Yahoo Finance

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions)
Wood Lay, KBW.

Wood Lay

Hey. Good morning, guys. Wanted to start on the NII guide and was hoping you could just walk through any major assumptions that are based into that. I know you have the loan growth guide. But I was just curious, sort of about the puts and the takes behind the low end of the range versus the high end of the range.

Jay Brogdon

Yeah, I'll jump in on that. Woody, good morning and, Daniel may have some comments as well here. But I think when I think about the NI guide, the first thing I'd start with is our outlook, even going back to, I think prior quarters and then, and activities throughout the fourth quarter even. We've really been pointing toward our ability, our belief that we could cross over a 3% net interest margin the back half of the year or this year. Obviously, we were more optimistic about that if you go back to maybe even like October when the forwards looked very different at that time than they do today. But, but we still believe that that is within the range of expectations we had a really good quarter this quarter. H1stly, our launching off point at the beginning of the year is a little better than we thought it was going to be in terms of our original forecasting for the fourth quarter. And we can talk about that some on the call today to the extent of our questions there. But I think as we look to 2025 I still really feel confident in our ability to continue to see Nim expansion. Obviously you asked about the puts and takes to the low and high end of the range.
We remain a bit liability sensitive here, a fair amount liability sensitive. So any changes in the Fed's actions or the forwards would, would impact outcomes within that range. And then I think just the growth outlook on both sides of the balance sheet, we, we've been more optimistic certainly today as we think about, loan growth at the same time, that's still sort of conversations and, and, voice over and, and conversations among our bankers and our and our clients. But we've got to see that kind of converting into the pipeline and pull through the pipeline and it's a bit early to see that optimism reading through. But we do see some green shoots there. And then on the deposit side, our focus will continue to very much be to grow the core customer base. And simultaneously shrink the wholesale funding that's on the balance sheet. And so I think that, the growth side of that equation, we will obviously have an impact on where we would be in the, in the range on the guide there. Daniel, anything you'd add.

Daniel Hobbs

Yeah, I would add, an important thing to note is that our guide is based on the forwards, which was the 113 January 13 forwards. And that had our first full rate cut by October of '25. So if you think about, the low end of the range versus the high end of the range, if that rate cut happened sooner, then we'd probably be at the high end of that range and maybe some opportunity. And if we didn't get a rate cut at all, we feel still feel pretty good that we could be at that low end of that range. So that's how I would tell you to think about that.

Wood Lay

Got it that, yeah, that's, that's good to hear. And then a follow up on the loan growth, up low single digit is below what I would consider as sort of a, a normalized growth rate. For you all, is it all related to customer demand or, or is part of it related to you all being a little more disciplined in order to run off higher costing deposits?

Jay Brogdon

I think, I think it's a absolutely. I want to tie it back to something you've been hearing us say, woody, all of you have been hearing us say which is soundness, profitability and growth in that order. This comment applies both to the loans and the deposits. We're going to maintain discipline, always have on soundness and, and, and increasingly too on the profitability side. And that's going to, that's going to mute absolute levels of growth but, but, but candidly, that's going to increase levels of profitability and returns. And so sort of leaner meaner balance sheet with a with much less you know, much more improve level of profitability in terms of returns on invested capital.

Wood Lay

Yeah, makes sense. And last for me, I mean, just given the balance sheet should remain relatively stable, I would expect capital to, to grow pretty nicely throughout 2025. How do you view your excess capital position and are there opportunities to deploy some capital in the, in the year ahead?

Jay Brogdon

Yeah, so I may let me, let me make an attempt to just kind of thinking about the answer to that in terms of how we evaluate our, our priorities around capital woody. So, I don't think you'll hear anything new here, but our, our number one priority around capital continues to be, organic growth initiatives to your point. You know, that growth is really kind of within the mix of the balance sheet et cetera. And so we should be able to, to, to continue to grow capital from here on that asset base. I would include within kind of organic balance sheet initiatives. We continue to also evaluate you know, balance sheet restructure opportunities. You've seen us do that in the past, we did one in the third most recently in the third quarter of last year. So we'll continue to evaluate those and, and the market I think will continue to give us some opportunities to evaluate that. That would be, top priorities around our use of capital. Obviously, our dividend is a priority and then from there, we'll continue to maintain, an authorized share buyback. You know, we have that in place. We'll continue to evaluate that, but, share buybacks or other external priorities around capital would fall behind those, those first couple of priorities that we outlined there.

Wood Lay

All right, that's all for me. Thanks for taking my questions.

Operator

Matt Olney with Stevens. Please go ahead.

Matt Olney

Hey, thanks. Cood morning. Want to go back to the margin discussion and, and it sounds like that fourth quarter, margin of 287 was a little bit above your expectations just in any, any color on that comment.

Jay Brogdon

I'll give a couple of remarks. I know Daniel will have some things to say here too, but I really, I think even just thinking about our forecasting for the fourth quarter, you know, and I don't want to apologize for this at all, but we outperformed our expectations both on the loan pricing and the deposit pricing side in the fourth quarter. You know, we expected maybe a little more pressure on loan yields than what we saw. And, and so we were, we were pleased with our discipline and ability to kind of fend off. And at least for now lag some of the downward movement by the fed on the asset side. And, and then, conversely on the deposit side, sort of the double benefit was, and Matt, you've heard us talk about this previously, but we did a lot of work going back to last spring and especially over the summer around evaluating the elasticity of our customer base. We were sort of doing, testing across markets, to, see where we felt like the elasticity points were across different types of customers, different types of products and, really felt like we were able in the fourth quarter to, to pull forward. Again, maybe, maybe mitigating some of the lag that we otherwise would have assumed, maybe, maybe outperforming our beta assumptions on the deposit side. And so I think, the good news, as I said earlier is that, that allowed us to maybe have a better launch point in 2025 than where our original expectations were. Doesn't really change the shape of what we're expecting in terms of, nic expansion throughout 2025. We talked earlier about some of the dependencies there, but we did, we did see some relative outperformance in the fourth quarter for some of those reasons. Daniel, anything.

Daniel Hobbs

Maybe just a couple of finer points around your commentary there. You know, if you look at our nim walk forward in the IP, you'll see that the majority of our benefit and out performance to our model came from our funding cost benefit. You know, our, our funding cost was about 24 basis points lower than the second quarter and that, that drove about 22 basis points of the nim impact. And within that funding costs, you've got kind of deposits and the wholesale or the FHLB side of that funding, the majority of the benefit came from the deposit cost side, probably 80% of that benefit did for the reasons that Jay mentioned if you go back. So if you look at our deposit costs, we're down 19 basis points in the third quarter. Yeah, I think it's even a little bit more impressive if you go back to, to the third quarter where we were flat 279 from Q2 to Q3. While I think we were the only peer in our peer group that didn't increase our deposit cost over that time period. So our starting point was, was strong to today's comments around pulling forward the lag, we effectively eliminated a lag, which typically is about, 3 to 3 to 6 months when at the change of the cycle. So that, that really is what drove a lot of our benefit in the fourth quarter out for our model.
And then on the loan yield side, you know, we were down 12 basis points. And you think about that between variable and fixed, our variable rate loan yields, portfolio yields were down about 40 basis points. But the fixed rate loans repricing was up seven basis points. So that, that tail in that we've been talking about for several quarters now around our fixed rate loans repricing higher, they repriced higher in the fourth quarter by about 200 basis points within the portfolio yield. So the going off the paydowns versus the new production, there was a spread of about 200 basis points of positivity which drove seven basis points of total portfolio yield improvement on the fixed asset side, fixed loan side. So those two things kind of kind of outperformed where we thought. And so we're in a really good spot going into to the first quarter.

Matt Olney

Okay, I appreciate that commentary and Daniel, you kind of led me into that. My next question around the loan pricing of that fixed rate book. You've got some great disclosures on that slide 15 around the $2.4 billion of cash flows and during 2025 not a small number. So it sounds like you still have some more tailwinds there any, is that relatively spread throughout the year evenly or is that weighted towards any, any specific quarter? And is that 200 basis point increase that you just mentioned a few minutes ago? Is that a reasonable number to assume at least in the near term as far as some of these renewals?

Daniel Hobbs

Yeah, in terms of the spreading across the time frame, I think it's probably fair. I don't have it in front of me, but I think that's probably a fair assumption. I know it's going to continue the tailwind of that fixed rate book repricing is going to continue for some for some time into, into 26. So that's going to continue to be a benefit for us. And that 200 basis point spread, I'd have to look at the our modeling on that. But I think that's probably a fair way to think about it.

Jay Brogdon

I'd add -- I don't disagree. I'd maybe just add a little bit of market color mat to, to maybe influence the thought process there. And I'd also point you to the loan pipeline on slide 19 and the materials where you can see both the pipeline as well as our rate ready to close trends. And you know, so I think the 200 basis point spread is certainly fair in the immediate term. You know what I'm already seeing, what we're already seeing in the marketplace is a fair amount of price competition, particularly on a a credit out there. You know, when we see really good, you know, opportunities in our pipeline, those are still, that, that really high quality credit is, still really, really coveted in the marketplace. The activity, as I mentioned earlier has some green shoots to it, some optimism to it, but we're not just seeing tremendous volume in the market come to bear yet.
And therefore, when you see good opportunities right now, we're seeing a lot of price competition those. And so, can we maintain 200 basis point spread for 12 months this year? I think part of that question is going to depend on that, that competitive environment that we're talking about there. And again, we're just going to, we're going to maintain, that's where relationships matter, that's where your ability to, you know, to flex in relationships matters and get paid. And we're, we're going to maintain those, those priorities around sales, profitability and growth and, and that'll, that'll play out through the year this year and there's probably some, some color there to lead through into the deposit side as well. You got pricing competition both on the loan side and the deposit side. It's still pretty intense out there in this market. Despite some you by the fed.

Daniel Hobbs

Hey Matt. It's Daniel. I'll make one more comment about Nim and, and kind of looking forward, the 13 basis points improvement that we got in the fourth quarter. We talked about the lag and bringing that forward, we've got a really good jumping off point for the first quarter, but I wouldn't expect the same pace of increase that we got in the fourth quarter to occur in the first quarter because of bringing forward a lot of that benefit from eliminating that lag. So just, we do expect some expansion in the first quarter but not at the level that we saw in the fourth quarter.

Jay Brogdon

Yeah, I mean to accentuate that point, if we had, if we stack 213 basis point quarters together, we'd be a 3% them at the start of the year and the first quarter of the year. And our expectation is that, as we've been saying all along, that's a, that's a run rate. We believe we can get to in the back half of the year. I think that's a good way to summarize that point.

Matt Olney

Okay, guys. Thanks for the commentary.

Jay Brogdon

Thank you, Matt.

Operator

David Feaster, Raymond James.

David Feaster

Hey. Good morning, everybody. I just wanted to follow up a bit on kind of what we were just talking about to an extent. But on the on the deposit side, you guys have done a great job optimizing the funding base, reducing deposit costs. How is client reception of lower rates been thus far and just the competitive landscape as you see it in your ability to to continue to reduce deposit costs, especially if you know, the industry loan growth starts to accelerate. Like we've talked about.

Jay Brogdon

Yeah, I think David on the deposit side, it's still to state the obvious, it's still very, very competitive out there. The flip, the flip side of that is the good news of that is we've been positively you know, I think influenced around the elasticity in the deposit base as we've talked about it. You know, when we, when we did some of the testing over the summer last year, we really became increasingly confident in our ability to as we talked about earlier to kind of reduce some of the lags became a little more confident in some of our beta assumptions around the core customer base. And so I don't, I'm not aware of anything within our administered rate portfolio where we've made moves and sort of regretted those moves. You know, thus far, so that that piece is encouraging that the competition piece is, I wouldn't say it's more intense than it has been. It just continues to be a very competitive environment around the deposit side. And, we don't really expect that to abate. That's been a consistent thought of ours throughout the past couple of years and really doesn't influence how we think about sort of our outlook for 2025. That's just, that's just the environment we're operating in today. And.

Daniel Hobbs

David, I might add, you know, always rate and, and balance growth. There's a trade off there and you're trying to maximize the right point there. And, and we probably have more optimization than our peers in terms of our, our rate part of our book. So, as you think about growth for us, relative to peers, you know, we're trying to find that right balance, I think we've done a really good job of that, maybe just a point around that, in the fourth quarter, in our, our I forget what slide it is, but where we, where we do our walk forward on our deposits, you'll notice that customer time deposits declined and IB deposits increased. And so if you, if you dig into that and you look at the customer closure C DS in the fourth quarter, where relationship really pulls through is of those C DS that closed in the fourth quarter, we were able to retain on the relationship side. Those, in other words, those that had more than just a CD with us. We were able to retain over 75% of those balances either in lower cost C DS. They, in other words, they closed the CD, they were in and went into a lower cost CD at the current lower rate or they moved into interest bearing lower cost deposits.
And so, we've, we're really stressing relationship, profitability with our, with our team and that's really showing through there. And then, and then even on the ones that aren't relationship, we were able to retain 25% of those balances. And so, that's the rate side of the house. But then if you just look at the core funding, the nib, we're really encouraged in the fourth quarter with consumer consumer, we saw growth both on an ending and average basis for the first time in a long time. And you know, even in all balance here, so we do an analysis that looks at, five or six different balance tiers and we saw growth in every single one of those tiers in the fourth quarter, which is really encouraging to us as you generally see seasonal growth in consumer in that fourth quarter. So we're encouraged by that. And then one final point on that is that for the year we grew consumer checking accounts by 1.5%. And, that is the lifeblood and the core engine of a Consumer bank. And so we're leaning into that, continue to expect that going forward.

David Feaster

That's, that's great color. May maybe on the other side just, just switching to loans, we talked a bit about that. Could you just touch a bit on the complexion of the pipeline? And, and what you'd expect to be key drivers of growth and just, with the pipeline staying relatively stable, I mean, would you expect kind of growth to be maybe more focused on like the seasonally stronger quarters with ag increasing and maybe some, slower growth in the first half of the year as demand starts to improve. And at what point do you do, you just do you start getting more competitive on the pricing front in order to, to drive growth?

Jay Brogdon

Well, we'll, we'll be, we'll, again, we'll be competitive. We're not trying to be out of market from a pricing point of view. Even today, I would just say that we're, we're maintaining discipline from a pricing point of view and that includes, relationship views around profitability, not, not just, single transaction views, it's comprehensive of all of those things, David. So we, I'm going to be real clear there. We're, we're seeking to grow the loan portfolio. And, and we're just seeking, get really good risk adjusted returns on those investments. The way I think about the pipeline today. You know, we're seeing good opportunities really as we go into 2025 that, it's, it's pretty well diversified. It's diversified within the commercial real estate areas of the bank and it's, it's diversified in other commercial areas where we're seeing some good opportunities. You know, so that, that part feels pretty healthy and broadbased.
To me, it's also somewhat broadbased geographically. I can't believe, certainly markets like you, DFW in Nashville continue to be, pretty positive markets for us on a relative basis within our entire footprint. But, but really, I'm pleased with the level of productivity we're seeing, you know, throughout the footprint in terms of loan growth opportunities. I do, as I sit here today, this is about as confident as predicting what the fed is going to do. But, I believe that we will, potentially see an uptick in volume as we move through the year. This year. I mentioned earlier in my, some of the opening comments just around the puts and takes for the for the NI outlook and we talked about volume. We see some green shoots today, we see more positive conversations.
You know, commercial balance sheets are very, very healthy. You know, that's both good and bad, that's, that's good from an overall credit point of view. When we look at our customer base. But that, that can also mute demand a little bit when you got a really, really healthy balance sheet, that that may not lead to an onslaught of, of a borrowing need. I think as we move through the year, if some of the optimism continues that, that we see today, I think, I'm optimistic, we're going to see more need for investment, more willingness to invest and more opportunity out there. The last thing I'd mentioned in terms of that shape of that loan growth is, we already talked about in one of the earlier questions around kind of fixed rate paydowns. We'll have paydowns good healthy paydowns this year. We'll have, for example, some, CRE that goes to the permanent market just, just exactly the way that it's supposed to. And, and so a lot of our, what we see in the pipeline will fill up that good healthy activity and then we'll be seeking to grow on top of that. I think we'll be able to do that.

David Feaster

That's great. That's great. And, and last one for me, just touching on credit, you know, it seems like things are kind of just normalizing, right? Obviously, some, some weakness in areas like the consumer. But, looking broadly, it just kind of feels like a normalization and that's kind of what your guidance implies. I I'm just kind of curious, what are you seeing on the credit front? What are you watching closely? Is there anything you know, you know, notable or, or just kind of curious what you're seeing on the credit front broadly?

Jay Brogdon

Yeah, thanks. Nothing. Nothing that I would call notable. That's, that's new. I think normalization is still exactly the right, term in terms of how we think about what's happening in the portfolio. David specific to us, we, we've talked about, we've identified a runoff portfolio, it continues to run off significantly. Those balances are you know, getting somewhat irrelevant to talk about. But as we've said before, your your best loans in those portfolios are the ones that are paying off and the ones that will continue to have to deal with and could see some charge offs in are the ones that remain there. So the runoff portfolio small balance, but that's one we keep a close eye on and then outside of that, I mean, in our portfolio, it's, it's really just kind of a handful of credits. It's nothing new, it's nothing new that's migrated in.
So we feel like we've got a really tight box around, the credits and the portfolios that we have to talk about and keep a close eye on. You know, when I think about commercial real estate broadly our performance and we have some, some detailed breakdowns in terms of the makeup of those portfolios, the levels of past dues, nonaccruals, et cetera. You know, we're just, we're not seeing anything that is causing us any kind of new concerns in those portfolios. You know, so I think we'll continue to be, you know, prudent in dealing with the known credits and, and the small runoff portfolio that we have. We'll, we'll work through those as aggressively as we can outside of that. The good news is we're just not seeing a lot of changes on the credit front. E even had some, some good trends with like classified and criticized in the quarter. So I feel, I feel like the credit picture is, is really kind of business as usual at this point.

David Feaster

Perfect. Thanks, everybody.

Operator

Gary Tenner, D.A. Davidson.

Gary Tenner

Thanks, good morning guys. Hey, I just wanted to ask about longer term profitability. I mean, you talk about the kind of the focus on profitability at the, kind of expensive growth if you will you know, in the in the positive nim direction you see for 2025 what's, what's the rate environment? Do you think you need to get the ROA back over 1 1%? What's the kind of the optimal set up for you there and kind of visibility around that?

Jay Brogdon

I think first and foremost, the steeping of the yield curve is a really good thing for, for the whole industry, right? And so that, that is an environment that I think, all of us need in the industry. The, we've talked before Gary, I feel pretty good about, just to kind of, let's think down a couple of KPIS starting at the top. I feel pretty good about something in the area of the 350 nim kind of being an operating NIM for us, plus or ma range around that 350 area that fits well within our, our risk appetite. That would, that well, within what we would kind of think of as a more optimized balance sheet. I think, when, we're still going to be, we're, we're proud to have a, a retail community bank out there. So that, you take a 350 nim and in our business model and the granularity of that model that still probably spells out something in the low f top efficiency ratio. Hard, hard to get a whole lot lower than that on a, on a retail base like we have.
And I think that would, result in something in the area of a 125 ROA and, we have a real continuous improvement around all of those things. To continue to press those metrics better and forward, to get there. You know, we got, we got to chew through you know, some of the duration overhang on some of the assets on the balance sheet. So there's, there's a rate and time element of that every time we talk about timeline, you have to talk about what, what's the rate environment in that timeline and then what opportunities will we have from a balance sheet restructure or otherwise to help accelerate those timelines? So that, that's how we think about our long range targets and, and you know, the scenarios or the path to getting there.

Gary Tenner

Okay. I appreciate that my other questions were answered. Thank you.

Operator

Stephen Scouten, Piper Sandler.

Stephen Scouten

Yeah, thanks everyone. Jay, I know you kind of touched on this at a high level saying you guys would still evaluate potential security restructuring. But can you talk about maybe what dynamics would compel you potentially to do that? Obviously, with rates a little higher, we think the math, maybe slightly more compelling now. And maybe just in particular around the health first health maturity book and how you guys think about that.

Jay Brogdon

Yes, Steve, and I appreciate the question. I think that, the reality is we're, we're looking at all versions of those scenarios. And it's not a there's not a single dimension that we look at through, look at it through. I mean, as an example, you mentioned the held to maturity portfolio in a scenario where we did a larger top transaction like that the sensitivity of the balance sheet changes dramatically. And so we evaluate the A LM aspects of the balance sheet kind of pre and pro forma obviously, we evaluate capital and earnings. That's probably you've heard me say this before, Steven, that's probably our leading evaluation. When we're looking at balance sheet restructures is just tradeoff between you know, capital and earnings. One of the things that I like to look at is in one of those you know, in any kind of scenario, big or small kind of trade within the balance sheet restructure. I like to look out over, the next three, four, five years, Stephen, can you still hear us? Getting some background noise here?
Drew, can you help with that? Drew, can you hear us?
(technical difficulty)

Operator

Yes, now I can hear you, sir. Just one moment, please. Please go ahead, sir.

Jay Brogdon

Yeah. Hey Stephen, can you still hear us? So I'll just finish my comment there to the extent. I'm not sure where we are in terms of the operator in the line here, but let me just finish my comment for those that are on the call, one of the things that we focus on, that I think is particularly important is looking out three or four years in the context of any kind of trade. Look out over a period of time and look at different rate scenarios shock, for example, down rates 102, 103, 100 basis points. And what is our earnings outlook on the current balance sheet over that period of time versus the pro forma for a trade? Are we making more money or less money in different rate environments? And so we really, as you've heard me say before, we're very scenario rich. We run a lot of scenarios around a lot of these things. And obviously, if we think that there's an economically viable path for a pull forward of those timelines, we're going to want to take advantage of that.
(technical difficulty)

Operator

Excuse me, Steven, are you still there?
At this time, 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 not surprisingly, we've outlined a pretty conservative outlook for 2025 but I will say that we're cautiously optimistic that a favorable business environment will help us exceed our expectations. So, stay tuned before we drop off today, I've got some special recognition that I'd like to make. We had five key executives retire at the end of 2024. Bob Feldman, who was our CEO; Steve Masini who was our chief administrative officer; Steve Wade, who had served as our chief credit officer; Johnny Mikaela, who served as our chief audit executive; and Pat Neely, who ran bank operations, all retired at the end of 2024. That's a lot of talent to lose at one time.
But I'll tell you, the replacements are just as good with long runways and we're excited about that. These five folks played a pivotal role over the last 10 years as we grew. And if you can think about how they were able to manage our day to day operation, but also improve our operations, our risk management oversee our credit operation as we integrated 13 banks. It was a monumental task and I can't thank these guys enough for what they've meant for Simmons Bank. So guys will miss you. But thanks very much. You've left the, left the company in a good way.
That's really all we have for today. Thank you for joining us and have a great day.

Operator

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