Good morning, and welcome to Simmons First National Corporation's Fourth Quarter 2024 Earnings Call. Joining me today are several members of our executive management team, including our Chairman and CEO, George Makris; 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 risk 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 yesterday 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 we included as exhibits to the Form 8-K we filed yesterday 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.

We will now begin the question-and-answer session. The first question comes from Woody Lay with KBW.

Wanted to start on the NII guide and was hoping you could just walk through any major assumptions that are baked into that. I know you have the loan growth guide, but was just curious sort of about the puts and the takes behind the low end of the range versus the high end of the range.

Yes, I'll jump in on that. Woody, good morning, and Daniel may have some comments as well here, but I think when I think about the NII guide, the first thing I would start with is our outlook, even going back to, I think, prior quarters and in activities throughout the fourth quarter even. We've really been pointing toward our ability, our belief that we could cross over a 3% net interest margin in the back half of the year this year. Obviously, we were more optimistic about that if you go back to maybe even like October, when the forwards looked very different at that time than they do today. But we still believe that is within the range of expectations. We had a really good quarter this quarter. Honestly, our launching off point at the beginning of the year is a little better than we thought it was going to be in terms of our original forecasting for the fourth quarter. And we can talk about that some on the call today to the extent there are questions there, but I think as we look to 2025, I still really feel confident in our ability to continue to see NIM expansion. Obviously, you asked about the puts and takes to the low and high end of the range. We remain a bit liability sensitive here, a fair amount liability sensitive. So any changes in the Fed's actions or the forwards would impact outcomes within that range, and then I think just the growth outlook and on both sides of the balance sheet, we've been more optimistic certainly today as we think about loan growth. At the same time that's still sort of conversations and voiceover, optimism and conversations among our bankers and our clients. But we've got to see that kind of convert into the pipeline and pull through the pipeline and it's a bit early to see that optimism reading through. But we do see some green shoots there. And then on the deposit side, our focus will continue to very much be to grow the core customer base and simultaneously shrink the wholesale funding that's on the balance sheet. And so I think that the growth side of that equation will obviously have an impact on where we would be in the range on the guide there.

Yes, I would add an important thing to note is that our guide is based on the forwards, which was the January 13th forwards, and that had our first full rate cut by October of ’25. So if you think about the low end of the range versus the high end of the range, if that rate cut happened sooner, then we'd probably be at the high end of that range and maybe some opportunity. And if we didn't get a rate cut at all, we still feel pretty good that we could be at that low end of that range. So that's how I would tell you to think about that.

That's good to hear. And then a follow-up on the loan growth, up low-single-digits that it is below what I would consider as sort of a normalized growth rate for you all. Is it all related to customer demand or is part of it related to you all being a little more disciplined in order to run-off higher costing deposits?

I think, it's absolutely. I want to tie it back to something you've been hearing us say, Woody, all of you have been hearing us say, which is soundness, profitability and growth in that order. This comment applies both to the loans and the deposits. We're going to maintain discipline, always have on soundness, and increasingly too on the profitability side. And that's going to mute absolute levels of growth, but candidly that's going to increase levels of profitability and returns, and so sort of leaner meaner balance sheet with much more improved levels of profitability in terms of returns on invested capital.

Yes. Makes sense. And last for me, I mean, just given the balance sheet should remain relatively stable. I would expect capital to grow pretty nicely throughout 2025. How do you view your excess capital position? And are there opportunities to deploy some capital in the year ahead?

Yes. So I may, let me make an attempt at just kind of thinking about the answer to that in terms of how we evaluate our priorities around capital, Woody. So, I don't think you'll hear anything new here. But our number one priority around capital continues to be organic growth initiatives. To your point, that growth is really kind of within the mix of the balance sheet, et cetera. And so we should be able to continue to grow capital from here on that asset base. I would include within kind of organic balance sheet initiatives. We continue to also evaluate balance sheet restructure opportunities. You've seen us do that in the past. We did one in the most recently in third quarter of last year. So, we'll continue to evaluate those, and the market. I think will continue to give us some opportunities to evaluate that. So, that would be top priorities around our use of capital. Obviously, our dividend is a priority. And then from there, we'll continue to maintain an authorized share buyback. We have that in place. We'll continue to evaluate that. But share buybacks or other external priorities around capital would fall behind those first couple of priorities that we outlined there.

The next question comes from Matt Olney with Stephens.

Hey, thanks. Good morning. I want to go back to the margin discussion and it sounds like that fourth quarter margin at 2.87% was a little bit above your expectations. Just any color on that comment?

I'll give a couple of remarks. I know Daniel have some things to say here too. But really, I think even just thinking about our forecasting for the fourth quarter. And I don't want to apologize for this at all, but we outperformed our expectations both on the loan pricing and the deposit pricing side in the fourth quarter. We expected maybe a little more pressure on loan yields than what we saw, and so we were pleased with our discipline and ability to kind of fend off and at least for now lag some of the downward movement by the Fed on the asset side. And then conversely on the deposit side, sort of the double benefit was. And Matt, you've heard us talk about this previously, but we did a lot of work going back to last spring and especially over the summer around evaluating the elasticity of our customer base. We were sort of doing control testing across markets to see where we felt like the elasticity points were across different types of customers, different types of products, and really felt like we were able in the fourth quarter to pull forward. Again, maybe mitigating some of the lag that we otherwise would have assumed, maybe outperforming our beta assumptions on the deposit side. And so I think, the good news as I said earlier is that allowed us to maybe have a better launch point in 2025 than where our original expectations were. Doesn't really change the shape of what we're expecting in terms of NIM expansion throughout 2025. We talked earlier about some of the dependencies there, but we did see some relative outperformance in the fourth quarter for some of those reasons.

Yes, maybe just a couple finer points around your commentary there. If you look at our NIM walk forward in the IP, you'll see that the majority of our benefit and outperformance to our model came from our funding cost benefit. Our funding cost was about 24 basis points lower than the second quarter. And that drove about 22 basis points of the NIM impact. And within that funding cost, you've got kind of deposits and the wholesale or the FHLB side of that funding. The majority of the benefit came from the deposit cost side. Probably 80% of that benefit did for the reasons that Jay mentioned. If you go back, so if you look at our deposit costs were down 19 basis points in the third quarter. I think it's even a little bit more impressive. If you go back to the third quarter where we were flat at 2.79% from Q2 to Q3. While I think we were the only peer in our peer group that didn't increase our deposit cost over that time period. So our starting point was strong to Jay's comments around pulling forward the lag. We effectively eliminated a lag, which typically is about three to six months when at the change of a cycle. So that really is what drove a lot of our benefit in the fourth quarter outperforming our model. And then on the loan yield side, we were down 12 basis points. And you think about that between variable and fixed, our variable rate loan yields, portfolio yields were down about 40 basis points, but the fixed rate loans repricing was up 7 basis points. So that tailwind that we've been talking about for several quarters now around our fixed rate loans repricing higher, they repriced higher in the fourth quarter by about 200 basis points within the portfolio yield. So the going off, the pay downs versus the new production, there was a spread about 200 basis points of positivity, which drove 7 basis points of total portfolio yield improvement on the fixed asset side, fixed loan side. So those two things kind of outperformed where we thought, and so we're in a really good spot going into the first quarter.

Appreciate that commentary. And Daniel, you kind of led me into that, my next question around the loan pricing of that fixed rate book. You have got some great disclosures on that slide 15 around the $2.4 billion of cash flows and during 2025, not a small number. So it sounds like you still have some more tailwinds there. Is that relatively spread throughout the year evenly or is that weighted towards any specific quarter? And is that 200 basis point increase that you just mentioned a few minutes ago, is that a reasonable number to assume at least in the near term as far as some of these renewals?

Yes, regarding the distribution over time, I believe that assumption is reasonable. While I don’t have specific data at the moment, I think it’s fair to expect that the benefits from the repricing of our fixed-rate book will persist into 2026. The 200 basis point spread is something I would need to review in our modeling, but I think it's a reasonable perspective to hold.

I agree with you, Matt, but I would like to provide some market context to shape our thinking. I also want to direct your attention to the loan pipeline on Slide 19 of the materials, where you can observe our pipeline and the trends in rates ready to close. I believe that a 200 basis point spread is reasonable in the near term. Currently, we are witnessing significant price competition, especially in the credit sector. We see excellent opportunities in our pipeline, and that high-quality credit remains highly sought after in the market. As I mentioned earlier, there are some signs of optimism, but we have not yet seen a large volume of market activity. Consequently, when good opportunities arise, we are encountering considerable price competition. Whether we can sustain a 200 basis point spread for the next 12 months will largely depend on the competitive landscape we've discussed. Moreover, maintaining good relationships is crucial, as it directly affects our ability to adapt and thrive. We will continue to prioritize soundness, profitability, and growth throughout the year. There are also implications for the deposit side, where we are experiencing pricing competition in both loans and deposits, which remains quite intense despite some actions taken by the Fed.

Daniel here. Let me add one more comment about net interest margin and looking ahead to the 13 basis points improvement we saw in the fourth quarter. We discussed the lag and how we are addressing that. We have a solid starting point for the first quarter. However, I don't anticipate the same rate of increase that we experienced in the fourth quarter because we have already captured much of that benefit by addressing the lag. We do expect some growth in the first quarter, but not at the same level as what we achieved in the fourth quarter.

Yes. I mean, to accentuate that point, if we had if we stack 2, 13 basis point quarters together, we'd be a 3% NIM at the start of the year and the first quarter of the year. And our expectation is that, as we've been saying all on, at a run rate, we believe we can get to in the back half of the year. I think that's a good way to summarize that point.

The next question comes from David Feaster with Raymond James.

I just wanted to follow-up a bit on kind of what we were just talking about to an extent. But on the deposit side, you guys have done a great job optimizing the funding base, reducing deposit costs. How is client reception of lower rates been thus far just the competitive landscape as you see it in your ability to continue to reduce deposit costs, especially if the industry loan growth starts to accelerate like we've talked about?

Yes, David, regarding deposits, it remains highly competitive. On the positive side, we've seen a favorable impact on the elasticity of our deposit base. After conducting tests over the summer last year, we grew more confident in our ability to address lag times and adjusted our beta assumptions concerning our core customers. So far, I am not aware of any regrettable decisions we've made in our administered rate portfolio, which is encouraging. The level of competition is not more intense than it has been; it's just persistently competitive in the deposit sector, and we don't expect that to change. This has been our consistent perspective over the past few years and it does not alter how we view our outlook for 2025—this is simply the environment we are in now.

Yes. David, I want to emphasize that balancing growth involves a trade-off, and our goal is to find the optimal point. We likely have more optimization in our rate segment compared to our competitors. So when considering our growth in relation to our peers, we're focused on striking that right balance. I believe we've done a commendable job in this regard. In the fourth quarter, it's noteworthy that customer time deposits dropped while interest-bearing deposits rose. If you analyze the customer closure CDs from that quarter, our relationships really made a difference. Of the CDs that closed in the fourth quarter, we managed to keep over 75% of the balances from customers who had multiple accounts with us, either by shifting them into lower-cost CDs at current rates or into lower-cost interest-bearing deposits. We're emphasizing relationship profitability, and it's paying off. For the accounts we retained, we managed to keep 25% of those balances. On the funding side, we're optimistic about the growth in consumer deposits during the fourth quarter, both in terms of ending and average balances, which has not been the case for a while. We conducted an analysis across several balance tiers and saw growth in each one, which is quite promising, particularly because we typically expect seasonal growth in consumer deposits during the fourth quarter. Additionally, for the entire year, we increased consumer checking accounts by 1.5%, which is vital for a consumer bank. We’re committed to nurturing this growth moving forward.

That's great color. Maybe on the other side, just switching to loans. We talked a bit about that. Could you just touch a bit on the complexion of the pipeline and what you'd expect to be key drivers of growth? And just with the pipeline staying relatively stable, I mean, would you expect kind of growth to be maybe more focused on like the seasonally stronger quarters with ag increasing and maybe some slower growth in the first half of the year as demand starts to improve? And at what point do you just do you start getting more competitive on the pricing front in order to drive growth?

We will remain competitive and are not looking to be out of the market on pricing. We are committed to maintaining discipline regarding pricing, which includes evaluating profitability in a comprehensive way rather than just focusing on individual transactions. Our goal is to grow the loan portfolio while achieving strong risk-adjusted returns on our investments. Currently, I see a healthy and diversified pipeline as we approach 2025, particularly within commercial real estate and other commercial sectors where we are identifying good opportunities. The geographic distribution is also broad, with positive markets like DFW and Nashville performing well. Overall, I am encouraged by the productivity levels across our footprint concerning loan growth opportunities. While predicting Fed actions can be tricky, I believe we could see an increase in volume as the year progresses. I previously mentioned the factors influencing our net interest income outlook, and we do observe some positive trends today. Our commercial clients have robust balance sheets, which is beneficial overall but could dampen borrowing demand. If optimism persists, I am hopeful that this will lead to increased investment needs and more opportunities. Lastly, we expect to see healthy paydowns this year, including some commercial real estate moving to the permanent market, which will contribute to our activity. We aim to build on this foundation and believe we can achieve that growth.

Great. That's great. And last one for me, just touching on credit. It seems like things are kind of just normalizing, right? Obviously, some weakness in areas like the consumer. But looking broadly, it just kind of feels like a normalization, and that's kind of what your guidance implies. I'm just kind of curious, what are you seeing on the credit front? What are you watching closely? Is there anything notable or just kind of curious what you're seeing on the credit front broadly?

Yes, thanks. Nothing that I would call notable that's new. I think normalization is still exactly the right term in terms of how we think about what's happening in the portfolio. David, specific to us, we've talked about, we've identified a run-off portfolio. It continues to run-off significantly. Those balances are getting somewhat irrelevant to talk about. But as we've said before, your best loans in those portfolios are the ones that are paying off and the ones that we'll continue to have to deal with and could see some charge-offs in are the ones that remain there. So the run-off portfolio, small balance, but that's one we keep a close eye on. And then outside of that, I mean, in our portfolio, it's really just kind of a handful of credits. It's nothing new. It's nothing new that's migrated in. So we feel like we've got a really tight box around the credits and the portfolios that we have to talk about and keep a close eye on. When I think about commercial real estate broadly, our performance, and we have some detailed breakdowns in terms of the makeup of those portfolios, the levels of past dues, nonaccruals, et cetera. We're just we're not seeing anything that is causing us any kind of new concerns in those portfolios. So I think we'll continue to be prudent in dealing with the known credits and the small runoff portfolio that we have, we'll work through those as aggressively as we can. Outside of that, the good news is we're just not seeing a lot of changes on the credit front, even had some good trends within like classified and criticized in the quarter. So I feel like the credit picture is really kind of business as usual at this point.

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

I just wanted to ask about longer-term profitability. I mean you talked about the kind of the focus on profitability at the kind of expensive growth, if you will and the positive NIM direction you see for 2025. What's the rate environment do you think you need to get the ROA back over 1%? What's the kind of the optimal set up for you there and kind of visibility around that?

I believe that the steepening of the yield curve is beneficial for the entire industry. This is the kind of environment that we all need. As we consider some key performance indicators, I feel optimistic about achieving an operating net interest margin around 350 basis points, give or take. This aligns well with our risk appetite and a more optimized balance sheet. Maintaining our presence as a retail community bank, a 350 basis point net interest margin in our business model likely translates to a top efficiency ratio in the low 50s. It’s challenging to reduce that much further with our retail base, and I anticipate this could lead to a return on assets around 1.25%. We are focused on continuous improvement to enhance these metrics. However, we need to manage the duration overhang on some of our assets, which introduces timing considerations. Whenever we discuss timelines, we must also address the rate environment during those periods and the opportunities for balance sheet restructuring that might help accelerate our progress toward our long-term targets.

Okay. I appreciate that. My other questions were answered.

The next question comes from Stephen Scouten with Piper Sandler.

Jay, I know you mentioned this briefly, discussing the evaluation of potential securities restructuring. Could you elaborate on the dynamics that might lead you to pursue that? With rates being slightly higher, the math could be more compelling now, particularly regarding the held-to-maturity book and your thoughts on that.

Yes, Stephen. Thank you for the question. The reality is that we are considering various scenarios, and it's not a straightforward analysis. For instance, regarding the held-to-maturity portfolio, if we were to undertake a larger transaction, the sensitivity of our balance sheet would change significantly. We assess the asset-liability management aspects of the balance sheet both prior to and after the transaction. Naturally, we also evaluate capital and earnings, which, as I’ve mentioned before, is a primary focus when examining balance sheet restructures—it's all about the trade-offs between capital and earnings. One of the factors I like to consider is the long-term outlook, spanning the next three to five years, in any scenario, whether it involves significant or minor adjustments within the balance sheet restructure.

Drew, can you help with that?

Please go ahead, sir. I just dropped out there.

Stephen, can you still hear us? I'll finish my comment for everyone on the call. One crucial aspect we focus on is projecting 3 to 4 years ahead, considering various trade scenarios over time and analyzing different interest rate environments, such as decreases of 100, 200, or 300 basis points. We assess our earnings outlook based on the current balance sheet during that timeframe compared to a pro forma for a trade. We want to know if we are making more or less money in different rate situations. As I've mentioned before, we run numerous scenarios around these issues. If we identify a viable opportunity to accelerate those timelines, we will seize it.

Excuse me, Stephen, are you still there? Okay. At this time, this concludes our question-and-answer session. I would like to turn the conference back over to George Makris for any closing remarks.

Thank you very much. And not surprisingly, we've outlined a pretty conservative outlook for 2025, but I will say that we're cautiously optimistic that a favorable business environment will help us exceed our expectations. So stay tuned. Before we drop off today, I've got some special recognition I'd like to make. We had five key executives retired at the end of 2024. Bob Feldman, who is our CEO, Steve Massanelli, who is our Chief Administrative Officer; Steve Wade, who served as our Chief Credit Officer; Johnny McCaleb, who had served as our Chief Audit Executive; and Pat Neely, who ran bank operations, all retired at the end of 2024. That's a lot of talent to lose at one time, but I'll tell you, their replacements are just as good with long runway, and we're excited about that. These five folks played a pivotal role over the last 10 years as we grew. And if you can think about how they were able to manage our day-to-day operation, but also improve our operations, our risk management, oversee our credit operation as we integrated 13 banks, it was a monumental task, and I can't thank these guys enough for what they've meant for Simmons Bank. So guys, we'll miss you, but thanks very much. You left the company in a good way. That's really all we have for today. Thank you for joining us, and have a great day.

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