Simmons First National Corp
NASDAQ:SFNC
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Simmons First National Corp
Earnings Call Analysis
Q2-2024 Analysis
Simmons First National Corp
Simmons First National Corporation started the second quarter of 2024 with a steady performance. The company managed to maintain its net interest margin (NIM) in a range-bound area, recording NIM figures of 2.68%, 2.66%, and 2.69% in the last three quarters, indicating stability in a competitive macroeconomic environment.
Notably, loan yields increased by 15 basis points on a quarter-over-quarter basis, with expectations for continued momentum, although the company clarifies that it wouldn't expect this pace to sustain over the coming quarters. The normalized increase in loan yield indicates a strong focus on maintaining profitability while avoiding riskier loan choices.
The management articulated a cautious outlook regarding loan growth, projecting low single digits for the year. The current pipeline suggests that the company will need to see an uptick in loan demand to maintain healthy growth rates. They emphasized that they are not willing to sacrifice credit quality for the sake of growth.
Simmons reported a 1% quarter-over-quarter growth in deposits, which translates to a 4% annualized growth. This mild increase highlights a successful strategy aimed at solidifying core customer relationships, and they experienced only a minimal decline in noninterest-bearing accounts, down just $29 million.
The bank is seeing some positive shifts in the cost of deposits, which only rose 4 basis points during the quarter, a significant reduction compared to earlier quarters where the increases were more pronounced. This reflects a commendable improvement in managing funding costs amidst fierce competition.
Management remains vigilant regarding credit quality, particularly against the backdrop of macroeconomic uncertainties. They've identified challenges predominantly within runoff portfolios, handling them proactively to mitigate risks while ensuring low loss rates.
The 'Better Bank' initiative has helped in managing expenses effectively, with a notable headcount reduction of 275 employees, or 8.5%. This wasn't merely a layoff but part of a strategy to enhance operational efficiency without compromising service quality.
Looking ahead, Simmons First National Corporation focuses on bolstering organic growth and maintaining a strong capital position through prudent expense management and a clear prioritization of returning capital to shareholders via dividends. Acquisitions remain on the back burner for the time being, as the company emphasizes solidifying its foundational strengths.
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Good day, and welcome to the Simmons First National Corporation Q2 earnings conference call. [Operator Instructions]. 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. Today -- 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, and 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.
[Operator Instructions]. Our first question is from the line of Wood Lay from KBW.
I 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 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 maybe just start with kind of a reminder. We have, for a few quarters now, basically highlighted that we feel like our NIM is in kind of a stable range-bound area. And I think our last 3 quarters of NIM are the prints were $2.68, $2.66, $2.69. So I feel like we've been sort of right in that expectation. And generally speaking, I think that's a continued theme for us here. We were -- some things definitely went right for us in the quarter. Again, I'm going to flip it to Daniel here in a second to maybe unpack a couple of those items that are drivers to NIM.
I think we're very, very poised for favorable asset repricing. We're seeing some stability on the deposit side. Still a very competitive macro backdrop. And I think we're very, very poised for rates down or liability sensitivity type environment given our balance sheet dynamics. So that's kind of the big picture of where I think we've been and where I think 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.
Yes. Woody. So let's start on the asset side of the balance sheet. So 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 that our loan yields have portfolio yields have been increasing relative to prior periods, and that -- we expect that to continue. Of that 15 basis points, I'd tell you, I wouldn't expect that for Q3 or Q4. There was some timing in that relative to Q1 and Q2 with some loan fees on both sides of that, it's about 3 basis points. So 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. Also in loans, we had good deposit growth, 1% quarter-over-quarter or 4% annualized. That's kind of middle of the fairway for us. we're keenly focused on soundness profitability growth and with -- in that order. And we're focused on every loan that we put on is has that profitability hurdle and mindset that is going to help us improve our ROA. So as you think about where that's headed, would tell you probably the loan demand may be a little bit tapped out there, but we're not going to sacrifice on our profitability and reach there. So that 1% quarter-over-quarter is a good number for us.
Maybe if you flip to the liability side of the balance sheet, deposits, I think for the quarter, I think it was a good story for us. You see kind of the ending balance was down $500 million. There -- it can sometimes skew the number when you look at a quarter end versus a prior quarter end. You've got businesses taking positions on their balance sheet that affect us and then you've got some timing of public funds, seasonality there. You've got counties and schools building balances in the first quarter, then they start to disperse that in the second quarter. But if you look at average balances, we were down $189 million quarter-over-quarter. And specifically, and maybe more importantly, if you look at noninterest-bearing accounts, we were only down $29 million in balances there. And that's probably one of the best quarters we've had in a while in terms of just the ease of remixing in that base.
And so fast forward, that had a positive impact for us in terms of deposit cost. We were only up 4 basis points in our deposit costs, and that's significantly lower than where we had been in the past. Last quarter, we were up 17% in the quarter before that, 21% a quarter before that 41%. And so the pace of increase slowed dramatically and that was primarily driven by noninterest-bearing deposits. The other thing I would tell you that is a positive for us is CDs. In April, we had our first month where our going on CD renewals were at lower rates than the maturing rates. And that theme carried forward for the entire quarter. So as we think about headed forward, that hopefully is flipping from a headwind to somewhat of a neutral and maybe even slightly positive trend for us. So deposits helped us with our NIM in the quarter.
As you think about -- Jay mentioned this a little bit, but as you think about that forward, it's still very competitive. That competitiveness is not easing there's some irrational pricing out there. You've got some competitors offering CDs above what our wholesale funding cost is. And so we're going to continue to battle that. But we're keenly focused on maintaining core relationships, profitable relationships. And one last thing I would tell you is from a deposit account standpoint, a number of accounts we're still growing our customer checking accounts year-to-date. And so that's a meaningful thing for us, big focus for us is that we continue to grow our customer base to provide that core stable funding for us.
That's really helpful color. Maybe shifting over to the securities portfolio. We've 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?
Yes, it does. I mean I think that's something you saw us do in Q4 last year. Our approach thus far has really been a patient. I kind of maybe call it an incremental approach. We haven't taken sort of a rip the Band-Aid off approach in the bond portfolio. And really, as we look at it, we really want to kind of maintain the optionality. We're very focused and disciplined around the trade-offs between kind of capital and earnings as we think about those 2 things and want to maintain our focus on the earn back as well. So no doubt with the movement in the -- I'm just going to call it the movement in the 10-year all associated to the 10-year.
We do get more constructive. You guys have heard me say before, I'll continue to say it, we are very scenario rich. We look at a lot of different opportunities and alternatives within the bond portfolio. So I don't want to get us out over the skis because, again, we've demonstrated a lot of patients around that. I think you'll continue to see us very disciplined. But no doubt, rates have come our direction as it relates to your question there.
The next question is from the line of David Feaster from Raymond James.
Good morning, everybody. I wanted to touch maybe a bit on the expense line. You've been very active with the Better Bank initiative. It's paying off. expenses has done better than we've expected. I'm curious what's left on that program? And how 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 like that versus 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. But I'd just say the big picture focus is continues to be to have a lot of discipline on the expense side. I think we have additional opportunities on the expense side. We're very pleased with the results from ongoing expense initiatives. But you hit on a theme that's really important that we always try to reinforce, and that is that we are continuing to invest in the business. That's been in people and systems all across the board. We have had a really good past year at least in terms of what I kind of call the talent upgrade category, very pleased with the talent that we're attracting to the bank.
Some of the initiatives that we have going on include evaluating current systems and new systems. But really, the overall mindset that we have adopted is to try to fund as much, if not all of those investments is possible. And thus far, we have been successful in doing that. The inflationary environment, the wage inflation environment may not be quite as severe as it was a few quarters ago, a year ago, but it's still pretty tough out there. And so I think for us to produce the results that we have thus far in the face of that is a compelling piece of the story.
The last thing I'd say to it is just that the same way that we have looked at initiatives going back a year plus ago, we're still doing that today. I mean we're trying to identify other opportunities. We're taking a hard look at everything in the franchise from the branch network to the deep back areas of the bank and everything in between to identify where there are redundancies, where there are opportunities to better serve our customers, better serve our associates in the most efficient and scalable way. And I think we'll continue to identify some opportunities as we do that.
One point I want to make, David, is it kind of gets lost out there. But if you remember back to last year, we did say, I think, at $18 million. We targeted about $15 million is what we thought all of this through a better bank initiative. It's not being forced out there. One number I think is very important to look at is our headcount size in that period of time when we started this better bank initiative. We're down 275 headcount during that period of time and 8.5%. This was not just layoffs. This was not -- this is just becoming a better bank through the process after digesting some of our M&A. So very proud of the team where we are there.
As Jay said, too, we're at a good point now. There will be more down the road and not ready to say when or how much. But we're very encouraged with the progress thus far and more to come.
And I'd maybe just say one final thing on that is at the end of every one of our executive counsel meetings, we say focus on the things that we can control. We can't control the rate environment. There are other things we can't control, but the thing we can control is expenses and we are focused on that day in and day out. And maybe just to give you one example of where an investment is paying off is we never had a procurement department. We invested in a head of procurement, and we are looking at all of our contracts. And we just renegotiated our largest vendor contract and we have about 8% savings on that.
Our second largest contract, we are in the process of renegotiating that. We expect to get some meaningful savings there. And then just going down the list. And so there's a lot of things that we're focused on. Jay mentioned the retail network, and that may be efficiency, and there's two sides of that. There's the investment side and there's the cost saving side. So I think we've still got opportunity and we'll continue to focus on that.
That's great. And then maybe switching gears to credit. The issue seem primarily isolated to the runoff book. But I'm curious maybe as you look at the overall portfolio, what you're seeing, what you're watching more closely. Any thoughts on what drove the increase in classified? It looks like it might be CRE, but -- maybe just any thoughts on credit broadly and your approach to managing asset quality.
Fortunately, David, I think your initial comment is exactly how we feel about it. Thus far, we've talked a lot about normalization credit. We're seeing that. But from a statistical or percentage basis, the overwhelming majority of that for us is in a very isolated portion of the balance sheet, a small area of the balance sheet. We've identified that as kind of runoff portfolios. Those have been in runoff for a period of time. But we're seeing some good success in working through that portfolio and continuing to focus on shortening the duration and working through those as very low loss rates.
When I look beyond that, you asked kind of what are we focused on. I mean we are searching high and low. We are being as proactive as we can to identify any kind of problem credits. That would, of course, include the significant focus just around stress on borrowers from a repricing point of view. You got maturity events. You've got loans that are repricing at a lot higher rates. Does that generate stress? So we've done a lot of deep dives in that scenario. We continue to do that. And that's not resulting in anything that's causing any kind of broad-based concern for us. And so we'll continue to be proactive there. There aren't any other sectors that we haven't identified previously or put into that runoff portfolio that kind of stand out at us within our portfolio that we're particularly concerned about.
And generally speaking, when I look at overall credit, including some of kind of the leading indicators, I like to focus on past dues even on a linked-quarter basis, we had pretty positive trends from a credit perspective this quarter. So we're very conservative as we think about the macroeconomic environment. There's a lot of uncertainty in the marketplace. But at the same time, we feel pretty good right now about where we are from a credit perspective.
That's great. And maybe switching gears to capital. You've got a really strong balance sheet. Obviously, you're a proven acquirer commentary in the industries that conversations are picking up, expectations are for more consolidation. I'm just curious maybe how do you expect to participate in that? I mean we've talked in the past about focusing more on organic growth, but I'm curious your appetite for a deal and how activity is from your perspective or any other capital priorities that maybe you have ahead of M&A?
Well, David, I'll start off on that. I'll tell you, first off, our capital priorities. Number one would be in our payment of dividends to shareholders, the long history we have of that. We then focus on our organic growth. As we've talked about through our Better Bank initiative, we think we have a really good footprint to be able to grow organically, especially as rates hopefully moderate at some point, and that brings some of our borrowers back into the line. So we think there's a lot of opportunity there.
The other is we talked about with Wood earlier is on our measured balance sheet optimization. That's a piece of it that we would use if it's -- the timing is appropriate. Outside of that, there are other priorities and it would just be measured over time. We look at stock buybacks in that mix. We're really -- we think there's better opportunities to use our capital right now than stock buybacks. So that's on the lower end of our priorities. And as we've talked about a lot right now on the M&A side, it's a lower end on our priority. We really -- as we talked about, we sat around the room in 2022, George, Jay and I said this is really a time to really focus on our bank and becoming a better bank and putting all the acquisitions we put together and really focus on that. So that doesn't mean we say we're not going to do M&A at some point down the road, but that's right now not in our focus of our strategy at the current time.
The next question is from the line of Matt Olney from Stephens.
Daniel already mentioned a good summary of the deposit strategy and seeing pricing pressure ease there. What about on the borrowing side? I think we did see a big step-up in the borrowing position in 2Q, especially at the end of the period -- end of the quarter. What's the overall strategy for funding for the back half of the year? Are we going to continue to see borrowings and the securities cash flow. Just any color there?
Matt, I think as much as anything, I really think the way to think about ending balance is just timing. I think really when you look at period-over-period ending balances, there's probably some timing noise in there. we're opportunistic in how we think about wholesale funding generally, right? And so the overall priority for wholesale funding is to reduce it, whether it's an FHLB advance or a brokered CD or anything else out there. But you'll see us be opportunistic in and out of that. You'll have some timing as it might relate to some public funds or other things. But really, the strategy is just to be as efficient as possible in and out of the wholesale funding in terms of kind of protecting net interest income and net interest margin in that area.
Stepping back more broadly, just what I would want to focus on, Daniel touched on it earlier, but we're really, really focused on driving core customer accounts. And the factors that are driving deposits, whether you want to think about quantitative tightening, whether you want to think about inflation and the impact that has on average balances of our consumer customers, et cetera. Those go into those categories that we don't control, but what we do control is sort of maximizing our retail network deepening relationships in the commercial areas of the bank with commercial treasury management and other products, that's really the primary focus that we have now and going forward.
Okay. I appreciate that. Let me ask it maybe a same topic just a different way on the securities portfolio, you've been allowing that to contract and kind of allow that to fund some of the loan growth of last quarter 2. And I think you disclosed $120 million of expected cash flows per quarter over next year. Can we just assume this continued to cash flow and then that continues to fund the loan growth?
Yes. Yes, I think that would be exactly the way to think about it. So our priorities would be funding loan growth and reducing wholesale funding with any cash flow from the balance sheet in that order.
Okay. Perfect. And then switching gears, you guys gave a great disclosure on -- I think it's Page 26. On the unfunded commitments and those continue to move lower, and we've talked about this now for a few quarters as far as kind of why that is. Just any color on where you expect this to ultimately land over the next few quarters?
Matt just to clarify, are you asking about where we land from an unfunded commitment level point of view?
Correct. Correct.
Yes. I'd say given where our pipeline is, and I think Daniel used the phrase earlier sort of more tepid outlook from a loan growth perspective. I think that it's going to be unfunded commitments, kind of have a floor in them somewhere in there. We have that floor now. Probably not, but we're getting closer to it. And the reason I say that is a lot of unfunded commitments are line of credits with commercial borrowers, et cetera, that we wouldn't expect necessarily to fund up.
If there's a trend out there among borrowers right now, it's that they've kind of got a lot of similar conservatism that we have, whether it's patient for lower rates or just fortressing up the balance sheet, you see more trends on the commercial side of paying off their bonds of credit and their borrowings to the extent they have excess cash laying around in the bank or elsewhere. And so -- as I look at some of that, I think you're going to have a floor in unfunded commitments. When I look at our pipeline, and I look at what I expect in terms of normal course and healthy paydowns of loans that fund up, go to the permanent market, et cetera, it's going to be difficult to see in this current environment, unfunded commitments sort of spike up from here. But I don't expect them to just go to 0, right, because of the dynamics I just described.
The next question is from the line of Gary Tenner from D.A. Davidson.
I hopped on the call a few minutes late, and you just mentioned a previous comment, I think, around a more tepid loan growth outlook. I just wonder if you could revisit that for a second. And then maybe talk about that relative to what's been a pretty stable pipeline on that kind of growing over the course of the last several quarters, obviously, below where it had been in the more distant past, but maybe just kind of juxtapose those two thoughts?
Yes. I think what I would add is color there, Gary, is I think more from a loan growth kind of aspiration or normal environment point of view, I think we'd be a lot closer to double-digit loan growth aspirations for a healthy macro environment. Our outlook for the year from the beginning of the year this year was low single digits. I think that was at the beginning of the year and all the way back in January, just an acknowledgment that this isn't that kind of environment. And we're seeing that play out. Through the first half of the year, we are seeing that lower single-digit type of growth, and we're pleased with that in this environment.
I just think that as we continue to look out there, I look at maturities across the portfolio, expected paydowns, expected cash flows or flows to come in from the permanent market for some of the projects that our borrowers are working on, et cetera. We'll need to see an uptick in those pipelines to maintain a good kind of healthy single-digit level of loan growth. I'm not -- as I sit here today, I'm not calling necessarily for loans to start declining or anything like that. I just think that this rate environment, which has really, really recently shifted back to kind of a rates down theme, most of the second quarter was a rate up thing, and our borrowers were I think just broadly, demand is impacted in that rate up theme scenario.
And so we're just keeping a pretty cautious outlook as it relates to loan growth. You guys continue to hear us say it. Daniel said this earlier in the call, we're not going to sacrifice our standards around credit or soundness, nor are standards around profitability to chase loan growth right now. And so all of those things come together and influence our outlook from a demand point of view.
Great. I appreciate the thoughts there. And then just as it relates to that pipeline slide, kind of highlighted a 30 basis point increase in the rate on ready to close commercial loans. Is that a pretty healthy mix based on that rate of fixed and floating loans at this point?
It is. It's -- there's probably more focus in recent pipeline activity in the last few quarters around floating relative to where variable rate loans as a percentage of the total mix today. But it's definitely a good mix of both. We're seeing some opportunities. We've been focused even on some opportunities in the -- with some loans that generate some swap fees and have had some success there. But again, all of that is just a function of the overall and total demand that's out there in the marketplace.
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 my comments by recognizing Daniel, Ed, Jay, Bob and the team for the information that they put together each quarter on our bank. And if you haven't looked at it, I would encourage you to go to our website at simmonsbank.com under the Investor Relations tab. A lot of great information about Simmons Bank and our performance and -- what I think it really points out is a stable condition to the bank, which is traditional here. We continue to be pleased with our solid all-round performance. We are encouraged by favorable economic data, which seems to indicate future interest rate reductions and eventually return to a neutral rate environment, which will be conducive to our long game strategy.
However, in the meantime, we'll continue to be patient while focusing on filling the needs of our customers and supporting the careers of our associates. So thank you very much for joining us this morning. Have a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.