Yahoo Finance

Jay Brogdon

Thanks, Ed. I appreciate everyone joining us on the call this morning. I know we typically go right into Q&A, but I think it's important to provide clarity regarding certain asset quality actions we undertook in the quarter as well as to highlight the underlying strength of our top line results. My comments will be relatively brief and we'll touch on trends within three broad categories: balance sheet, earnings and credit.
Starting with the balance sheet. Total period-end loans were up 2% on a linked quarter annualized basis. This level of growth was consistent with our outlook. However, average loans were down for the quarter as most of our funded growth was back-end loaded. Our commercial loan pipeline was up 43% linked quarter and is at its highest level since the second quarter of 2022.
We remain cautious about loan growth in the current macro backdrop, but we're pleased with the ability of our borrowers to lock in attractive economics and move forward with planned investments throughout Q1.
Shifting to the right-hand side of the balance sheet. Total deposits were down slightly on a linked-quarter basis due to reductions in brokered funding. Customer deposits grew $183 million during the quarter, roughly 4% linked quarter annualized as we continued to see a positive remixing into lower-cost transaction accounts. One nonfinancial metric we monitor closely as a measure of the health of our deposit franchise is growth in the number of consumer checking accounts. This metric grew by 1.5% year over year. Overall, we are very pleased with loan and deposit trends for the quarter.
Moving to earnings, from a top line perspective, total revenue was up $1.1 million linked quarter despite fewer days in the first quarter of 2025. This was our fourth consecutive quarter delivering top-line adjusted revenue growth and net interest margin expansion.
First-quarter net interest margin was 2.95%, up 8 bps linked quarter and up 29 bps year over year, primarily driven by 19 bps decline in total funding costs-linked quarter. We continue to benefit from fixed rate loan repricing and expect this to be an ongoing tailwind. Non-interest income grew 6% linked quarter. We delivered strong swap fee income in our Q1 loan production as well as diversified growth from our other fee-based businesses.
Adjusted non-interest expense increased $4.3 million linked quarter, including a customer deposit fraud event that involved entities affiliated with a borrower whose credit relationship was placed on nonaccrual this quarter. Excluding this item, adjusted non-interest expense would have totaled $139.3 million, down slightly from fourth quarter 2024 levels and reflective of our continued expense management discipline. For some time now, you've heard us say that our focus is on soundness, profitability and growth and in that order. This first quarter reflected our continued commitment to soundness as well as Simmons conservative nature when we have historically tackled potential challenged credits early and aggressively.
To that end, and moving to credit, we migrated two specific credit relationships to nonperforming in the quarter and boosted our level of specific reserves associated with each credit. These relationships have been on our classified list for some time.
Given further deterioration in the quarter in each relationship, we chose to take action and expedite our path toward resolution. The first credit was originated pre-pandemic and relates to a hotel property in downtown St. Louis and it represents our only credit in the downtown area. This is a $27 million loan that has been in our classified total since early 2021, primarily due to the pandemic and subsequent deterioration of business and consumer activity in downtown St. Louis.
The property securing the credit remains open and operating, and we believe is entering seasonally stronger occupancy and financial performance with spring and summer months ahead. We have recourse to the operator and continue discussions on appropriate resolution strategies. Based on current conditions and market valuations, we believe the level of specific reserves we have in place represents a very conservative mark against any possible exposure.
The second credit is to a borrower that is a fast food franchise operator, and it was primarily an acquired relationship from our most recent acquisition. The relationship totals $23 million and has been in our classified total since June 2024. The borrower is part of a larger franchise operation that involves multiple entities with multiple brands across a broad geography.
Late in the quarter, we discovered activity in deposit accounts of entities affiliated with our borrower that gave us concern. Upon further investigation, we determined there was a fraudulent activity occurring in those accounts. And as a result, we recorded a $4.3 million fraud, the fraud charges and non-interest expense this quarter. We are exploring our rights and remedies with respect to this situation, including potential opportunities for some level of recovery in future periods. The loan relationship with our borrower though, remains current as of the end of Q1.
However, considering the fraud event and the global cash flow challenges experienced by the borrower, we moved the relationship to nonaccrual and increased our reserve levels as of 3/31. We have personal recourse to the principal, and we are in active discussions regarding the best possible outcome for the bank.
In prior quarters, we carried roughly 30% specific reserves on each of these two relationships. Due to recent developments, we increased our specific reserves to approximately 60% for each relationship, which resulted in additional provision expense of $15.6 million in the quarter. As a result, total provision expense for the quarter was $26.8 million, and our ACL ratio increased to 1.48%. In both cases, we believe we are exercising a proactive and conservative approach to address these two situations. Importantly, and not to overlook the serious nature of credit deterioration, we believe these situations are unique to these particular borrowers, and we believe our overall loan portfolio remains healthy.
To illustrate this point further, I will outline a few portfolio statistics. Past due loans were 21 basis points as of 3/31, down from 22 bps at 12/31. NPLs increased 89 bps in the quarter. However, absent the 2 specific relationships, nonperforming loans declined 5 bps linked quarter to 60 basis points. Net charge-offs for the quarter were 23 bps compared to 27 bps in Q4 of 2024.
As I reflect on recent weeks, it seems like the word of the day is uncertainty. Amidst this challenging backdrop, I will conclude my remarks this morning with 3 things we believe about Simmons as we look to the rest of 2025. Number one, our original 2025 outlook that calls for 3% plus positive operating leverage and implies mid-teens year-over-year growth in PPNR remains intact.
Number two, our net interest margin could cross 3% sooner than originally anticipated, given positive trends in customer deposits and favorable asset repricing. I will also remind you that our 2025 outlook contemplated only one rate cut in Q4 of this year.
Number three, we feel very good about our asset quality outlook for the remainder of the year. We are confident and our level of reserves based on today's circumstances.
In March, our bank celebrated its 122nd year. Our focus on soundness, profitability and growth remains unwavering, and we believe we are well positioned to navigate even the uncertain times with a high level of confidence in the future of Simmons. I will now turn the call back to the operator, and we look forward to answering your questions.

Question and Answer Session

Operator

(Operator Instructions) David Feaster, Raymond James.

David Feaster

I just wanted to appreciate all that color. That was extremely helpful. Do you have a time line for resolution of those credits? I know you mentioned that there could potentially be some resolution by end of year in the guidance slide. But I'm just kind of curious your expectations for the time line of potentially resolving these.

Jay Brogdon

Yes, David, I'll respond on that at least initially here. So I would say the fact pattern could be a little different between the two situations. On the downtown St. Louis Hotel, again, they're entering, as we've indicated, in the seasonally stronger months here, we'd probably like to see some of that seasonality come into the mix as we evaluate our options there.
I think in any scenario, we'd like to see that when resolved before the end of the year. But again, if it benefits us to be patient around that situation, we'll allow that to happen to get to the best kind of net result in terms of recovery around that or best dollar in terms of resolution.
On the other one, again, this is a loan that's been classified since last year. However, the fraud-related activity is not something that we anticipated. It happened late in the quarter. So we're still early in our analysis of that situation, both as it relates to the fraud event and potential recovery there as well as resolution of the credit relationship itself. So again, we're going to be as proactive as possible, and we want to move these out of the bank as quickly as possible.
But we're going to be thoughtful in how we do that and make sure that we've got the best possible path forward. So I think the short answer to your question is, we'd love to get them out this year, but they're both going to have some time line associated with them. And in any scenario, we think whatever charge-off risk is there is adequately covered in our level of specific reserves today.

David Feaster

Okay. Terrific. And then maybe I just want to touch on the pipeline. It's extremely encouraging to see that improvement and with really attractive rates. I guess the first part of my question is, could you just touch on what's driving that?
Where are you seeing opportunities? And just the kind of the pulse of the client from your perspective? And then secondarily, how has that pipeline shifted early in the second quarter and your thoughts on pull-through and whether you started to see any of that fall out, just kind of given that you (inaudible) the market, I mean, it's just -- just kind of curious your thoughts on that.

Jay Brogdon

Yes. So I would say that we're pretty cautious about the (inaudible) in the market ourselves, but when we talk to our borrowers, when we talk to our bankers on the front line, one of the consistent themes is nothing's happened yet. We're all concerned about it. We're seeing some delays in activity or delays in investments, but it's really more conversational. It's more, hey, we're thinking about delaying investment.
The flip side of what we saw in the quarter is maybe, David, is a pull forward in some of the demand. We saw some of the projects that were closer to kind of the start date further in their analysis, further in the initiatives to get off the ground, whether it was C&I, CRE, or otherwise.
Those situations, we have borrowers who were, I think, very effective in locking in economics in whether that's preordering supplies, whether that's hedging, et cetera. So that allowed, I think, some of our opportunities that were in the pipeline to pull forward a bit. And then the flip side of -- or the other piece of it is it's broad-based. When we look deeply into the pipeline, we see it really across the, what I'll call the community and the commercial bank. It's broad-based within our geography.
And even within category, there's C&I. There's CRE. There's agricultural. And we do have some seasonal benefits this time of year as well in that pipeline. And that's not the driver of the seasonal piece. But just keep in mind within there, for example, agricultural, mortgage warehouse, et cetera, are entering more seasonally positive periods here. And I think that's what drove some of the late quarter nature of the funding that we saw.

David Feaster

Okay. That's helpful. And then -- and maybe along the same lines on the other side of the balance sheet, just touching on deposits. I mean the core deposit trends that you saw were also very encouraging. And again, in a seasonally weaker quarter with tax payments and end of the year payments and all those kinds of things.
I just wanted to get your thoughts on the deposit growth strategy where you're seeing opportunity, kind of the competitive landscape and how you think about deposit growth and your ability to continue to drive deposit growth? And whether it's primarily going to be like flattish balances is really a remixing and optimization in there? Just kind of curious how you're thinking about the deposit side today.

Jay Brogdon

Yes. So a lot of things to unpack there, David, in that question. But I would just start with you -- one the things you included in your comment was -- or in your question was the competitive environment. It's still very competitive. Just rest assured that it is a competitive environment.
One of the things we've been pleased with, both within our own balance sheet and sort of that competitive landscape is it does seem that the banks have done a good job of aggressively moving prices down on the deposit side with the rate moves late last year.
So that's been good news. But again, we're still seeing a lot of deposit competition, a lot of protection of existing relationships, et cetera. I really don't expect that to abate anytime soon. Keep in mind, when you think about our deposits, and this is really reflected in how we talk about the outlook, both back in January and still today. We're actively working to remix deposits and to reduce the level of brokered funding. We were successful with that in the first quarter. That's going to continue to be a focus for us.
In addition, you'll see that we were successful in the quarter in remixing out of customer CDs and into interest-bearing transaction accounts. And while NIBs were basically flat or very, very slightly down linked quarter, that's the best quarter we've had in NIBs in quite some period of time. And so we're pretty positive that a lot of those trends are inflecting.
We have all of the systems on go really with focus around deposits, and we have had for quite some time. Every lending opportunity that we're looking at has a deposit conversation involved in it. And really, the hurdle requires that deposit activity. And so continue to be pleased with the trends there. But again, I want to reiterate that the competitive environment is still pretty difficult. Daniel, do you want to add anything on the deposit front?

Charles Hobbs

Yes. David, I think the thing that I would add is if you think Jay's comments around NIB being relatively flat, we were down $5 million, but relatively flat first time in a while that we've been close to that. If you break that down into our different businesses and you look at the consumer customer, our consumer deposits make up about mid-40% of our total customer deposit base. We're actually pleased with what we're seeing there.
The last two quarters, we've seen positive growth. That's kind of the first time in a long time, probably since the rate rising cycle in the last part of '22 that we've seen consumer deposit growth. So we're pleased with that. It's getting back to a more traditional seasonal patterns, that's predictable.
So we feel good about that. The other thing I would say about consumer is we're actually growing the core customer accounts. So if you think about the core checking account, which is the number one driver of revenue in the consumer bank. We've grown that year-over-year 1.5%, and we'll continue to focus on that. We have a number of initiatives that we're working on this year with various campaigns and whatnot that we expect to continue to grow that.
And then the other piece of that, we've seen some -- in this quarter, specifically just some seasonality in nature with public funds. And then on the commercial side, I would tell you, there's still probably some pressure on the commercial side. It's less than it has been. We were down a little bit on the NIB side there, but hopefully, over the coming quarters, if we can get that piece back to flattish or to growing, that will provide us a lot of tailwind as we think about just the overall deposit cost going forward.
Jay talked about time deposits. We are seeing some really positive shifts there into interest-bearing -- of all the -- if you go back to the last 90 days and you look at the CD closures that occurred, we retained about 65% to 70% of those deposits. And we're okay with the others that left because they were seeking higher rate. Of that 65%, about two-thirds of those stayed in CDs, but at a lower cost. The CDs that matured in the last quarter was in that $4.14, $4.15 range and the renewal rate was in the $3.40 range.
So we feel good about that piece of it. But then that other one-third of the CDs that closed went into DDA accounts, which are at a much lower cost. So we feel good about that as well. So we're encouraged about the momentum that we've got along with the deposits and the cost of those deposits.

David Feaster

Kind of thinking about continued deposit optimization, maybe deposit balance is relatively stable and the growth kind of funded by securities cash flows and that remixing and repricing of both assets and liabilities is what's driving margin expansion. Am I thinking about that the right way?

Jay Brogdon

You are. Yes, that's exactly right, David.

Operator

Wood Lay, KBW.

Wood Lay

I had a couple of follow-ups on the credit side. I wanted to start with the fast food operator. Just any color you could give on the underlying collateral there? It sounds like it's potentially to a couple of different entities.

Jay Brogdon

Yes. I mean we've got the stores themselves, the real estate collateral. We have, again, full recourse, as we've outlined in the materials to the principal here. So I think we've got a decent amount of collateral and guarantor support. But again, we're also maybe more aware now given what we discovered late in the quarter on the fraud event of some global concerns around the cash flow picture for the principal. So the guarantor reliance is not probably as valuable as we would have otherwise hoped. But again, we have real estate, we have the stores, we have the equipment in the stores, et cetera.

Wood Lay

Got it. That's helpful. And then maybe shifting over to hospitality. It looks like hotels are about 4% of loans. Just any commentary on how the rest of the portfolio is performing? And are there any other geographic concentrations within that portfolio?

Jay Brogdon

No. There's no real concentrations to speak to there on the hospitality side. And really, this has been -- if you think back to the pandemic, this was obviously a major focus across all of that hospitality portfolio. You flash forward to today but for maybe a small exception or two that I can't even think of this is the one. I mean this is the one we've been talking about internally since kind of the -- what you might call the dust settling on the pandemic a couple of years ago.
And what really happened in this situation, Woody, is we believe, is just unique to that downtown area. Unfortunately, the business climate there has just continued to suffer. And again, we were specific to point out. We obviously have a very good St. Louis presence.
We really like our presence in that market. It's that downtown area that's suffering so bad, and this is the only credit of any kind, not just hospitality of any kind that you would kind of put in the city blocks of downtown that's in our portfolio.

Wood Lay

Got it. And then last for me, it was helpful that you provided the ACL methodology on slide 26. Just two quick questions around that. First, did you adjust the scenario weighting quarter over quarter? And then second, I think if you look at April, Moody's baseline, it looks like GDP was moved a little lower and unemployment was moved higher. How would you all expect this to impact forward reserve levels?

Jay Brogdon

Yes, I think I -- we would expect the baseline scenarios based on everything we know today to continue to worsen from what we -- and we did update scenarios, update baseline from Q4 to Q1. We'll do that every quarter. So we do that again in Q2. So my expectation, unless there is a really significant about shift, that would be that you would see a worsening in the baseline scenarios. You could see a worsening in the weightings, so shifting in how we weight the scenarios, but we'll determine that later in the quarter in Q2.
But I think it would be our expectation that -- I'm going to make this comment outside of the specific reserves for these two specific credits, I think it would be our expectation that based on trends we see today that reserves for the industry would be building throughout the year this year based on those dynamics.

Charles Hobbs

Yes. And maybe I'd add one thing to that. We use Moody's analytics for our modeling, and we have taken a look at the April scenarios, and they did worsen, as you would expect, our management percentages that we put in fourth quarter versus first quarter, the mix didn't change very much. But as you think about where we land in our range, so our models spit out kind of an estimate. We put ranges on both sides of that. We are currently reserved at the high end of our range.
So if you think about the scenarios worsening, you would think that range would go up even if we held our reserve where it is, we would still likely be in the middle of that range. So to Jay's point, we will evaluate all the different components of that come June and make decisions accordingly. But I just want to make a point that we are already reserved in the high end of our range.

Operator

Matt Olney, Stephens.

Matt Olney

Sticking with credit, it sounds like you've got a meaningful specific reserve on each of these two credits. Any color on just the process of how you ended up with a specific reserve allocation? Was there an appraisal of the assets? Just trying to appreciate the risk of additional impact to the reserve when these two loans do kind of reach resolution.

Jay Brogdon

Yes. I would just say, Matt, these -- both of these credit relationships have been for some period of time now managed within our special assets group. So we're intimately familiar with the properties, the values around the properties, been in active conversations with the borrowers even before this quarter, given that treatment. So I think we've got as good a handle as you can have around what we think the underlying value upon resolution could be here.
Now, that said, it's both situations are struggling properties as an example, on the St. Louis hotel in a struggling market itself. So we were pretty heavy in our discounts to what we thought that value would be or said differently, we're very conservative in our approach to where we would kind of record net value here. And the whole thought process around all of that was to ensure that whatever we're going to build the provision to here would be an area where we would have strong conviction that there wouldn't be incremental loss beyond those reserves today.

Matt Olney

Okay. All right. I appreciate that, Jay. And then I guess, switching over to the expense side, if I understand this right, it sounds like you reiterated the full year expense guidance even though there were some higher fraud expenses in the first quarter. So it sounds like there was some good progress kind of beneath the surface. Any color on kind of the progress you're seeing on the expense side?

Jay Brogdon

Yes, I'll quickly say, and I bet Daniel maybe want to make a comment or two here as well. But I'll just quickly say that even if you strip out the fraud impact in the first quarter, our expenses in the quarter actually came in a little ahead of where we had budgeted and thought they would. We were already seeing and working on some opportunities that we thought could give us some expense tailwinds in the balance of the year. And again, we're seeing pull forward and some of that even here in the first quarter. So we already kind of had a pretty bullish view on the expense outlook for our bank as we were making progress through the quarter.
Obviously, the fraud event is we feel very strongly as a onetime item. We also recorded 100% of that expense this quarter given how late in the quarter, it came through. It's difficult for us to estimate yet what we think the recovery on that will be, which would offset that expense to a degree. And we're continuing to explore very aggressively all of those opportunities for recovery. And then I think we'll just be -- this will enhance our already disciplined focus around expenses as we think about the balance of the year.
And when we put all of that together, my at least top of house view is I think we can stand by the expense guidance that we had originally given for the year, this year, even with the $4.3 million fraud in there. Daniel, I don't know if you've got any other color you'd want to provide on that?

Charles Hobbs

Yes. We've talked about before that the things that -- we focus on the things that we can control and the expenses are the one thing that we can control. We talked about continuous improvement, and we continue to have a pipeline of ongoing initiatives all the time that we are looking to be more efficient. We're continuing to get benefit out of our centralized procurement group through contract renegotiations to establishing standards and processes by how to do things.
Every time a physician comes open, we evaluate whether we need to refill it. We have a lot of conversation and discussion around new positions. If you -- I'll make a point there. If you look at our head count, we were up three head count quarter over quarter, but we self-funded -- we added 15 on the banking side, so revenue producing, and we funded that with 12 reductions on the support group side. So everything that we do when we spend the dollar, we're evaluating that.
And having said that, I will say again that we are making investments in our business, and we'll continue to do that. That won't be anything that we stop. So we do feel good and confident about our expense guide even with the $4.3 million fraud in there. And then to the extent that the recovery comes in, that would give us even more ground there.

Matt Olney

Okay. Appreciate that, Daniel. And then I guess, going back to previous comments, I was looking for little more color around broker deposits and remixing away from those. I think it's still a pretty material balance around $2.9 billion. Good progress in the quarter, but still on a year-over-year basis, it looks like broker deposits are still relatively flat, so just looking for any kind of help thinking about kind of what is the plan to remix that over the next year?

Charles Hobbs

Yes. So if you look at it year over year, we're down close to about $100 million. And we've talked about growing customer deposits. So for every NIB dollar that we can grow or every customer deposit benefits interest-bearing time, that's a dollar of broker that we don't have to have. So brokerage kind of a back-end funding mechanism that we do to fund the balance sheet at the end of the day, along with SHLB.
And by the way, those two things, we kind of go in and out of, depending on what's most feasible from a cost standpoint, but the main focus there is growing core deposits, and that's the arm that's going to let us reduce our reliance on wholesale funding.
We've got a number of initiatives going in this year. With the addition of Chris Van Steenberg, he's brought a number of ideas and things to the table. And so we'll continue to work on that, but that's primary mechanism by how we can reduce wholesale funding.

Jay Brogdon

And the only other thing I'd add in there, Matt, is it's grow core deposits to everything Daniel said. And then to the extent there's not loan growth, and we're growing loans and seeking to grow loans. But to the extent there's not good profitable loan growth. The other thing that would reduce the reliance on wholesale funding is just ongoing reduction in the securities balances.

Matt Olney

Okay. All right, guys. Thank you.

Operator

Ahmad Hasan, D.A. Davidson.

Ahmad Hasan

I just got one quick one on capital deployment. You guys had a strong capital with modest loan growth projected for the year. And with (inaudible) just modestly above tangible book, what would kind of get you off the sidelines on buybacks? Was it like the pressure on earnings this quarter from higher provisioning? Was that why you guys did not execute repurchases this quarter?

Jay Brogdon

Yes, I appreciate the question. I think generally -- and we've said for a number of quarters and continue to fill this way today that really our priorities around capital sort of start with organic growth in the balance sheet. We've also been kind of in that same vein. We've very much been in capital preservation mode or opting to have optionality around capital as it relates to securities restructurings, et cetera. You've seen us do a couple of those over the past several quarters.
And so we'll continue to be opportunistic in that regard. So that's kind of priority one for us. Priority two is, of course, our dividend. And then any other kind of capital deployment opportunity is really beneath those first couple of priorities, and I think just overall, the outlook that's there, we want to -- for the macro outlook, we think it's smart right now and the right thing to do as we think about the long game to preserve capital and be smart with our capital.
ut at the same time, we always want to have the buyback in place. If we were to see market dislocation or opportunities where it was very, very attractive for us to leverage some of our excess capital in the buyback regard, we have that tool in the toolkit if and when we need it.

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 Makris

Thank you very much, and I appreciate everyone joining us today. As you can tell from our comments, we're pleased with our profitability trends, and we expect those to continue to improve. We took some very conservative actions on two specific credits, which is not a surprise regarding the way Simmons handles our risk management. For the time being, we're going to keep our head down and keep focused on organic growth opportunities, which have some positive momentum right now.
And I guess the (inaudible) into in today's session. For the time being, we're well positioned to wait for greater clarity. So thanks again for joining our call this morning. We will do this again three months from now. Have a great day.

Operator

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