Yahoo Finance

Question and Answer Session

Operator

Thank you very much. We will now begin our question and answer session to ask a question. You may press star and one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star two.
We will pause momentarily to assemble our roster.
Today's first question comes from Woody Lay with KBW. Please go ahead.

Woody Lay

Hey, good morning guys.
What is the morning?
So it was great to see the opportunistic bond sale in the quarter. Could you just give us some detail on the thought process of the transaction and, and how you landed on the sizing of the sale?

Jay Brogdon

Yeah, I'll jump in with some remarks there. Woody, this is Jay, I'm sure some others may have some remarks on our side as well. But, you know, really what I'd start with is this has just been kind of consistently our thought process around it is, you know, very patient with the bond portfolio, evaluating opportunities when the market, you know, affords those to us. We have not and we've said before, we'll, we'll reiterate it again. You know, at least at this point in time, we have not, sort of wanted to do a bond overhaul or, you know, kind of rip the band aid off approach on the bond portfolio. We think patience is a better virtue here. We balance, you know, earnings and capital here and, and are thoughtful and, and try to be disciplined around the earn back. So all of those things kind of come in to factor into the equation thinking about sizing timing, et cetera. Obviously, rates came our direction in the, in the quarter, '10 year in particular moved quite a bit during the quarter. And so we were in a position to take advantage of that. What do you and others have probably heard us say before, we're very scenario rich when it comes to. You know, the way we look at the bond portfolio and all the analysis that we do and we, and we saw the market come right into a number of the scenarios that we've looked at and feel like the transaction we put forward really is one that offers good economic returns in and of itself. You know, balancing the, the size of the loss and the pro forma earnings implications. And so all of those stars kind of aligned and that's, that's how we put forward the transaction in the quarter.

Woody Lay

Got it that, that's helpful color. May maybe shifting over to deposits and deposit pricing in the quarter. Obviously, we've got the, the 50 basis point cut towards the end of the quarter. Could you just give some color on deposit pricing trends sort of from a, from a pre and a post cut perspective?

Daniel Hobbs

Yeah. Hey, hey, Woody, this is Daniel. So you'll note in the, in the IP that we talked about our deposit costs peaking in June at about you know, I I would tell you it peaked at 281 for the second quarter. We were at 279. So our, our top point was 281. We were at 281 for June, July and August.
And then we had the rate cut happened. We got 50 basis points. And so as you think about that impact of deposit cost for the for for the month of September that brought our total for September down to 275. We were already trending down. I'll tell you because we, you know, you've heard us talk about some of the management decisions that we've been doing some of the testing that we've been doing. We've actually doubled down on a few of those tests include more markets, specifically around the money market tests that we were doing. Those have performed really well. So we've been forward leading going into the rate cut. On money market C DS, we've changed our standard pricing, we've changed our promo pricing, we brought those down. And then the other part was brokered deposit cost was trending down ahead of the rate move. So if you think about just the rate move itself, that was about, I call it 2 to 3 basis points of impact for the quarter for, for, for that third quarter. So we were already, like I said, we were already moving down the path of, of rates coming down from that 281 peak, but the rate that helped us get there a little bit faster,

Woody Lay

Got it. And then just lastly, I mean, looking at the, the CD maturity schedule you provide, you've got a pretty large tranche here in the fourth quarter. Could you just give us an idea on, on sort of the incremental re pricing there? And, and do you expect those C DS to remain sort of short duration or, or do you expect the terms to sort of be increased a little bit?

Daniel Hobbs

Yeah. So, you know, if you, if you, if you go back and look at the last 90 days, our C DS are maturing at a rate of about 440 are going on today. All in is in that rate of about 397 close, close to four. So a pretty good tell in there in terms of your question on duration. Yeah, I mean, we're pretty short in that right now and we would expect to keep that in the near term, relatively short.

Jay Brogdon

The only thing I'd add on top of that woody is just, you know, yet yet to be seen, we can all, you know, maybe speculate but yet to be seen what the competitive environment is going to be around deposits, whether we're talking about, you know, CD promo rates, et cetera. I think one of Daniel's earlier points is a, is an important one. You know, we leaned a little harder into brokered C DS, especially kind of late in the quarter simply because, you know, a number of competitors. We're keeping rates, you know, above broker rates and, and we just weren't willing to do that for kind of hotter money in the balance sheet, when we had better opportunities in the brokered area. And so I think the one, the one caveat will just be, what is the competitive environment look like for for deposits overall?

Woody Lay

Yeah. All right. That's all for me. Thanks for taking my questions.

Jay Brogdon

Thank you. Thanks, Woody.

Operator

Thank you. The next question comes from David Feaster with Raymond James. Please go ahead.

David Feaster

Hey, good morning, everybody.
Maybe just kind of following up on, on that line of questioning and just, you know, look, you guys have been very active both on managing assets and liabilities, right? You got the restructuring, you talked about utilizing brokered funding instead of borrowings.
You know, I know you're not looking for a rip the band aid off transaction, but do you expect maybe more opportunistic and smaller repositionings, especially as loan growth comes. And then on the other side of the coin, is there any other opportunities to optimize the funding base? You know, especially with FHLB advances maturing here soon.

Daniel Hobbs

Yeah, I'll take a shot at that, at least out of the gate here. I I think that the answer on the bond portfolio side is we're going to continue to be opportunistic and, you know, we, that that's not the, you know, I don't want to get out over our skis. The opportunity is one we don't really control all we control is preparation and preparedness and we were very prepared. We saw the '10 year come down to, you know, 380 range. It hadn't been there in a while and it shot right back above there soon after we did the transaction. And so we, we stepped into the market and we're prepared to do so in the quarter and, and we will continue to be opportunistic. If and when the market gives us opportunities to do so for any bonds that we're evaluating to, to trade out of. And, and David in my mind, that's really the key driver. I mean, we are overall in the balance sheet. We continue to focus on, you know, relationships from both the deposit and the loan side to your point. We're looking at both sides of the balance sheet. But when I, when I think about kind of brokered funding or, or wholesale funding in general, you know, I think our, our ability to, to optimize those aspects of our liabilities is going to be really is really hinge upon, you know, duration and ability to pull forward duration in the bond portfolio. And then of course, the ability to you know, continue to grow for customer accounts,

David Feaster

You know, David one thing I'd like to point out also on the security trade. You know, one of our parameters, many parameters that we look at is, you know, what is our current period earnings? You know, what are we going to do? Our balance sheet is remain relatively flat as we're remit, see the balance sheet. And one of our parameters is to really what earnings do we have in the quarter after dividends to utilize for a bond sale. So that's one of the many factors we look at and that's our choice of use of the capital today to optimize the balance sheet.

Daniel Hobbs

And I I might add one more thing to that discussion is, you know, the, the long end of the curve is going to drive the loss and then the short end of the curve is going to drive you know, the the reducing of the wholesale funding. So, with short end coming down, that's going to make it a little bit more challenging that we move forward and that earn back calculus. So that's something that, you know, we we think about every day.

David Feaster

Yeah, that's a good point. And then maybe just kind of putting it all together, like just thinking about the margin side. I mean, you screen moderately liability sensitive but curious maybe how do you think about the trajectory of the margin as we look forward? Obviously, we got the 50 basis point cut at the last meeting. But if I look at the forward curve. I'm just curious how you think about the margin trajectory. You know, you got the lag impact on repricing some deposits, but you do have some in, in index deposits as well. I'm just kind of curious how do you think about the margin trajectory as, as we look forward?

Daniel Hobbs

Let me, let me take a shot at that. David. So I think, let's, let's start with immediate term. You know, I think even just looking to Q4, you know, I think when, when I'm, when I'm looking at numbers, I think something even close to where we were in Q3 is probably a realistic starting point for, for Q4. And the reason for that is there's a lot of puts and takes in the in the quarter, we obviously get the benefit of continued asset repricing the the full quarter benefit from the bond transaction where we only got about a half quarter in Q3. So there's some obvious positives in there in Q4. But something that we have been saying consistently, I want to remind everyone of is, you know, there is a lag effect with the 50 basis point down move in September. You know, we, we, we have probably as many or more assets repricing in the fourth quarter as we do liabilities. And so I think when we think about liability sensitivity, really the inflection of that happens more notably into 2025. And so, and then you've got to start thinking about what does the fed do along the way as you start stacking rate cuts together. So I think, you know, we're more probably a little more conservative or balanced in our view. Again, acknowledging there's a lot of puts and takes here coming into Q4, but when we look out into 2025 you know, we, we think that increasingly through the year, especially if the fed does anything close to what the dot plot or the forwards would suggest now that we see some, you know, some notable inflection in the net interest margin in the next year.

David Feaster

Yeah. Okay, that's great. Maybe touching on, on the loan growth side, I mean, look loan growth has been modest. We've talked a lot about how your, your focus has shifted from growth to really profitability. But look the pipeline built, rates are down expectations are we could see improving loan demand. I'm curious maybe what you're seeing on the growth front, the complexion of that pipeline and, and your appetite for growth here and, and maybe what you would expect to be some of the key drivers of your growth.

Daniel Hobbs

Yeah. Well, first of all, thank you for you know, pointing out something we say all the time, you know, we definitely are focused on you know, soundness and profitability and growth and we say it when we say that we, we're focused on them in that order. And, and we're seeing some good progress there. I'm very, very pleased with some, some large relationship wins that we saw in the third quarter. And I want to emphasize the word relationships on the commercial side and then just even all the way out through things that we're doing within the, within the community bank more broadly. And so, I think we're seeing some good progress and in all those regards, our appetite to grow is as strong as it's ever been. I think our, you know, our filters around soundness and profitability are also as taught as and strong as they've ever been. So we're going to continue to be disciplined. You know, I, we, we've indicated kind of low single digit growth throughout the year this year. I think that continues to come through in the numbers as I look out into next year, you know, I'm going to be, I'm going to be balanced. I think in my remarks to you here on the one hand, I think the rate trajectory and, and, and you know, if the economy can stay strong, You, you know, if there's a soft landing here from a macro perspective, then I think we're going to see demand increasing and we're going to be ready to capture that demand. On, on the flip side, we're not seeing that demand yet. We're seeing optimism and some green shoots around. Okay. The Fed, the Fed made a good move in September. I think a lot of our borrowers and a lot of the demand out there, there's election uncertainty, there's still overall macro uncertainty. And so, you know, we, we lean optimistic but it, that, that optimism hasn't started to firm up yet. We, we hope that it does and we're going to be ready for it and our appetite for it will be strong when it gets there.

David Feaster

Okay.
Terrific. Thanks everybody.
Thanks.

Operator

Thank you. The next question comes from Matt Olney with Stevens. Please go ahead.

Matt Oney

Hey guys, good morning.
On the expense side, I saw the disclosure, some savings, some branch closings. It sounds like you want to reinvest that in any color on those reinvestments and then just more broadly on expenses, we saw the core expense levels step down a little bit in the third quarter, just any color on expense levels in the near term. Thanks.

Daniel Hobbs

Yeah. Hey, Matt, this is Daniel. So a little bit on the branch consolidation. So we're, we're constantly reviewing our retail network and our, our, our strategy there, we're evaluating you know, the the profitability, the, the trends customer usage, how, how that has evolved over time. And so we're constantly reviewing that and we're reviewing our markets and where we have density where we have share where we might need to add some branches So your question about where would we invest? I, I would kind of put it in a bucket of you think about our Better Bank initiative. That's not all about cost reductions, there's investments into revenue that we're doing there too. So, you know, we, we haven't put a finite '10 to that 3 million and how we would deploy that. We'll likely take some of the bottom line, we'll likely reinvest that. We, you know, we have opened I think what, four to no votes this year. So, there's been some reinvestment there. You know, we, we always want to hire a great banker when we find one.
We've invested in, in some of our back office function. We talked about investments and in procurement, which has driven future benefits to us. So we're investing all over the bank and, and you know, so that, that's what I tell you about that. And then just, just the whole mindset that we are operating under is, you know, how can we self fund our investments? And we've done a really good job of that. I think over the last couple of years, you know, you look at the guide that we gave, which was kind of a 555 the 560. And that, to remind you, I know we say this a lot, but I think it's worth repeating.
That's down 1% to 2% from our Q4 2022 annualized run rate. So, you know, you've got a couple of years of, of merit high inflation investments that we're making and we're still down 1% to 2%. I think, you know, as you think about that guy for this year, I think we'll come, come in on the, the probably below that. You know, we we, we, we with, within that there's, there's a couple of parts of that, there's things some, one timers that have gone our way this year. There's also some things that we've done to have permanent reductions to expenses. We've renegotiated several of our major vendor contracts and that's providing providing benefits. So, you know, as you think about fourth quarter, you're probably relative to third quarter, there's probably a little bit higher in the fourth quarter just because there, there was a one time benefit for some salary incentive accruals in the third quarter. But, you know, I, I still feel really good about our guidance and it will probably come under that 555 number.

Matt Oney

Okay, great. Thanks for the color there, Daniel. And then I guess putting that all together, it just feels like there are some nice opportunities for some, some, some nice positive operating leverage next year. I mean, we talked about the benefits of lower rates, potentially, we talked about, you know, maybe some loan growth next year, some good cost discipline any just big picture thoughts you want to leave us with as far as achieving some operating leverage in 2025.

Jay Brogdon

I, I'll jump in on that at least initially on our side here, Matt. I mean, I think you're absolutely right. Everything we're doing is to position you, you know, the balance sheet in the bank for positive operating leverage and, and, and really just overall for scalability. You know, the things we talk about internally all the time, I think the things George drives us on from his seat are, are really around, you know, how do we ensure that everything we're doing today puts us in a position to grow revenue faster than expenses going forward. And, and we feel pretty optimistic that we're poised for that in, in 2025 and again, increasingly through the year, given a lot of the remarks that have been made so far and then ongoing into 2026. And so we'll continue to sharpen up our outlook, you know, and, and, and probably provide an outlook in, in our January earnings call consistent with how we have historically. But I think the, you know, the liability sensitivity, the balance sheet, the opportunity, we think we have to continue to be really disciplined on expenses, etcetera, have a, have a nice shape in terms of the trajectory of our pre provision, net revenues and, and earnings going forward.

Matt Oney

Okay. Thanks for that, Jay and if I can sneak in just, just one more you disclosed, I guess the index deposits a pretty material level there a any more color on that. What are those index to and how quickly and how often do those index deposits reprice?

Jay Brogdon

Yes. So those those are generally index to funds and you know, they're going to be price, you know, immediately when, when the rate cut happens. And so now we did see that and that was some of that benefit that we got when I mentioned that that three basis points from the quarter from from the production.

Matt Oney

Okay, perfect. Thanks guys. Appreciate it. Thank you. Thank you.

Operator

Thank you. The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten

Hey, good morning everyone. I guess if I could revisit some of the discussion around the NIM. I know Jay, you said not necessarily ready to give specific guidance, but you did note kind of this idea of a notable inflection for the NIM which you know, could be construed as a pretty wide berth. I mean, we're, we're 274 here. I mean, as you think about the possibilities for the NIM next year, I mean, could this move towards 3%? Is that too far of a road to hoe? Like how can we kind of frame up that, that, you know, notable inflection as we look at the projected fed path?

Jay Brogdon

Yeah, I think like what you just said is important to note, right? I mean, what, what, what the fed does is going to be, you know, material to, to any outlook we would have there. But if you just kind of follow the forwards, and assume the macro remains at least intact and I think we're on a glide path toward three in the, you know, in the back half of next year, for sure. You know, the, the the factors at the end of the day that we're really focused on Steven, probably even more than net interest margins, dollars of net interest income. We're really trying to focus on the balance sheet overall. You know, loan growth as we've talked about profitability, etcetera. And so, you know, again, I think we feel pretty good about our prospects for growing and, you know, moving forward from here. But if you want to focus on A N, I think it's fair to think of, you know, in a, in a status quo or subject to all of the caveats of the, the, you know, the market, contributors that we don't control but kind of follow the glide path and the forward curve. I think it's fair to think that, you know, there's a 3% clip on them in the back half of next year.

Stephen Scouten

Great. That's extremely helpful Jay. And then just as I think specifically about maybe deposit base is on the way back down. I think they're around 51% total on the way up. Do you think that's replicable on the way down or, you know, do you think we've had kind of structural changes in terms of customer perception that maybe, you know, creates a little bit of a headwind to achieving that same path on the way back down.

Daniel Hobbs

Yeah. Hey, Stephen, this is Daniel. I'll, I'll take a shot at that and others can jump in if you think about that 51% where we started from and where, where we got to, we went from, you know, 0% to 550 in a pretty, pretty short period of time. So I, I think it would be difficult to replicate a 51% on the way down. I think that's going to be determined by, the, the volume of reduction and the frequency of the reduction. I think if the frequency is quicker, the beta might be more, if it's more protracted, it might, might be less. But what, what we've modeled right now is, we've got, you know, 100 basis points in the fourth quarter, which was down from 550. Excuse me. Yeah, 550 to, 5 and another 100 basis points for, for next year. And so what I would tell you is we're kind of in that range of somewhere plus or minus 40% on, on the deposit based on the way down through, through that part of the cycle.

Stephen Scouten

Okay, great. That's super helpful as well. Thanks Daniel. And then just lastly for me, you know, Jay, you kind of touched on worried more about N I dollars and, and ultimately profitability, which is, is clearly the right thought process and message. How do you think about profitability for the bank in the maybe near and medium term from, you know, we're looking at a 67 basis point kind of operating ROA by my math this quarter, you know, what's what's kind of, you know, does it take until '26 to get to a one ROA? I mean, how can we think about the return to kind of tier and, and like profitability for you all?

Daniel Hobbs

Yeah, I think what I'd say to that Steven is that, you know, in the, in the intermediate term, the near to intermediate term, you know, we're, we're, we're fighting to get the margin back above 3%. We're fighting to get ROA, you know, back to 1%. Those are not long term targets, those are the more near term targets. And again, we think we think we see, you know, path that direction with, with you, you know, extrapolating from where we are here on rate expectations and macro backdrop longer term, I'm going to reiterate what we've said before. We, we think, you know, a good ROA for, for our balance sheet for where we are today is, you know, 125 or, or greater. We think that pencils out to, you know, lower 50% type efficiency ratio. You know, we think that's net interest margin in the mid three S give or take. Those are, those are areas where we think we can operate the balance sheet, where we think that we can grow relationships within our, within our risk appetite, which is a conservative one.
But we think that's a, you know, a very, very high quality of earnings given the, you know, the retail base that we have, the long history we have in terms of, you know, disciplined underwriting and, and, and credit risk and we think we can, you know, generate some strong returns on tangible common equity by doing those things. And so that's, that's, that's the targets that we're focused on as we move forward.

Stephen Scouten

Fantastic, great color J and it's nice to see everything moving here in the right direction.
Thank you,

Operator

Steven.
Thank you. The next question is from Gary Tenner with D A Davidson. Please go ahead.

Gary P. Tenner

Thanks, good morning guys. I wanted to ask a question about the competitive nature on the lending side. You kind of, you know, mentioned that obviously the competitive dynamics on the deposit side kind of remains to be seen how that will shake out. But you know, your rate on the ready to close loans is is quite strong. Wondering if you've seen, given just maybe some more general economic optimism. Have you seen any change in stance from other banks in your markets? From a lending perspective? A little more willingness to lend or greater activity there?

Daniel Hobbs

Yeah, I think there's definitely, you know, more willingness to lend across, you know, across the industry candidly, in, in terms of pricing. I want to go back to what I said though earlier. We're not seeing just a massive influx of demand yet, we're, we're seeing optimism, we're seeing people who were, you know, delaying projects or maybe even more interested in paying down debt and entering into, you know, into new loans. We're, we're seeing conversations pick up but, but that's not really turned into demand yet. So I think there's willingness by, by us and the industry in this rate environment to understand where that's headed. Again, we're, you know, we're going to be very relationship focused so we can move over businesses, operating accounts and other services alongside the loan that's going to give us even more opportunity to be flexible in terms and we're already doing that. But at the same time to your point, we've, we, thus far, we've been able to maintain really good discipline and still grow the pipeline for, you know, several quarters in a row at what we think is, you know, pretty strong pricing and and we're going to continue to try to stay very, very focused there. But yeah, I think, I think the industry to your point is going to be more flexible here. You know, on pricing. And if we, if we sense really firm footing and remove some of the uncertainty that's out there, hopefully that can convert into some demand and some, some continued increase in growth for, for all of us going forward here.

Gary P. Tenner

Thank you. And then just as a follow up to clarify something. So the billion of FHLB you've got due in the fourth quarter. And, and the reference, I think on slide '12 of the increase in broker deposits was that was that kind of just pre funding some of the some of that maturing FHLB is that the way I do think,

Daniel Hobbs

I do think some of what you see there is is ins and outs of FHLB quarter to quarter in and out between FHLB and, and brokered funding. That's, that's one part of it. Another, another part of it, as I said earlier is even just some of the higher cost customer C DS we had were you know, we were willing to let the hotter money portion of of those balances go out to other banks at above brokered rates. And so those are the factors really that I would point you to, we maybe stepping away from your question and just reinforcing a couple of points. We, we continue to stay pretty short in duration overall on the liability side. And we haven't really come off that post a couple of years ago. We extended duration on the liability side. We, we, we're not in extension of duration mode, right now. And, and then the other big point that I think is the most important point is, we're really focused at the end of the day on, on just customer account growth and we've had customer account growth this year. I mentioned earlier in the call, we're very focused while we'll let hot money walk out of the bank. We're very focused on retaining relationship dollars, very focused on core accounts, whether it's the household account or, or you know, a business or commercial operating account. And we're seeing growth in those accounts and, you know, big parts of our better bank initiatives are geared around continuing to grow and increasing the growth of those operating accounts. And so, we're pleased to see that you don't see it in aggregate numbers yet because of the the factors. You, you know that come into play in total balances with impact of inflation. You know, people willing to chase rate right now. But what we do control there that's very valuable is growth in customer accounts and we are seeing that for sure.

Operator

Thank you.

Gary P. Tenner

Yeah, thank you here.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the call back over to George Makris for closing remarks.

George Makris

Hey, thanks to each of you for joining the call today as you've heard this morning. We're very pleased with our performance this quarter and the trajectory of our trends, our better bank initiative has produced good results so far and our team has been diligent in its efforts to improve our market penetration and deepen our customer relationships. Starting to see those efforts pay off and are encouraged about potential headed into 2025.
Sort of changing the subject. We hope you'll tune in next week to the inaugural Simmons Bank Championship PGA tour champions playoff event. Here in Little Rock Tournament will be televised Friday through Sunday on the golf channel.
We're excited to be the title sponsor and we look forward to welcoming the world to Arkansas.
Thanks again for your participation today and have a great weekend.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a great day.