Hello, and welcome to the Simmons First National Corporation Third Quarter 2024 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to Ed Bilek, Director of Investor Relations. Ed, please go ahead.

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

Today's first question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

So it was great to see the opportunistic bond sale in the quarter. Could you just give us some detail on the thought process of the transaction and how you landed on the sizing of the sale?

Yes, I'll provide some insights on that. This is Jay. Others may also want to add their thoughts. Our approach has always been to be patient with the bond portfolio and to evaluate opportunities as they arise in the market. As we have mentioned previously, our intent has not been to completely overhaul the bond portfolio at this time. We believe that patience is key. We consider earnings and capital carefully and strive to maintain discipline in our decision-making. All these factors play a role in our strategy regarding sizing, timing, and other considerations. During the quarter, interest rates were favorable for us, particularly with the 10-year yield seeing significant movement, which allowed us to take advantage of the situation. As we've said before, we employ a variety of scenarios in our analysis of the bond portfolio. The market aligned well with several of these scenarios, and we believe the transaction we proposed offers strong economic returns while balancing the size of the loss and the projected earnings impacts. Everything fell into place for us to proceed with this transaction during the quarter.

Got it. That's helpful color. Maybe shifting over to deposits and deposit pricing in the quarter. Obviously, we've got the 50 basis point cut towards the end of the quarter. Could you just give some color on deposit pricing trends sort of from a pre- and a post-cut perspective?

Yeah. Hey, Lay, this is Daniel. So you'll note in the IP that we talked about, higher deposit costs peaked in June at about 2.81%. For the second quarter, we were at 2.79%. So our top point was 2.81%. We were at 2.81% for June, July and August. And then we had the rate cut happen. We got 50 basis points. And so as you think about that impact to deposit cost for the month of September, that brought our total for September down to 2.75%. We were already trending down because of some management decisions and testing that we've been doing. We've actually doubled down on a few of those tests to include more markets, specifically around the money market tests that we were doing. Those have performed really well. So we've been forward-leading going into the rate cut on money market CDs, and we've changed our standard pricing. We've changed our promotional pricing. We brought those down. The other part was brokered deposit cost which was trending down ahead of the rate move. So if you think about just the rate move itself, that was about 2 to 3 basis points of impact for the quarter in the third quarter. So we were already moving down a path of rates coming down from that 2.81% peak, but the rate cut helped us get there a little bit faster.

Got it. And then just lastly, looking at the CD maturity schedule you provided, you've got a pretty large tranche here in the fourth quarter. Could you just give us an idea of sort of the incremental repricing there? And do you expect those CDs to remain sort of short duration? Or do you expect the terms to sort of be increased a little bit?

Yeah. So if you go back and look at the last 90 days, our CDs are maturing at a rate of about 4.40%, going on today, all in is in that rate of about 3.97%, close to 4%. So a pretty good tailwind there. In terms of your question on duration, yeah, I mean we're pretty short in that right now, and we would expect to keep that in the near term, relatively short.

The only thing I'd add on top of that, Woody, is just yet to be seen, we can all maybe speculate what the competitive environment is going to be around deposits, whether we're talking about CD promo rates, et cetera. I think one of Daniel's earlier points is an important one. We leaned a little harder into brokered CDs, especially late in the quarter, simply because a number of competitors were keeping rates above broker rates, and we just weren't willing to do that for hot money in the balance sheet when we had better opportunities in the brokered area. And so I think one caveat will just be what the competitive environment looks like for deposits overall.

Yeah. All right, that’s all for me. Thanks for taking my question.

Thank you.

Thanks, Woody.

Thank you. The next question comes from David Feaster with Raymond James. Please go ahead.

Hi, good morning, everybody.

Good morning, David.

Maybe just kind of following up on that line of questioning, just look, you guys have been very active both on managing assets and liabilities, right? You got the restructuring, you talked about utilizing brokered funding instead of borrowings. I know you're not looking for a rip the Band-Aid off transaction, but do you expect maybe more opportunistic and smaller repositionings, especially as loan growth comes? And then on the other side of the coin, are there any opportunities to optimize the funding base, especially with the FHLB advances maturing here soon?

I believe the approach to the bond portfolio is to remain opportunistic. However, it's important to be cautious. We can't control the opportunities that arise, but we can control our preparation, and we were well-prepared. We noticed the 10-year yield drop to around 3.80%, a level it hadn't reached in some time, before it rose again shortly after our transaction. We took advantage of the market and are ready to make similar moves this quarter. We'll continue to look for opportunities to trade bonds when the market allows. Overall, we're focusing on our balance sheet by maintaining strong relationships with both our depositors and borrowers. Regarding brokered or wholesale funding, our ability to manage those liabilities effectively depends on duration and our capacity to advance duration in the bond portfolio, along with the ongoing growth of our core customer accounts.

David, one thing I'd like to point out also on the security trade. One of our parameters, many parameters that we look at is what is our current period earnings, what are we going to do? Our balance sheet has remained relatively flat as we're remixing the balance sheet. And one of our parameters as to what earnings we have in the quarter after dividends to utilize for a bond sale. So that's one of the many factors we look at, and that's our choice of use of the capital today to optimize the balance sheet.

Yeah. I might add one more thing to that discussion is the long end of the curve is going to drive the loss and then the short end of the curve is going to drive the reducing of the wholesale funding. So with the short end coming down, that's going to make it a little bit more challenging as we move forward in that earn-back calculus. So that's something that we think about every day.

Yeah. That's a good point. And then maybe just kind of putting it all together, like just thinking about the margin side, I mean, you scream moderately liability-sensitive. But curious maybe, how do you think about the trajectory of the margin as we look forward? Obviously, we got the 50 basis point cut at the last meeting. But if I look at the forward curve, I'm just curious how you think about the margin trajectory? You got the lag impact on repricing some deposits, but you do have some index deposits as well. I'm just kind of curious how do you think about the margin trajectory as we look forward.

Let me address that, David. Starting with the immediate term, looking at Q4, I believe a performance close to what we achieved in Q3 is a realistic expectation. This is due to various factors affecting the quarter. We will benefit from ongoing asset repricing and will see a full quarter's impact from a bond transaction that contributed only part of its effect in Q3. However, I want to underscore that there is a lag effect from the 50 basis point cut in September. We have a comparable amount, or possibly more, of assets repricing in Q4 as we do liabilities. Therefore, when considering liability sensitivity, the significant changes are likely to occur more noticeably in 2025. Additionally, we need to consider potential actions from the Fed as we anticipate further rate cuts. Thus, we adopt a more conservative or balanced outlook, recognizing the various influences at play as we enter Q4. Looking towards 2025, we expect to see a significant improvement in net interest margin throughout the year, especially if the Fed's actions align with current projections.

Yeah. Okay. That's great. Maybe touching on the loan growth side, I mean, look, loan growth has been modest. We've talked a lot about how your focus has shifted from growth to really profitability. But look, the pipeline is built, rates are down, expectations are we could see improving loan demand. I'm curious maybe what you're seeing on the growth front, the complexion of that pipeline and your appetite for growth here and maybe what you would expect to be some of the key drivers of your growth.

Yeah. Well, first of all, thank you for pointing out something we say all the time. We definitely are focused on soundness and profitability and growth. And we say it when we say that, we're focused on them in that order. And we're seeing some good progress there. I'm very pleased with some large relationship wins that we saw in the third quarter, and I want to emphasize the word relationships on the commercial side. And then just even all the way out through things that we're doing within the community bank more broadly. And so I think we're seeing some good progress in all those regards. Our appetite to grow is as strong as it's ever been. I think our filters around soundness and profitability are also as strong as they've ever been. So we're going to continue to be disciplined. We've indicated kind of low single-digit growth throughout the year this year. I think that continues to come through in the numbers. As I look out into next year, I'm going to be balanced in my remarks to you here. On the one hand, I think the rate trajectory and the economy can stay strong; if there's a soft landing here from a macro perspective, then I think we're going to see demand increasing, and we're going to be ready to capture that demand. On the flip side, we're not seeing that demand yet. We're seeing optimism and some green shoots around, okay, the Fed made a good move in September; I think a lot of our borrowers and a lot of the demand out there, there's election uncertainty, there's still overall macro uncertainty. And so we lean optimistic, but that optimism hasn't started to firm up yet. We hope that it does, and we're going to be ready for it, and our appetite for it will be strong when it gets there.

Okay, terrific. Thanks, everybody.

Thanks, David.

Thank you. The next question comes from Matt Olney with Stephens. Please go ahead.

Hi, guys, good morning.

Good morning, Matt.

On the expense side, I saw the disclosure, some savings, some branch closings. It sounds like you want to reinvest that. Any color on those reinvestments? And then just more broadly on expenses, we saw the core expense levels step down a little bit in the third quarter. Just any color on expense levels in the near term? Thanks.

Sure. We are continually assessing our retail network and strategy, focusing on profitability, trends, and customer usage over time. We are analyzing our markets for branch density and share, as well as identifying areas where branches may need to be added. Regarding potential investments, they align with our better bank initiative, which involves not just cost reduction but also revenue-generating investments. We haven't finalized how to utilize that $3 million, but we plan to reinvest some of it into our bottom line. This year, we have opened four new branches, demonstrating our commitment to reinvestment. We prioritize hiring skilled bankers and have invested in our back office functions, including procurement, which has yielded future benefits. Overall, we are focused on self-funding our investments, and I believe we've managed that well in recent years. As for our guidance, we previously estimated it at 5.55% to 5.60%, which is down by 1% to 2% from our Q4 '22 annualized run rate. Considering the consistent high inflation and investments over the past few years, I think we might come in under that guidance. There are some one-time benefits we've experienced this year and some permanent expense reductions from renegotiated vendor contracts contributing to our outlook. While expenses may be slightly higher in the fourth quarter compared to the third due to one-time salary incentive accruals, I remain confident in our guidance and expect to come in below the 5.55% target.

Okay. Great. Thanks for the color there, Daniel. And then I guess putting that all together, it just feels like there are some nice opportunities for some nice positive operating leverage next year. I mean we talked about the benefits of lower rates potentially. We talked about maybe some loan growth next year, some good cost discipline. Any big picture thoughts you want to leave us with as far as achieving some operating leverage in 2025?

I'll jump in on that at least initially on our side here, Matt. I mean I think you're absolutely right. Everything we're doing is on the balance sheet and the bank for positive operating leverage and really just overall for scalability; things we talk about internally all the time. The things George drives us on from his seat are really around how do we ensure that everything we're doing today puts us in a position to grow revenue faster than expenses going forward. And we feel pretty optimistic that we're poised for that in 2025. And again, increasingly through the year, given a lot of the remarks that have been made so far and then ongoing into 2026. And so we'll continue to sharpen up our outlook and probably provide an outlook in our January earnings call, consistent with how we have historically. But I think the liability sensitivity, the balance sheet, and the opportunity we think we have to continue to be really disciplined on expenses, et cetera, have a nice shape in terms of the trajectory of our pre-provision net revenues and earnings going forward.

Okay. Thanks for that, Jay. And if I can sneak in just one more, you disclosed, I guess, the index deposits at pretty material level there. Any more color on that? What are those indexed to? And how quickly and how often do those index deposits reprice?

Yeah. So those are generally indexed to Fed funds. And they're going to reprice immediately when the rate cut happens. And so we did see that, and that was some of that benefit that we got when I mentioned that three basis points from the quarter from the deposit production.

Okay. Perfect. Thanks, guys. Appreciate it.

Thank you.

Thank you. The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Hey, good morning, everyone. I guess if I could revisit some of the discussion around the NIM. I know, Jay, you said not necessarily ready to give specific guidance, but you did note kind of this idea of a notable inflection for the NIM, which could be construed as a pretty wide burst. I mean we're at 2.74% here. I mean as you think about the possibilities for the NIM next year, I mean, could this move towards 3%? Is that too far of a road to hold, like how can we kind of frame up that notable inflection as we look at the projected Fed path?

Yeah. I think what you just said is important to note, right? I mean what the Fed does is going to be material to any outlook we would have there. But if you just kind of follow the forwards and assume the macro remains at least intact, then I think we're on a glide path toward 3% in the back half of next year for sure. The factors at the end of the day that we're really focused on, Stephen, probably even more than net interest margins, are the dollars of net interest income. We're really trying to focus on the balance sheet overall, loan growth, as we've talked about profitability, et cetera. And so again, I think we feel pretty good about our prospects for growing NII moving forward from here. But if you want to focus on a NIM trajectory, I think it's fair to think of it in a status quo or subject to all of the caveats on the market contributors that we don't control, but kind of follow the glide path and the forward curve, I think it's fair to think that there's a 3% clip on NIM in the back half of next year.

Great. That's extremely helpful, Jay. And then just as I think specifically about maybe deposit betas on the way back down, I think they're around 51% total on the way up. Do you think that's replicable on the way down or do you think we've had kind of structural changes in terms of customer perception that maybe creates a little bit of a headwind to achieving that same path on the way back down?

Yeah. Hey, Stephen, it's Daniel. I'll take a shot at that and others can jump in. If you think about that 51%, where we started from and where we got to, we went from 0% to 5.50% in a pretty short period of time. So I think it would be difficult to replicate the 51% on the way down. I think that's going to be determined by the volume of reduction and the frequency of the reduction. I think if the frequency is quicker, the beta might be more. If it's more protracted, it might be less. But what we've modeled right now is we've got 100 basis points in the fourth quarter which was down from 5.50% to 5% and another 100 basis points for next year. And so what I would tell you is we're kind of in that range of somewhere plus or minus 40% on the deposit beta on the way down through that part of the cycle.

Thank you for that insight. Lastly, Jay, you mentioned concerns regarding net interest income and profitability, which is definitely an important focus. How do you view the bank's profitability in the near to medium term? Looking at this quarter, I calculated an operating return on assets of 67 basis points. Will it take until 2026 to reach a 1% return on assets? How should we approach the idea of returning to profitability levels similar to your peers?

Yeah. I think what I'd say to that, Stephen, is that in the intermediate term, we're fighting to get the margin back above 3%. We're fighting to get ROA back toward 1%. Those are not long-term targets. Those are the more near-term targets. And again, we think we see past that direction with extrapolating from where we are here on rate expectations and macro backdrop. Longer term, I'm going to reiterate what we've said before. We think a good ROA for our balance sheet for where we are today is 125 or greater. We think that pencils out to a lower 50% type efficiency ratio. We think that's net interest margin in the mid-3s, give or take. Those are areas where we think we can operate the balance sheet, where we can grow relationships within our risk appetite, which is a conservative one. But we think we can generate some strong returns on tangible common equity by doing those things. And so that's the target that we're focused on as we move forward.

Fantastic. Great color, Jay. And it's nice to see everything moving here in the right direction.

Thank you, Stephen.

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

Thanks. Good morning, guys. I wanted to ask a question about the competitive nature on the lending side. You kind of mentioned that obviously, the competitive dynamics on the deposit side kind of remains to be seen how that will shake out. But your rate on the ready to close loans is quite strong. Wondering if you've seen, given just maybe some more general economic optimism, have you seen any change in stance from other banks in your markets from a lending perspective, a little more willingness to lend or greater activity there?

I believe there is certainly a greater willingness to lend across the industry. However, I want to emphasize that we're not yet experiencing a significant surge in demand. There is optimism in the market, and while some people who previously postponed projects are now more inclined to pay down debt and consider new loans, these discussions have not yet translated into actual demand. We see a willingness on our part and within the industry to assess where this is headed in the current rate environment. Our approach will focus on building relationships by aligning with businesses' operating accounts and other services in addition to loans. This strategy will provide us with more flexibility for the long term, and we have already begun implementing it. At the same time, we have maintained strong discipline and continued to grow our pipeline for several quarters with what we believe is competitive pricing. We will keep a strong focus on this area. I think the industry will indeed demonstrate more flexibility on pricing as we move forward. If we can establish solid footing and alleviate some of the existing uncertainty, we hope this will lead to increased demand and consistent growth for all of us in the future.

Thank you. And then just as a follow-up to clarify something. So the $1 billion of FHLB you've got due in the fourth quarter and the reference, I think, on Slide 12, the increase in broker deposits, was that kind of just prefunding some of that maturing at FHLB? Is that what...

I believe that some of the changes you see are due to fluctuations between the FHLB and brokered funding from quarter to quarter. Another factor is that we had higher-cost customer CDs that we were willing to allow to leave to other banks at rates above the broker rates. These are the key points I would highlight. Additionally, I want to emphasize that we are maintaining a short duration on the liability side and have not changed that approach. A few years back, we extended the duration of our liabilities, but we are not currently looking to extend it further. The most significant point is our focus on customer account growth. We have achieved growth in customer accounts this year, and we are very committed to retaining relationship dollars and core accounts, whether they are household or business operating accounts, and we are seeing success in these areas. Although you may not see this reflected in the overall numbers yet due to inflation and the current environment where people pursue higher rates, we are focused on what we can control, which is the growth in customer accounts, and we are definitely seeing progress there.

Thank you.

Yeah. Thank you, Gary.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to George Makris for closing remarks.

Okay. Thanks to each of you for joining the call today. As you've heard this morning, we're very pleased with our performance this quarter and the trajectory of our trends. Our Better Bank initiative has produced good results so far, and our team has been diligent in its efforts to improve our market penetration and deepen our customer relationships. We're starting to see those efforts pay off and are encouraged about the potential headed into 2025. Sort of changing the subject, we hope you'll tune in next week to the inaugural Simmons Bank Championship PGA Tour champions playoff event here in Little Rock. The tournament will be televised Friday through Sunday on the Golf Channel. We're excited to be the title sponsor, and we look forward to welcoming the world to Arkansas. Thanks again for your participation today, and have a great week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a great day.