward curves factored in, there appears to be potential for margin expansion throughout the year. I would like to hear your thoughts on the margin trajectory and whether it aligns with your perspective.

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 are. We are probably a little more conservative than the forward curve. We 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 NIM and NIM trajectory to your second question there. I'm going to kind of stick with the guidance that we gave you in the third quarter. We were obviously pleased with some of the trends that underlie the results this quarter. And that was, you know, maybe a little favorable for the fourth quarter compared to where we thought we would be. I still think those trends point in a very good direction, but there are still a lot of variables. You know, we were pleased with some of the flows in deposits this quarter. There are seasonal attributes to our deposits in both the fourth quarter and early part of the year. So again, some constraints there. And then again, I'll just point you to some of the disclosure we have in the deck around timing of some of our cash flows. We've still got some, you know, term deposits, a fair amount of them in Q1 that will reprice still again in Q2, but to a much lesser degree than Q1. So again, optimistic around NIM overall, but I think in the near term, we're still in kind of the range that we're operating in and still need to manage some of the pressures that exist on the deposit front. As we move past kind of the immediate term, into the balance of the year, we feel good that the repricing of assets, again assuming 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 see some expansion in the margin and in 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.

That's great. That makes sense. And then, maybe just touching on the loan growth side. You talked about in the press release about demand slowing. And as you guys are taking a very conservative approach, obviously, just looking at the new origination yields and the pipeline yields. You're doing a great job pushing pricing, but at the same time, we've seen the pipeline grow for two straight quarters. I'm just curious, maybe what's driving some of the growth and the improvement in the pipeline? Despite slowing demand and you continue to push pricing, where are you seeing an opportunity to gain market share? And maybe just some color on what segments and geographies 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. And I would argue that's even masked a little bit in the fourth quarter. We have a very good ag production team and history here at the bank, and we're seasonally low. You know, ag loans were down in the fourth quarter. Despite that, we still had some growth. And we'll see those ag loans begin to pick back up in the early part of the year here. And so, 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 remains very disciplined there on what we let through the system. And then also continuing to focus on pricing and profitability. So, even with that focus, we saw in the fourth quarter some expansion in the loan pipeline, and we'll continue to make a push to see that. I think a lot of that really depends on Fed actions throughout the year this year and just kind of the macro backdrop. And I'll use that same term I used earlier. You know, 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 there.

Okay, that's helpful. Moving on to the funding aspect, you've done a great job increasing core deposits this quarter and reducing reliance on wholesale funding. I'm curious about where you see opportunities for core deposit growth, especially since you mentioned a slight decline in deposits while focusing on remixing. How is the pricing for new core deposits on the interest-bearing side? Additionally, if rates decrease as you've suggested, how quickly do you think you'll be able to adjust those relationships to lower pricing?

Yes, those are good questions, David. We were pleased with the results and the underlying trends regarding deposits. Non-interest-bearing accounts declined again in the fourth quarter, but the rate of decline has slowed down. We hope that this trend continues early in the year, and we would like to see those non-interest-bearing accounts stabilize. On the interest-bearing side, savings and money market accounts performed exceptionally well this quarter, which is a positive turn compared to recent quarters. When looking at the deposit growth for the quarter, consumer accounts remain very stable, having been so for quite a while. There may have been slight downward pressure this quarter, but it’s minimal and likely just reflects holiday spending by consumers. The commercial side also showed promising growth, which has been a major focus for us. We had some successful outcomes in that area this quarter. Some of this growth may be timing-related, and not all of the funds are likely to remain, as commercial customers are making plans for the early part of the year. Nevertheless, the indicators and results from our strategic focus have been encouraging. Additionally, the successful portfolio sale this quarter helped us reduce some of the higher-cost wholesale funding, which will continue to be a priority for us throughout the year. Regarding your question about the timing in a scenario where rates decline, we currently have some liability sensitivity, especially when viewed over a 12-month period. There may be a three to six-month window where we might be more neutral or even slightly asset-sensitive. However, as we progress beyond those initial months, we will likely see more liability sensitivity in our balance sheet, and further details can be found on page 16 of the slide deck.

That's helpful. Thanks, everybody. Great quarter.

Thanks, David.

Thank you, David.

The next question comes from Brady Gailey with KBW. Please go ahead.

Hey. Thank you. Good morning, guys.

Good morning, Brady.

I want to make sure I understand the expense guidance on Slide 11. So you're basically looking at an adjusted annualized expense base of $548 million and saying that you could see roughly 1% growth. So that would translate into expected 2024 expenses around that $555 million mark. Is that the right way to think about total expenses?

Brady, you're right on target. There were many variables in 2023, especially concerning accrual adjustments. We aimed to highlight on slide 11 that when we started the Better Bank Initiative, our infrastructure and non-interest expense run rate was about $566 million. We projected $15 million in savings from those initiatives, and we surpassed that throughout the year. Looking ahead to 2024, which reflects a two-year outlook from the start of the Better Bank Initiative, we anticipate expenses decreasing by about 1% to 2%. We're proud of the progress we've made, but we are not done yet. We continue to focus on these initiatives, and there are investment opportunities we will keep exploring. We maintain a strong commitment to continuous improvement and believe we can counter a lot of the inflationary pressures. All of this should lead to positive operational leverage as we move forward.

And Brady, one thing I'd just reiterate what Jay just said is we showed our baseline of Q4 '22 and the savings there, but the inflationary pressure was there in '23. It will be there in '24, but yes we're still showing that we're going to relatively hold the line on the expenses.

That's great to see. And then my next question on the $175 million buyback authorization. I think that if you repurchase it today, it would be about 7% of the company. So fairly notable size. Is that something that you have in place that you could use on a rainy day, or is that something that you really expect to be active in 2024?

Yes. Brady, 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. You know, we still think we're in some challenging times in banking, trying to fight through on the NIM side as we talked about where's loan growth going, where is the capital, where does it need to be deployed and what levels do you need to maintain. So, we focus on that. 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 first for organic growth, loan growth. Second is to pay cash dividends to our shareholders. We've been paying dividends for over 115 years. We don't want to be the group to mess that up. I'd tell you that. And then after that, it comes down to what is the best use of that capital at that point. And one of them is stock buyback. Another is, is there opportunities on balance sheet optimization with bond sales like we had this quarter. And so, we'll analyze it, but I would tell you in the stock buyback, our strategy is still to stay within the realm of our earnings for the quarter, less cash dividends would be the maximum amount we would buy back.

Okay. And then finally for me, if you look at the full-year 2023 and if you look at the ROA on a core basis, it was running about 75 basis points. I think Simmons in the past has talked about longer-term wanting to get to an ROA of 150 basis points, so about double that. I realize profitability is under pressure for the entire industry. So you guys are not alone. But how do you think about the path to get Simmons towards a higher ROA and ROE level?

Yes, Brady, I think the very first and biggest aspect of that goes back to our balance sheet optimization efforts. 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 time at the end of the day, but we are incredibly proactive and will continue to be in our approach to accelerate that timeline where we can. And so, we'll continue, I think, to be prudent and balanced in how we look at that. But 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 and the scalability that that's put into our system. You know, I think those are very realistic results for us to work toward. Honestly, when I think about that, the biggest wildcard to me really is kind of on the fee side. Fees are under pressure. You know, there are some things that are out there and being proposed that 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 that Simmons Bank and within our strategy and business model that 125 to 150 basis points of ROA is what we ought to be focused on when and where our goals ought to be wrapped around.

Okay, great. Thanks for the color, guys.

Thanks, Brady.

The next question comes from Jordan Ghent with Stephens Inc. Please go ahead.

Good morning, guys. I just had a few questions on the securities restructure that took place. Could you guys give any insight on when the restructure took place and the impact it had on 4Q '23 NII, and then maybe what's remaining, if there is any for 1Q '24?

So, the transaction that we consummated in the fourth quarter is 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 1 basis point of net interest margin impact in the fourth quarter. So I think margin improved 7 basis points from 2.61% to 2.68% linked quarter. You can give about 1 basis point of credit to that as a result of the trade. And again, the reason that it's only 1 basis point is a lot of the trade closed, you know, in the latter part of the quarter.

Perfect, thanks. And maybe just one follow-up on that. To clarify, there weren't any securities repurchased with that? It was used to pay.

We were selling securities at 1.81% and paying off wholesale funding at over 5%. That was the trade.

And I'd just point out a couple of things on that trade for our conservative nature for our company. First off, we did this in smaller sizes. You know, we'll continue to look at is there another opportunity to do another small size. You know, we're not a rip-the-band-aid-off and get it all done at 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 non-core funding. So that's what we did here. We didn't take the money and go back and buy higher rate securities to offset it. It was better to reduce the balance sheet and take risk off the balance sheet effectively.

Perfect. Thanks for the answers.

Thanks, Jordan.

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning. I had a couple of questions about kind of the deposit guide and thoughts around, you know, the retail and brokered CD maturities in the first quarter. As you're looking for down deposits in 2024 and given the amount of, you know, maturities in the first quarter, should we think about kind of the run-off there being a little bit front-loaded and then 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 the first quarter?

I believe much of this will depend on loan demand. Currently, we have loan demand that exceeds other cash flows from the balance sheet, which may lead us to renew more loans. Looking back to the fourth quarter, our ability to sell some securities and achieve core deposit growth enabled us to significantly reduce wholesale funding. So, it won't be a straight trajectory; it will hinge on factors like seasonality and the timing of cash flows associated with our balance sheet and loan demand. I don’t think it's realistic to expect everything to be front-loaded. We'll evaluate opportunities to invest our capital based on profitability and determine how to fund those investments. If that means reducing wholesale funding, we will do so. However, if we see favorable loan demand in terms of pricing and credit, it might necessitate maintaining higher levels in certain areas.

Great. I appreciate that. On a related note, regarding those renewals or maturities, do you consider shortening the duration of what's rolling over so that if the Fed begins to cut rates, you could reprice those lower sooner rather than waiting 12 months or longer?

Yes, we have already made that decision at some point last year. Looking back at the fourth quarter of 2022 and early 2023, we were actually extending liabilities a bit, which is why there were higher volumes in the fourth quarter and first quarter, along with some repricing in our funding. While we made decisions then to extend, we are now deciding to shorten some of that for the reasons you mentioned.

Great, I appreciate that. I joined a minute late, so I apologize if I missed the first question. Regarding the rate sensitivities you provided for 25, 50, and 75 basis point cuts, what is the base case you are using internally for where you believe the Fed will move this year?

Three rate cuts is what we're kind of modeling everything to internally. And I did mention this earlier. So I'll mention it again to you here, Gary, that third cut comes really late in the year. So for all intents and purposes, it's kind of two cuts, if you think of it that way.

Okay. So effectively in line with the dot plot. Is that about right?

Yes. Our thinking is much more aligned to the dot plot for internal assumptions than to the forward curves. That's exactly right.

All right, great. Thanks, guys. Appreciate it.

Thanks.

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 real clear about our execution in this volatile market. And I think our results reflect our success. And just want to assure you that we will continue to conservatively manage our business and create as much flexibility to react in these current market conditions. As was just mentioned, there are some discrepancies between the dot plot and the forward 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 that you come to recognize at Simmons as we go forward. And we'll look forward to having more good calls in the future. Thanks for joining us today, and have a great day.

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