Earnings Call Transcript - SFNC Q2 2025

Operator, Operator

Good morning, and welcome to the Simmons First National Corporation Second Quarter 2025 Earnings Conference Call and Webcast. 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.

Edward J. Bilek, Director of Investor Relations

Good morning, and welcome to Simmons First National Corporation's Second Quarter 2025 Earnings Call. Joining me today are several members of our executive management team, including Chairman and CEO, George Makris; President, Jay Brogdon; CFO, Daniel Hobbs; and Chief Operating Officer, Chris Van Steenberg. 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 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, 2024, 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 furnished as exhibits to the Form 8-K we filed yesterday with the SEC and are also available on the Investor Relations page of our website, simmonsbank.com. Operator, we're ready to begin the Q&A session.

Operator, Operator

The first question comes from Woody Lay with KBW.

Wood Neblett Lay, Analyst

I wanted to start on guidance. And just looking through the slide deck, I didn't see any guidance slide like that's been featured over the past couple of quarters. So I was just curious if any of your expectations for 2025 have changed for the back half relative to where we sort of started the year?

James M. Brogdon, President

Yes. Woody, I appreciate the question. And I may just insert a reminder to you and everyone. Historically, we've really only provided guidance or outlook commentary in January each year, given sort of uncertainties around tariffs, the outlook for growth, some of the nonrecurring items in our first quarter that put noise in the numbers. We brought that back forward in our first quarter announcement. But I'd say, when you think about our outlook for our business, I think the trends in the quarter or this quarter sort of speak for themselves. We continue to be very, very pleased with the ongoing trends in our business. We have some performance targets that we've outlined with you and others before, and we're very ambitious in those targets. And I think the acceleration in our performance improvement and the pace of that improvement continues to exceed even our internal expectations. So I'd just say with that in turn, we're pretty confident and maybe as confident as ever about our ability to execute and execute toward achieving those target levels.

Wood Neblett Lay, Analyst

Yes, that's helpful. And yes, definitely, I mean, it looks like NII and expenses both beat it would only be positive from here. Maybe looking at the NIM, you sort of hit the 3% level ahead of schedule and kind of jumped over that line. Do you think there's room to continue to see expansion from here? And is there more juice to squeeze on the deposit base? Or would you expect deposit costs to sort of start stabilizing from here?

James M. Brogdon, President

Sure. Let me explain what we observed in the second quarter, addressing both sides you mentioned. On the asset side, our performance continues to be primarily driven by repricing, contributing to the expansion of our net interest margin (NIM). There is still considerable potential for us regarding this repricing, especially with the lower-rate fixed-rate loans that have repriced over recent quarters, and we anticipate this trend to persist. One aspect that may be overlooked is the strength of our loan pipeline and production. The challenges to overall growth include some elevated paydowns, permanent market financings, and our commitment to price discipline. We are willing to accept a slower growth rate in loans while maintaining this discipline around credit and pricing. The competitive landscape for loan pricing remains high, which will impact our overall loan growth. Nevertheless, our pipelines and production are solid, driving our net interest income (NII) and NIM from the asset side. On the other side of the balance sheet, deposits have become more about remixing at this stage. In the second quarter, we witnessed positive trends in transitioning from higher-cost deposits to lower-cost ones. Although there is an element of repricing involved, the opportunity for further repricing is diminishing as time passes since the last Federal Reserve rate cut. We did see some opportunities in the second quarter, particularly with our core customer base, but they are not as robust now as the repricing opportunities on the loan side.

Charles Daniel Hobbs, CFO

Yes. This is Daniel. I would like to add a few details. Regarding loan yields, we previously discussed how our total portfolio consists of approximately 46% fixed-rate loans, down from 48.5% last quarter. These fixed-rate loans continue to reprice each quarter with a spread of nearly 200 basis points, a trend that has remained consistent over the past few quarters. We anticipate that this trend will persist, with some minor fluctuations. Additionally, in terms of portfolio remixing, this quarter saw 75% of our production as variable, compared to 80% the previous quarter. The spread between fixed loans that have matured and those that are repricing as variable is around 175 basis points. We view both of these factors as positive tailwinds. However, as Jay noted, funding may become more challenging as we move forward. One observation is that the rate on CDs maturing in the next few quarters is decreasing, which indicates a diminishing opportunity for repricing in the coming months. While we do expect some repricing, it may not reach the historically higher levels we have experienced.

Wood Neblett Lay, Analyst

Right. That's really helpful. And then maybe just last for me. As you noted, payoffs were a little bit of a headwind to growth this quarter. Just any expectation for the payoff outlook over the back half of the year?

James M. Brogdon, President

We observed significantly increased payoffs in the first quarter. However, nothing exceeded our expectations in the second quarter. The current environment is seeing healthy paydowns, especially in construction and permanent market activity. I don’t foresee any changes in our outlook regarding paydowns. For the next few quarters, we anticipate results similar to the first half of the year, although perhaps not at the same high level as before.

Operator, Operator

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

Gary Peter Tenner, Analyst

I would like to follow up on the pipeline. It's modestly lower than last quarter but still significantly higher than it was a year ago and at the end of 2024. I'm interested in the intra-quarter dynamics, specifically regarding the pull-through from the first quarter pipeline, which seems to have been quite good. What do you think is causing the lower pipeline compared to three months ago?

James M. Brogdon, President

Yes, Gary, I touched on this in our first quarter call. At that time, it felt more theoretical, but now it's clearer. We experienced some advance activity late in the first quarter. As I mentioned earlier, some tariff-related concerns were emerging, leading to opportunities that were more developed, resulting in significant pull forward in that quarter. When I adjust for this, the slide in the IP shows a more typical progression from the fourth quarter to the first quarter and then to the second quarter, had there not been that advancement. Additionally, our business experiences some seasonality, and we are seeing substantial success in the agriculture sector. We've been working in this area for over 120 years, and while it faces certain challenges, we remain optimistic about it from a credit standpoint. We are very selective in our approach, but there is indeed normal seasonality, which contributes to pipeline growth in the early part of the year. This is reflected in the trends we’re observing in the pipeline.

Gary Peter Tenner, Analyst

Great. Appreciate the thoughts on that. And then in terms of the comments about continuing to recruit and kind of open for business in terms of adding talent, which I don't know if you've said today, but you certainly have in the past. It seems like it's a very competitive environment for bringing on talent. I think in the past, you flagged Nashville, particularly as a market that could be very competitive. What's the hiring environment look like right now? And certainly, in Texas, there's been a lot of recent merger announcements. So wondering what your thoughts are around potential opportunities there.

James M. Brogdon, President

Yes, Gary, I really appreciate the question. Let me back up for a second and then kind of come back closer to the questions you're asking there. The first thing I want to say is we're pretty proud of what we've been able to do from an expense discipline point of view over the last few years, saw really, really good evidence of our continued progress there this quarter. And we don't think we're finished in terms of being able to do that. Daniel would say we're never going to be finished doing that, just that continuous improvement mindset. But at the same time, what I really want to underscore is we're making some significant investments in our business. And I would maybe broadly at a tactical level, think about those investments as talent and technology and really enabling the business through things like automation and just things that are driving both associate and customer experience, but really generating capacity in our business. And we're able to free up that capacity and the savings from those investments and a large part of the deployment of that is back into talent. And so we have been really pleased with kind of the upskilling, upgrading and attraction of talent as well as our sort of retention and investment in talent in our business. And so I'd say that the hiring environment has been very, very good. We feel like we've got a proven track record there at all levels of the business and in all areas of the business, from the back side to the front side and everywhere in between. And then my maybe bottom line comment would be when we think about our footprint and we think about, to your point in your question, the sort of disruption that even this week is being announced, our expectation is that, that disruption is nowhere near finished throughout our footprint. And we are very ambitious in pursuing a reputation in our marketplace of one where talent and customer opportunities from that dislocation that we're in a great place, a great landing spot for that. And again, we're seeing success there. I think the environment is only getting better.

Operator, Operator

The next question comes from Jordan Ghent with Stephens.

Jordan Spencer Ghent, Analyst

I just had a kind of a quick question, kind of going back to the loan growth. So it looks like your unfunded commitments have had a steady upward drive. And can we kind of interpret this as loan growth going into the back half of the year, maybe even to 2026 is setting up pretty nicely?

James M. Brogdon, President

Yes, I think that's the right way to view it, Jordan. One point that hasn't been mentioned is that while the pipeline and unfunded commitment chart shows certain trends, we can also observe a change in the quarterly loan growth mix. There are still aspects of commercial real estate growth that have historically contributed to those unfunded commitments. However, we are noticing a positive shift in the mix of commercial and industrial lending in our pipeline. Commercial activity has outperformed commercial real estate in terms of production and growth this quarter. Additionally, we believe building relationships in the C&I sector will play a role in this, especially concerning unused lines and lines with operating companies. All of this suggests that we are successfully advancing some of our strategic priorities and are positioned for funded growth as we approach the upcoming quarters.

Jordan Spencer Ghent, Analyst

Perfect. And then maybe just kind of one follow-up, talking about that CRE kind of looks like classifieds, just ticked up a little bit this quarter. Is there any color you could provide on that?

James M. Brogdon, President

Yes. There's nothing that stands out. We looked at those metrics very, very closely. And really nothing that stands out in kind of nonperformers, classifieds, past dues, charge-offs, all the metrics that we see are very indicative of all of our most recent quarters trends, but for the two large credits we talked about last quarter, sort of the underlying credit picture still feels, I think, stable and normalizing would be still good words for how we think about credit. And there's nothing that kind of stands out beyond that in our mind. And again, I go back to one of the numbers I focus on. Obviously, we look at what migrates in and out of NPLs, but we also pay a lot of attention to both classifieds and past dues and thinking of those as leading indicators, and had very, very good trends in past dues on a linked-quarter basis. And even just the aggregate number is a very low number for us in that category. So I think that helps kind of paint the picture overall how we think about credit.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to George Makris for any closing remarks.

George A. Makris, Chairman and CEO

Well, thank you very much for joining us this quarter. I want to reiterate one thing that Jay said earlier, and that has to do with our talent. We are extremely proud of our team whose discipline is demonstrated in our results. We have exceptional employee engagement, folks who can and want to do more and it's our job to make sure that we give them the resources for them to be successful. So I just want to reiterate our position on talent acquisition and current talent that we have today. We're awfully encouraged by the momentum that we show going into the second half of the year. We're looking for continued profitability improvement going forward. I think that was clearly defined for you this morning by Daniel and Jay. So thank you very much for joining us this morning. Hope you have a great day and a great weekend.

Operator, Operator

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