Simmons First National Corporation (NASDAQ:SFNC) Q1 2023 Earnings Call Transcript

Simmons First National Corporation (NASDAQ:SFNC) Q1 2023 Earnings Call Transcript April 25, 2023

Simmons First National Corporation misses on earnings expectations. Reported EPS is $0.36 EPS, expectations were $0.48.

Operator: Good day, and welcome to the Simmons First National Corporation First Quarter 2023 Earnings Call. All participants will be in listen only mode. After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ed Bilek. Please go ahead.

Edward Bilek: Good morning, and welcome to Simmons First National Corporation’s First Quarter 2023 Earnings Call. Joining me today are several members of our executive management team, including our Executive Chairman, George Makris; CEO, Bob Fehlman; and President and CFO, Jay Brogdon. Before we begin the Q&A, I would like to remind you that our first quarter earnings materials, including the 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.

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These statements involve risks and uncertainties, and you should, therefore, not place undue reliance on any forward-looking statement as actual results might 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 as well as our Form 10-K for the year ended December 31, 2022, 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.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey: Hey, thanks. Good morning, guys. So, I wanted to start with the piece of the provision expense that was related to the corporate bonds. Could you just give us a little more color as far as what happened there and any remaining exposure within these corporate bonds?

Jay Brogdon: Yes. Brady, this is Jay. So the corporate bond portfolio, as a remainder, represents, I think, a little less than 7% of our total bond portfolio. The overwhelming majority of that is sort of Fortune 500 type companies. We’ve done a review of the portfolio. We think this is very isolated bonds in there. It relates to some events that took place with the issuers of those bonds in the first quarter that were unique to those companies. We were, I would say, very aggressive in how we provision for those in terms of really trying to carve that out, I think, probably blended all in. There is a little bit of exposure left on those bonds, but it’s nothing that we don’t think we’ve already provided for.

Brady Gailey: Okay. All right. And then I saw the $15 million cost save plan. Can you just talk about the components of where that came for? And would you anticipate — I feel like you guys have looked at the expense base often over time and continue to get more efficient there. I mean, is this just kind of a part of the ongoing focus on increasing profitability?

Jay Brogdon: It is. I mean I really tie this back, Brady, to the Better Bank initiative overall. We’ve been telegraphing this for a few quarters. There are certainly some specific initiatives we have within the bank that have been months long initiatives. As we’ve sort of been able to execute through those, we’ve been able to identify some specific cost saves. We’ve also had in the — late in the first quarter and into — early in the second quarter here, a very successful early retirement program. We do that periodically every couple of years. So we had good uptake there. So those are the types of initiatives. One that we’ve spoken about before as an example, just sort of anecdotally is our credit optimization process. As we’ve worked through that, we’ve been able to identify a number of redundancies in our processes.

We sort of standardized and centralized a number of those activities. So these are things that both allow for efficiencies to be identified, but also lead to a much sort of better end-to-end process for us, better standardization of those processes across the entire footprint. And so those things should be revenue enhancing as well. That’s not a part of the $15 million cost save initiatives. But when you think about sort of improved time lines, better customer experience, better associate experience related to those types of activities, those are sort of the things that, again, are kind of examples of the types of initiatives that we have leading to that figure.

Robert Fehlman: And Brady, this is Bob. Just to kind of add on to Jay’s comments. As we’ve said, we’ve been talking about the Better Bank initiative, the people, processes and systems for the last six months or so. We’ve been working on some of this, as Jay said, on the credit optimization a year now. So this is just kind of, as we indicated in prior quarters, when we felt comfortable we could firm up the numbers, we would share it with the market, and that’s what we’re doing today is sharing that. And as Jay said, our early retirement program, we’ve done multiple times over the years. It was well received by some of our associates, and it exceeded our expectation, and we’ll be able to absorb that within the system pretty well.

Brady Gailey: All right. And then the margin has been expanding quite nicely over the last year or so, but it did take a step back in the first quarter, which the industry has seen as a whole, but thoughts on where the net interest margin trends for the rest of the year?

Jay Brogdon: So again, Brady, I’ll take a first shot at this. I want to remind you, I think the most important thing to remember is the baseline here. Last quarter, we sort of back-end loaded some moves on the funding side. So I talked about that in the last call. So we expected sort of the full quarter impact of that this quarter. I think that, sort of coupled with the continued migration within the portfolio itself, is really kind of the main contributing factors to where we see the margin compressing in the quarter. I don’t expect that level of compression to sort of continue because, again, we had that back-end loaded. If you look at Q4 to Q1, a lot of that Q4 was back-end loaded so you shouldn’t see that kind of dynamic from Q1 to Q2.

But I do expect there’ll continue to be some migration within the portfolio, like what we’re seeing. So that will be the ongoing headwind on the expense side. But, on the asset side, we’ll continue to have a lot of good repricing dynamics there as well. So I think, near term, next quarter or two, margins should be much more stable than what you saw in Q4 to Q1. And then just a reminder that in the fourth quarter of this year, when we look toward the back half of the year, look at the cash flows we expect overall across all of our portfolios and the repricing of those cash flows and then the interest rate swap that kicks in, in late September, and we’ll have all of that in the fourth quarter, I think all those fundamentals kind of continue to be in place for us as we look out toward the horizon here.

Brady Gailey: All right. And then just the last one for me. I know a lot has changed from when you all gave guidance 90 days ago, but you guided to mid-single-digit loan growth, you did a little better than that in Q1. How are you thinking about loan growth from here on now?