Good day and welcome to the Simmons First National Corporation Q2 Earnings Conference Call. All participants will be in the listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, that this event is being recorded. I would now like to turn the conference over to Ed Bilek. Please go ahead.

Good morning and welcome to Simmons First National Corporation second quarter 2024 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 second 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 and our Form 10-K for the year ended December 31st, 2023, 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 reconciliation 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 the Investor Relations page of our website, simmonsbank.com. Operator, we are ready to begin the Q&A session.

Thank you very much. We will now begin the question-and-answer session. Our first question is from the line of Woody Lay from KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Wanted to start on the NIM. It was great to see it inflect a little bit higher. Can you just talk about what went right in the quarter? And do you think you can sort of carry this momentum into the back half of the year where we could see some further NIM expansion?

Let me start on that. Woody, this is Jay and I think Daniel may have some additional comments as well here. But what I want to remind you of is that for a few quarters now we have basically highlighted that we feel like our NIM is in kind of a stable or range bound area. I think our last three quarters of NIM were 2.68%, 2.66%, and 2.69%. So I feel like we’ve been sort of right in that expectation. Generally speaking, I think that’s a continued theme for us here. Some things definitely went right for us in the quarter. Again, I’m going to flip it to Daniel here in a second to unpack a couple of those items that are drivers to NIM. We are very poised for favorable asset repricing. We’re seeing some stability on the deposit side in a very competitive macro backdrop. We’re poised for our rates down or liability sensitivity type environment, given our balance sheet dynamics. So that’s the big picture of where I think we’ve been and where we’re headed from a NIM and NIM trajectory point of view. But, Daniel, you may talk a little bit about a couple of the dynamics within the quarter here and your expectations.

Yeah. Good morning, Woody. Let’s start on the asset side of the balance sheet. If you look at the loan yields, our loan yields increased 15 basis points quarter-over-quarter. It’s been a trend for us that in this rising rate environment, our portfolio yields have been increasing relative to our prior periods, and we expect that to continue. Of that 15 basis points, I would tell you I wouldn’t expect that for Q3 or Q4. There were some timing in that relative to Q1 and Q2, with some loan fees on both sides of that, about 3 basis points. Thus, if you think about what the normalized increase of the loan yield was, it’s around 9 basis points. So, good momentum there. We expect that tailwind to continue. We had good deposit growth, 1% quarter-over-quarter or 4% annualized, which is kind of in the middle of the fairway for us. We’re keenly focused on soundness, profitability, and growth. Every loan we put on has that profitability hurdle and mindset that is going to help us improve our ROA. As for the liability side of the balance sheet, deposits, I think it was a good story for us. The ending balance was down $500 million. Sometimes that can skew the numbers when you look at a quarter end versus a prior quarter end—businesses taking positions on their balance sheet can affect us, along with the timing of public funding seasonality. Counties and schools build balances in the first quarter and then disperse them in the second quarter. But if you look at average balances, we were down $189 million quarter-over-quarter. More importantly, if you look at non-interest-bearing accounts, we were only down $29 million in balances there. That is probably one of the best quarters we’ve had in a while in terms of just easing our remixing in that base. Fast forward, that had a positive impact for us in terms of deposit cost; we were only up 4 basis points in our deposit cost, which is significantly lower than where we had been in the past—last quarter we were up 17, the quarter before that 21, and the quarter before that, 41. So the pace of increase slowed dramatically, primarily driven by non-interest-bearing deposits. On the other hand, in April, we had our first month where our going on CD renewals were at lower rates than the maturing rates. This theme carried forward for the entire quarter. As we think about the future, that hopefully is flipping from a headwind to somewhat of a neutral and maybe even slightly positive trend for us. Deposits helped us with our NIM in the quarter. As Jay mentioned, it’s still very competitive out there, and that competitiveness is not easing. There’s some irrational pricing with some competitors offering CDs above what our wholesale funding cost is. We will continue to battle that, but we’re keenly focused on maintaining core, profitable relationships. From a deposit account standpoint, we’re still growing our customer checking accounts year-to-date, and that’s meaningful for us—growing our customer base provides that core stable funding for us.

That’s really helpful color. Thanks for that. Maybe shifting over to the securities portfolio, we have seen some pullback in longer-term rates throughout the quarter. Does it make you get a little more constructive on the way you view potential bond sales?

Yeah, it does. I mean, I think you saw us do something similar in Q4 last year. Our approach thus far has really been patient. I would call it an incremental approach, as we haven’t taken a rip-the-band-aid-off approach in the bond portfolio. We want to maintain the optionality and maintain our focus and discipline around the trade-offs between capital and earnings as we consider those two aspects. With the movement in the 10-year rates, we are getting more constructive. As I’ve said before, we have many scenarios to evaluate, considering different opportunities and alternatives within the bond portfolio. I don’t want to get us out over our skis, as we’ve demonstrated a lot of patience, but no doubt, rates moving in our direction allow for better opportunities.

Yep. All right. That’s all for me. Thanks for taking my questions.

Thanks, Woody.

Thank you. The next question is from the line of David Feaster from Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning, David.

Hey, David.

I wanted to touch maybe a bit on the expense line. You’ve been very active with the Better Bank Initiative, and it’s paying off. Expenses have done better than we’ve expected. I’m curious what’s left on that program? And how do you think about expenses? We’re obviously continuing to invest in the franchise, but I’m just curious how you think about balancing, investing in new hires and other things against cutting costs to help fund some of that and managing that expense trajectory?

Big picture. I’ll jump in on that one again, and Bob or Daniel or others may have some comments here too as well, David. The big picture focus continues to be to have discipline on the expense side. I think we have additional opportunities there. We’re very pleased with the results from ongoing expense initiatives. You hit on a theme that’s really important to reinforce, we are continuing to invest in the business—people, systems, all across the board. We have had a really good year at least in terms of what I call the talent upgrade category, and I’m very pleased with the talent we’re attracting to the bank. Some initiatives we have include evaluating current systems and new systems. The overall mindset we’ve adopted is to try to fund as much of the investments as possible and thus far, we’ve been successful in doing that. The inflationary and wage inflation environment may not be quite as severe as it was a few quarters ago, a year ago, but it’s still tough out there. Producing the results we have thus far in the face of that really speaks volumes. As we’ve looked at initiatives going back a year plus ago, we’re still doing that today—trying to identify other opportunities. We’re taking a hard look at everything in the franchise—from the branch network to deep back areas of the bank—to identify redundancies and opportunities to better serve both our customers and associates efficiently and scalably. I believe we’ll continue to identify some opportunities as we go.

One point I want to make, David, is that it kind of gets lost. If you remember back to last year, we targeted about $18 million; we thought that reducing expenses through the Better Bank Initiative was achievable. It’s worth noting that our headcount size decreased by 275 during that period of time, an 8.5% reduction. This isn’t just about layoffs; it’s about becoming a Better Bank through the process after digesting some of our M&A. I’m very proud of the team and our progress thus far, and we’re encouraged with what lies ahead.

At the end of every one of our executive council meetings, we say to focus on the things that we can control. We can’t control the rate environment or other uncertainties, but what we can control is expenses, and we focus on that consistently. One example of an investment paying off is that we’ve invested in a Head of Procurement to look at all our contracts. We recently renegotiated our largest vendor contract and saved about 8%. Our second largest contract is in the process of being renegotiated, and we expect meaningful savings there, as well. There are many areas where we’re focused, including the retail network, which encompasses both investment and cost-saving strategies. We still have opportunities for improvement in many areas.

That’s great. Thanks for that color. And then maybe switching gears to credit. The issues seem primarily isolated to the runoff book. I’m curious as you look at the overall portfolio, what you’re seeing, and what you’re watching more closely. Any thoughts on what drove the increase in classified? It looks like it might be CRE, but I’m curious about your general thoughts on credit, broadly, and your approach to managing asset quality.

Fortunately, David, your initial comment is exactly how we feel about it. We’ve talked a lot about normalization in credit and have been observing that. But statistically, the overwhelming majority of credit concerns are isolated to a small area of the balance sheet, identified as runoff portfolios that have been in decline for a while. We’re making good progress working through that portfolio and focusing on managing through with very low loss rates. Beyond that, we are being proactive in identifying potential problem credits, including stress on borrowers from repricing, maturity events, and other factors. We continue to dig deep into those scenarios. As of now, we don’t have broad-based concerns and haven’t identified other sectors beyond what’s already noted as problematic. Generally speaking, past due rates remained positive from a credit perspective this quarter. Although we are being conservative given the macroeconomic environment and uncertainty, we’re feeling good about our credit position right now.

That’s great. And maybe switching gears to capital. You’ve got a strong balance sheet. You’re a proven acquirer, and commentary in the industry suggests conversations are picking up, with expectations for further consolidation. I’m curious about how you expect to participate in that. We’ve previously discussed focusing more on organic growth, but I want to know about your appetite for deals, any capital priorities ahead of M&A.

Well, David, let me start off on that. Our capital priorities include primarily our payment of dividends to shareholders, given our long history of doing so. We then focus on organic growth, and as discussed from our Better Bank Initiative, we have a solid foundation for organic expansion. As rates hopefully moderate, we anticipate additional opportunities to emerge. Following that, we’ve discussed measured balance sheet optimization, taking advantage of good timing. Other priorities include potential stock buybacks; however, we believe better opportunities exist to utilize our capital at present, so stock buybacks sit lower on our priority list. Regarding M&A, it currently isn’t a primary focus, as we aimed to concentrate on our bank and enhancing efficiencies post-acquisitions over the past year. However, this doesn’t mean we won’t engage in M&A at some point down the line, but for now it’s not part of our strategy.

Helpful. Thanks, everybody.

Thanks, David.

Thank you. The next question is from the line of Matt Olney from Stephens. Please go ahead.

Good morning, and thanks for taking the question. Daniel already mentioned a good summary of the deposit strategy, and we’re seeing pricing pressure ease there. What about on the borrowing side? I think we saw a significant step up in the borrowing position in 2Q, especially at the end of the quarter. What’s the overall strategy for funding in the back half of the year? Are we going to continue to see borrowings and then securities cash flow? Just any color there?

Yeah. Matt, I think it’s mostly timing noise when you consider period-over-period ending balances. We’re opportunistic regarding how we approach wholesale funding. The overall priority for wholesale funding is to reduce it, whether with FHLB advances or brokered CDs. Our strategy involves being as efficient as possible with wholesale funding to protect net interest income and net interest margin. Stepping back, we’re focusing on driving core customer accounts. Factors affecting deposits—like quantitative tightening and inflation—impact average consumer balances, but what we can control is maximizing our retail network and enhancing relationships in our commercial divisions. That’s our primary focus moving forward.

I appreciate that. Let me ask it in a different way regarding the securities portfolio. You’ve allowed that to contract, which has funded some of the loan growth over the last couple of quarters. You disclosed $120 million of expected cash flows per quarter over the next year. Can we assume this continues to cash flow and support loan growth?

Yes, that’s exactly how to think about it. Our priorities will focus on funding loan growth and reducing wholesale funding utilizing any cash flow from the balance sheet in that order.

Okay. Perfect. Thanks for that. Switching gears, you provided great disclosure on the unfunded commitments, which continue to move lower. We’ve discussed this topic over the last few quarters regarding the cause. Could you provide any insight into where you expect this to ultimately land over the next few quarters?

Matt, just to clarify, are you asking about our expectation concerning the unfunded commitment levels?

Correct.

I would say our current pipeline is moving slower; we now have a floor on our unfunded commitments. Many of those commitments are lines of credit with commercial borrowers. We don't expect those to fund at this time. Borrowers are displaying a similar conservatism; they are being patient for lower rates or fortifying their balance sheets. It’s likely that we will have a floor in unfunded commitments. On the other side of the pipeline, we can expect normal course paydowns and healthy funding in the permanent market for the projects we’re working on. However, I don’t see unfunded commitments increasing significantly from here.

Okay, that makes sense. Thanks, guys.

Thank you.

Thank you. The next question is from the line of Gary Tenner from D.A. Davidson. Please go ahead.

Thanks, good morning.

Hey, Gary.

I hopped on the call a few minutes late, and you just mentioned a previous comment regarding a more tepid loan growth outlook. I wonder if you could revisit that for a second. Also, could you talk about that relative to a stable pipeline that’s grown over the last several quarters, albeit below the levels seen in the past?

Sure, Gary. My outlook for loan growth aspirations in a typical environment would be much closer to double-digit levels. Our year-end growth expectation was low single digits, starting in January to reflect the current economic environment, which has become evident as we've seen lower single-digit growth. I’m pleased with our progress thus far but cautious on pipeline growth. We need to see an uptick in pipelines to maintain healthy loan growth. I’m not suggesting loans will decline, but I think the rate environment, particularly a recent shift back to a down-trend, affected overall demand.

I appreciate your insights. One more thing: you indicated a 30 basis point increase in rates on ready-to-close commercial loans. Is there a healthy mix of fixed and floating loans at this point?

Yes, it is. There’s been more focus on the pipeline activity related to floating rates, but we maintain a healthy mix overall. We’re continuing to explore opportunities, including some loans that generate swap fees, and we’ve been successful in that regard.

Got it, thank you.

You bet.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to George Makris for any closing comments.

Good morning. I’d like to start by recognizing Daniel, Ed, Jay, Bob, and the team for the information they assemble each quarter on our bank. If you haven’t checked it out, I encourage you to go to our website at simmonsbank.com under the Investor Relations tab. A wealth of great information is available regarding Simmons Bank and our performance, highlighting the stability of the bank, which is traditional for us. We continue to be pleased with our solid all-around performance. We are encouraged by favorable economic data suggesting potential future interest rate reductions, ultimately leading back to a neutral rate environment, which will benefit our long-term strategy. Meanwhile, we’ll remain patient, focusing on fulfilling the needs of our customers and supporting our associates' careers. Thank you very much for joining us this morning, and have a great day.

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