Ladies and gentlemen, thank you for standing by. And welcome to the Simmons First National Corporation Second Quarter Earnings Call and webcast [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Steve Massanelli. Thank you. Please go ahead, sir.

Good morning, and thank you for joining our second quarter earnings call. My name is Steve Massanelli, and I serve as Chief Administrative Officer and Investor Relations Officer at Simmons First National Corporation. Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer and Chief Operating Officer; David Garner, Executive Director of Finance and Accounting and Chief Accounting Officer; and Matt Reddin, Chief Banking Officer. The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued this morning, and to discuss the company's outlook for the future. We will begin with prepared comments followed by Q&A session. We have invited institutional investors and analysts from the equity firm that provide research on our company to participate in the Q&A session. All other guests in this conference call are in listen-only mode. A transcript of today's call, including our prepared remarks and the Q&A session, will be posted on our Web site simmonsbank.com under the Investor Relations page. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook. I remind you that actual results could differ materially from those projected in the forward-looking statements due to a variety of factors. Additional information concerning some of these factors is contained in our SEC filings, including without limitation, the description of certain risk factors contained in our most recent annual report on Form 10-K and the forward-looking information section of our earnings press release issued this morning. The company assumes no obligation to update or revise any forward-looking statements or other information. Lastly, we will discuss certain non-GAAP financial metrics we believe provide useful information to direct investors. Please note that additional disclosures regarding non-GAAP metrics including the reconciliations of these non-GAAP metrics to GAAP are contained in our earnings press release, which is included as an exhibit to our current report filed this morning with the SEC on Form 8-K and available on the Investor Relations page of our Web site simmonsbank.com. I will now turn the call over to George Makris.

Thanks Steve. I'd like to begin today's call by thanking the Simmons associates for their commitment and dedication during the past three months. The special debt of gratitude goes to our branch, call center and digital banking support staff, who were here every day to fill the needs of our customers. We will continue to make operational adjustments to help meet the needs of our customers and communities in the coming months as we navigate these very uncertain times. I'm very proud of our team and their demonstration of our community banking values. My prepared comments today will be brief. We have posted an extensive presentation on our Web site at simmonsbank.com along with press release and financial data, which gives much more detail regarding our quarterly results and other important information about our company. In our press release, we reported net income of $58.8 million for the second quarter of 2020, an increase of $3.2 million compared to the same quarter last year. Diluted earnings per share were $0.54 for the quarter. Included in the second quarter earnings were $3 million in net after tax merger-related, early retirement program and branch rightsizing costs, as well as a $1.6 million gain on the sale of branches. In May, we sold three branches in Colorado and on June 27th, we closed 11 additional branches. Excluding the impact of these items, the company's core earnings was $60.1 million for the second quarter of 2020, and core diluted earnings per share were $0.55 for the quarter. Our return on average assets was 1.1%. Our return on average common equity was 8.2%. Our return on tangible common equity was 14.6%. And our efficiency ratio was 49.1% for the second quarter. As of June 30th, total assets were $21.9 billion. Our loan balance was $14.6…

[Operator Instructions] Our first question comes from the line of Gary Tenner from D.A. Davidson. Your line is now open.

Just couple of questions, first, in terms of deferrals. I think you'd mentioned $3.3 billion. You guys have been fairly aggressive, you know on the front end I think in terms of providing deferrals, kind of you know for the asking, so to speak. And I'm just wondering as you're getting you know maybe to the end of the initial period of deferral for some of those loans. What you're seeing in terms of requests for extensions and what are your thoughts are on that program right now?

Let me, first of all, clarify modifications, to make sure that we're all on the same page. Modifications for us meant that we offered some payment modification not to exceed the six month period. We did that very early on in the process in order to keep our customers from going deeper in debt by drawing on unfunded line of commitments. We had not changed any of the original loan terms. We've also put into place a seven point scale. Each one of our lenders is going back to those customers in the last three weeks, and have rated those one through seven. One through four tells us that they expect to be back on third principal and interest payments within 90 days. Seven tells us that we may need to make some modification to the loan or take any immediate action. And I'm happy to report that we have a very small number in that category seven. Not surprising to any of you would be that hotels and full service restaurants appear to be the laggards in the group with regard to getting back on P&I. But so far analysis has not proven any problem loans at this point. But once again, we have to qualify that by saying we don't know how long the pandemic is going to play out. We don't know which states may close hospitality as they did early on in the process. So, we're trying to remain as fluid as we can and work with our borrowers. I will say this though, our borrowers have done an excellent job in mitigating any damage during this period of time. Most of them have applied for PPP loans that got them through. And if I’m reading the press correctly, there might be another stimulus package actually designed for those hospitality areas that are hardest hit by the pandemic. I think one thing that's very telling is I'm pretty sure you hadn't had a chance to look at our presentation. But you look at Page 10, we list our unfunded commitments by category. And what you’ll note is that from Q1 to Q2, there are only two categories that declined in unfunded commitments, that's construction and agri funding and that shouldn't surprise anyone that construction is continuing on and that we're funding our agri loans, all other categories increased in unfunded commitments. So, we don't have loan growth shown because we forced our customers to draw on their lines credit.

And I just had a follow up on in terms of the energy portfolio, down around $200 million now and it looks another $200 million of planned reductions back half of the year. I thought coming into the year, and correct me if I'm wrong, I thought that target to get the energy portfolio down to was about $200 million. And looks like now it's 100 towards the end of the year. I'm wondering are you moving closer to a full exit of that business? And I apologize if I missed you mentioning that previously?

We are moving toward a complete exit except for those borrowers who have a diversified relationship with the company. And we have several of those and that's probably that residual $100 million. The energy is just a portion of our relationship with that particular borrower before we have specific individual energy related credits it is our intention to exit.

Thank you. Our next question comes from the line of Brady Gailey from KBW. Your line is now open.

Maybe one more on energy while we're on the topic, but some of the energy shrinkage we've seen to date has been fairly costly. When you look at the continued shrinkage that you expect over the next couple quarters to a year, do you expect to still see some noise and some elevated costs associated with that shrinkage, like we've seen in the past?

Well, Brady I would tell you, I hope not. We monitor every energy credit and we have an analysis that shows when we expect to exit any issues that we may have, what their hedging position is. The south one was a bankruptcy that was not managed by Simmons. It was a national credit that we bought into. A unfortunate situation. We did sold one loan at a loss. We have this quarter identified one more problem loan in the midstream category that we have a specific reserve against. But other than that assuming that oil prices stay where they are and demand continues to rise proportionally, we think that the rest of our portfolio looks good and there is an excellent chance for us to exit based on the schedule that we've put in our presentation today.

And then so the 24 branches to be closed later this year, and any comment on, is that all concentrated in one geography, or is that kind of spread out throughout the Simmons franchise?

It’s spread out throughout the entire Simmons franchise. I think the state with the highest number of branch closures is six in the state. And I'll tell you we're not through evaluating our physical locations. Let me give you an example. As we have acquired banks, we have acquired some very impressive physical facilities. There's one corridor of about a hundred miles where we’ve required two banks and we have about 120,000 square feet of building, housing about 160 associates. Those were back office locations for banks that we’ve consolidated. So, in addition to branch reductions, we're also taking a look at the utilization of the square footage that we have in our entire footprint. So earlier this year, we talked about this year being an adjustment period and I think it's evident that that's the case. We have hired a new director of real estate. We're in real estate business whether we like it or not. He has done a fantastic job of giving us an unbiased view of the viability of some of these locations. So, I would say that by the end of the year, we'll be down to 200 branches across footprint, whether 200 is right number or not we don't know, but that is a constant evaluation for us.

And then finally on just with the net interest margin. I know there's a lot of moving parts with PPP and then the upcoming reinvestment into the bond book. But as you look at the margin in the back half of the year, how do you think that will trend?

Well, I would tell you, first off, obviously, the biggest impact this quarter was the additional liquidity, just like everybody else. We had $2.5 billion in cash invested basically 10, 11 basis points. The PPP loans are great but they're lower yielding loans at about 2.3, 3%. Going into Q3 and Q4, you know the biggest impact is going to be first off when do the PPP loans, are they forgiven or paid off. If it goes like we expected on the front end, which would be a larger portion paid off in the third quarter that yield would obviously go up quite a bit. However, when Congress changed the rules and it extended the submission period and all of that information, it could delay the PPP forgiveness and pay off period. So it could go into the fourth quarter and into first quarter next year. So that will probably be a little lower. But I would say definitely it's going to cause some lumpiness in the numbers for the next quarter. On the liquidity side, you know we're continuing to look at reinvesting that in the security portfolio. As you know, in the first quarter, we derisked some of our security portfolio and also built up liquidity before we knew that the government was going to provide liquidity to the market like they did. We're controlling our own destiny there. So, when we're able to reinvest that we are really re-investing over a period of time and getting good rates and just working on it. It just takes a lot time to be able to get in this rate environment obviously. Our goal and we're hopeful to have that reinvested $750 million to $1 billion dollars in the security portfolio by the end of the year. So, those two are going to drive the margin. You know whether it goes up back up to our target level of you know the 340 range. long it takes to get there will depend on that timing difference. We do think there is some continued opportunity in our deposits and funding costs, a little bit in our transactions. You can see, we did a lot of work at the end of the last quarter that really paid off this quarter. But there's still some timing on the time deposits and federal home loan bank pricing that we think will have some opportunity over the coming quarters. So, you know as we've talked before, I think if you normalize our margin, it's in the 340 range. But it's going to, I think just like everybody due to the circumstance, it’s going to be a wild guess for the balance of the year, whether it bumps significantly higher that because of forgiveness and pay off or if it continues at those same lower available because of liquidity.

Thank you. Our next question comes from the line of Matt Olney from Stephens. Your line is now open.

I want to follow up on that last question around securities reinvestments and Bob, you mentioned, hope to reinvest, I think between $750 million to $1 billion by the end of the year. I'm just trying to get a better idea, if you're going to be opportunistic and see how that it plays out, if the spreads become more attractive or if you really expect that range to be reinvested, the back half of the year, regardless of the shape of the curve? Just trying to understand the sensitivity behind that.

You hit it right on the first one. We're going to be very opportunistic in our reinvestment. We're not going to be forced. So our goal is to have it by the end of the year, if we can't get the opportunities that we're looking for, it may take a little longer, but we're not going to force it to go in. And that's what we did this quarter is we selectively, there was a lot of payoffs that we reinvested. We're investing in select markets in munis. We get a good tax equivalent yield there and some other investments in corporate bonds and such, like sub debt security. So, we do a little bit in there but mostly in the munies and then the agencies on a shorter term basis but definitely be opportunistic.

And then on the deposit cost, the bank did a really nice job this quarter bringing down the overall deposit cost. I think the interest earnings are now at about 59 basis points. If we go back four or five years, those costs were down in the 30 basis point range. So, I'm trying to weigh that against the outlook that called for stability for the remainder of the year versus where it was four or five years ago. Last time we're at this zero rate environment. Any color you can give on that?

Well, I’ll say a couple and George may want to say his on re-pricing. But as you saw, like you said interest bearing deposits re-price really nicely. And we also on Page 22 of the presentation kind of showed the last time in the Great Recession what happened with rates, and it took a lot longer for rates to drop to the lowest level back that it took from ‘07 to ‘12 before to actually drop to those 34 basis points. So, we think there's a little bit of opportunity in the interest bearing accounts still. Again, the time deposit has only been a small portion of that that's re-price, so we think there's opportunities there. Again, I think the market has gotten closer to the bottom this time than they did in the Great Recession where it took a couple of years to get near the bottom.

And I would say this. We, through our acquisitions, we have some longer term CD commitments that we will certainly have the opportunity re-price over the next 12 to 18 months. So, you can see on Page 22 of our presentation that our time deposits still have an average rate of 142, that's certainly higher than anything that's in the marketplace today. So, we would continue to see that bucket decline. Our transaction and savings rate decreased to 32 basis points. There's some room for continued reduction there, but 32 basis point is not a whole heck of a lot. So, I would say that time deposits give us the best opportunity for repricing over the next 12 to 18 months.

And then switching gears on to service charges. These were down sequentially, I assume because of fee waivers. Are you still waiving fees as of today, just trying to get a better idea of when it will rebound?

Matt, we are still waiving fees and we were very specific about any account that received stimulus payment. We made sure that there were no overdraft charges associated with any of that revenue. And Bob, I can't remember what that number was, but it was six digits in fee refunds or waivers. It's just when you take a look at Moody's projections and you take a look at retail sales and other consumer expenditures, they're down. And therefore, there's more money in those accounts than there would be otherwise, and I think it's just a reflection of less spending in the marketplace. How well the stimulus package propped up, some folks really needed it. And I'm going to make this statement, I would hate for us to hang our hat on overdraft fees for our customers. So, I think that's a good sign in the economy that they aren’t spending money they don't have. Bob, you might have couple of comments.

Good comments there. And I would say too is on the service charges, we had a commercial customer that we collect fees in the 300,000 to 350,000 a year. Their business was shutdown for a period of time. So during that period of time, we collected no fees because it's based on number of transaction. So that's just one example. And then as George said, we had significant amount of waivers that just to trying to help out the customers on waivers, on fee. So, we did some of that early on in the quarter. One a little bit of good news that we did see is the June numbers were better than the May and April numbers in that bucket, still was below our budget for the year for the month of June. But it did show improvement over the prior May and April. So, that's one that I do believe long-term. And when the economy gets back and everybody's back in business, that's more of a temporary. It's just how long does it take to get to those levels back up to the normalized levels. And it will probably take quite a bit of time to get on the other side of this problem.

And then I guess I want to go back to the loan growth commentary. George, you mentioned a few things in your remarks earlier. I think the outlook calls for loan balances of flat to down 5%. Can you add some more color on this and does that include or exclude PPP? And I think I appreciate the energy loan contraction. What else would be contracting the back half of the year at Simmons?

Well, Matt, probably has more detail. And I'll remind everyone back half of the year, our agri portfolio is certainly going to play down and it's probably $250 million, $300 million at the time. So $100 million or $150 million we’ll probably pay down before the end of the year. But Matt, you might want to talk a little bit about the loan growth or lack of outlook.

At a high level outside of energy, there's no specific category where we're going to see accelerated pay offs. But we are as we noted in our release for the second quarter, we saw substantial pay downs in CRE. I think we'll continue to see that. But there is no acceleration in any of the product type. As far as the loan growth goes now, what we're seeing today is where we have long customers that may be in a position to take advantage of an opportunity or have a good project, that's where we'll continue to see opportunities. But as you can say with the approved rate of close at $72 million that's dramatically down. So, I think just the continued decline will just be natural in just pay downs and amortization.

Thank you [Operator Instructions]. Our next question comes from the line of David Feaster from Raymond James. Your line is now open.

I just wanted to start on the reserve. Obviously, it's a challenging operating environment and there’s a lot of opinion as you noted in your prepared remarks. But you know given the pretty significant deterioration in Moody’s economic forecast when comparing the June to March figures, I was kind of surprised to only see a 1 basis point increase in the reserve ratio as PPP. I’m just curious how do you think about the reserve ratio? And you know the conversations that went into that, was there any change to the weighting to the scenarios, the baseline scenarios? I guess do you think the bulk of the reserve build is over, or would you maybe expect to see more in the second half the year?

So David, here’s how we weighted the Moody’s forecast. So, 68% weighting to the baseline scenario, 22% to the adverse scenario and 10% to the severely adverse scenario. But let me just qualify that by saying, these are not geographic specific. And when we take a look at the DFAST methodology and we take national projections and then we have to boil them down to what we work with in our footprint. Let me give you some data here on unemployment numbers. So, you know what Moody’s unemployment says, 14% in Q2 and over 10% at the end of the year. Well, here’s what they actually are in the markets where we do business. And this is as of June 30th. Oklahoma is 6.6%, Kansas is 7.5%, Missouri is 7.9%, Arkansas is 8%, Texas is 8.6%, Tennessee is 9.7%. So, the way we’re looking at Moody’s is we have, in my opinion, very conservative view of the economy based on the statistics in the markets we do business. All these scenarios are applied to our different categories and they come up with a very static number, and then we apply qualitative factors to that and quite honestly they’re fairly conservative too. So we add to our reserve fairly substantially. We believe that 1.7% of our loan portfolio is a very conservative number based on the risk as we understand it today. And once again, this Moody’s forecast is over the next 12 month period. Assuming that we continue to improve as Moody’s believes we will during that four quarter period, we ought to be just fine, and our additional allowance will be based on Moody’s forecast. So if they change and it becomes more severe then you would expect us to try to reserve more on that basis. If we have charge offs that are not accounted for specifically that could have an impact and then loan growth would have an impact. But those are the elements that we’ll take a look at as we continue to evaluate the appropriateness of our provision and therefore the allowance. So, I would tell you we’re very comfortable with where that is today based on some pretty significant analytics.

And then just follow up on that question on loan growth. Matt, had mentioned that originations are down. I’m just curious how much of this, and payoffs and pay downs are obviously elevated. But I'm just curious as to how much is this strategic where you tighten the credit box and are passing on more loans, or is this you losing deals to customer like competitors that are being more irrational? Or are customers just simply paying down debt using excess cash and just paying down debt? Just curious, and then maybe how your pipeline is looking heading into the third quarter?

Matt, would you mind addressing that question?

It's really a combination of all three of your scenarios. We definitely tighten down the crews as we should work. We have a COVID overlay to ensure new originations, they have the highest quality underwriting. And then also absolutely our customers are paying down faster. And then finally there are fewer opportunities in the marketplace, and we are in with fewer opportunities in the marketplace. You will see what we would call a faster gun with looser terms or lower yields that just don't fit our box right now. So, it's really a combination of all three. As far as the pipeline going into the third quarter, each quarter we've shown a decline in our approved rate of close. And I think you'll continue to see that until there's some more certainty with economic conditions.

And then last one from me, George, just I'd be curious as to, this is more of more of a strategic question. And obviously, you talked about the branch rationalization. But with the pandemic, there's increased remote working and increased digital adoption and changing consumer behaviors. Have there been any change in your strategy? Is there any, both on the cost saving front and opportunities to invest in and maybe grow in new markets, or maybe make some opportunistic new hires or anything like that? Just curious on how your strategy and focus may be changing in this new world?

Well, certainly, we have to take a look at those opportunities based on the changes that have happened as a result of this. And I believe some of them were going to be permanent. I will say this, we have had excellent results from our investment in our digital channels. And we have a roadmap over the next 18 months where we will continue to expand and enhance our digital offerings to including credit cards, to include investments in other products and services that we offer. So, I expect that the trend of self service will continue and therefore, put even more pressure on our physical locations. It's also going to require us to be more consultative with our customers instead of reactive. So, I think you're going to see quite a shift in skill sets with our customer facing, particularly our branch staff who are going to be more universal bankers, if you will, than tellers. We're going to have to be able to meet our customers’ expectations with regard to their questions across the spectrum of our products and services. We have been very lucky. We have recently hired two excellent executives within the company that I'll mention now. One is Kent Eastman. Kent is our new Division Chairman for Taxes. Kent came to us with a very storied background in the banking business and certainly well respected in the Dallas, Fort Worth market. So we’re glad to have Kent here. And then Jimmy Crocker has recently joined us as the Head of our Wealth Group. Jimmy has extensive experience as an attorney. As you may recall, Philip Tappan retired earlier this year. Joe Clement who has run our Trust Department for years and years is retiring at the end of this month. So Jimmy coming on board…

Thank you. Our next question comes from the line of Garrett Holland from Baird. Your line is now open.

It’s a great position to be in with your very strong CET1 ratio in this downturn. But where do you expect that to run from a near-term standpoint with CET1, and how you are able to use that strong capital position and profitability to be a bit more opportunistic and drive organic PPNR growth albeit in challenging operating environment?

Well, Bob, do you want me to talk about the outlook for capital and then maybe I can touch a little bit on maybe some utilization of that capital?

Garrett, our capital like you said is in, we’re in pretty good shape right now, especially taking the fact when you back out the PPP impact of $1 billion loans. Now it doesn’t negatively impact some of the ratios but it does our tangible our common equity and so forth. But right now, where we are in this given circumstance is due to the uncertainties is kind of really just build the capital you can and be ready and loaded when you can take advantage of it. So then that's what we can continue to do right here is continue to operate, continue to build profits that we can and build the capital levels. And again be ready for when the opportunity comes, whether and George said he’ll go through some of those opportunities. But that’s what we plan to do in this process is continue to build the capital and continue to pay dividends at our current levels as we have in the past.

Yes, and Bob touched on some of this very important to us is our dividend history, and that’s certainly important to our investors and certainly something that we intend to protect at all cost. I’m very disappointed that we aren’t able to buy our stock back right now. I think it’s a heck of a buy. We have some insiders that are taking advantage of that but we only 30 days a month or a quarter that we can do that. I expect that you will see some more buying when the window opens up for us this time. And of course we had some really good discussions going on with some merger partners when all this hit. So we expect that if they survive like we expect to that we’ll have those discussions again and we’ll have some more M&A opportunities. But right now, it’s just all hands on deck, every man for himself and we’re just trying to navigate through. We will continue to build not only our capital but our cash position at the holding company as well, certainly, over the next year and a half. And we will be ready for those opportunities as they present themselves in the marketplace.

And Garrett, I’d have one other comment because I think you hit right on it with CET1 ratio. I think in an environment like this the two most important capital ratios are the CET1 and the total risk based capital, because that really risk weights your balance sheet. As investors, we tend to look more at TCE but that doesn’t tell the story when you’re in an environment like we are today and you really want to risk weight the asset, and those two ratios do it. So, I think it’s a good idea to pointing that out.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to George Makris for closing remarks.

Well, thanks to each of you for joining us again this quarter. We’re very proud of our results and you know I wish I could tell you that we were very clear about what’s going to happen in the third quarter. You all know that we’re dealing with some uncertainty with regard to schools and reopening, that’s going to have a big impact on the economy and certainly it’s going to have a big impact on our ability to get all of our associates back to work. So, we’re just going to continue to do what we’re doing and hope for the best. W appreciate your support and hope you have a great day.

Ladies and gentlemen, this concludes today’s conference call. Thanks for participating. You may now disconnect.