Simmons First National Corporation (SFNC) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation First Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today's conference, Mr. Steve Massanelli. Sir, you may begin.

Good morning, and thank you for joining our first 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; David Garner, Controller and Chief Accounting Officer; Marty Casteel, Chairman and CEO of Simmons Bank, our wholly-owned bank subsidiary; Barry Ledbetter, President of our Southeast Division; and Matt Reddin, President of Banking Enterprise. The purpose of this call is to discuss the information and data provided by the Company in our quarterly earnings release issued yesterday and to discuss the Company's outlook for the future. We will begin with prepared questions, followed by a Q&A session. We have invited institutional investors and analysts from the equity firms that provide research on our Company to participate in the Q&A session. All other guests in this conference call are in a listen-only mode. A transcript of today's call, including our prepared remarks and the Q&A session will be posted to our website 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'll 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 forward-looking information section of our earnings press release issued yesterday and the description of certain risk factors contained in our most recent annual report on Form 10-K. The company assumes no obligation to update or revise any forward-looking statements or other information. Lastly, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Please note that the reconciliations of non-GAAP metrics to GAAP are contained in our current report filed yesterday with the SEC on Form 8-K and available on the Investor Relations page of our website simmonsbank.com. I'll now turn the call over to George Makris.

Thanks, Steve and welcome to our first quarter earnings conference call. In our press release issued yesterday, we reported net income of $47.7 million for the first quarter of 2019 and diluted earnings per share of $0.51. Included in the first quarter earnings were $1.4 million in net after-tax, merger related early retirement program and branch rightsizing costs. Excluding the impact of these items, the company's core earnings were $49.1 million and diluted core earnings per share were $0.53. We had solid operating results in the first quarter. Revenue was affected by three significant items compared to first quarter of 2018. Accretion income was down $4.6 million, debit card interchange income, primarily as a result of the Durbin rate cap was down $2.8 million and gain on sale of securities was up $2.7 million, a net decrease of $4.7 million of revenue from the previous year. Total assets were $16.1 million at March 31, and our return-on-average assets was 1.2%. Our efficiency ratio was 56.8%. Our loan balance was flat versus 2018 year-end. Our higher yielding seasonal balances in credit card and agricultural lending were down $40 million from year-end. We originated $542 million of new loans during the quarter where we had $373 million of loans payoff quarterly. The permanent market continues to be very appealing for certain credit, particularly CRE and we see some of our customers taking advantage of this dynamic. We continue to see growth opportunities ahead, but based on the attractiveness of longer term non-bank options, we believe our growth will be closer to 5% for 2019. Our loan pipeline, which we define as loans approved and ready to close, was $473 million at the end of the quarter compared to $277 million at the end of 2018. On a consolidated basis, our concentration of construction and development loans was 98.5% and our concentration of CRE loans was 293% at the end of the quarter. Total deposits at March 31, 2019, were $12 billion. During the quarter, brokered and public fund deposits decreased $557 million, while core deposits increased $148 million. We continued the management of our balance sheet and the net interest margin. Our cash balance was reduced as we eliminated some higher cost deposits. We're very pleased with our growth in core deposits, as we continue to emphasize relationship banking. Our net interest margin for the quarter was 3.85%, compared to 3.76% at December 31. The company's core net interest margin which excludes accretion was 3.67% for the first quarter, compared to 3.66% from the previous quarter. Our core net interest margin expanded by one basis point, which is consistent with our planned balance increase and deposit cost, with similar increase in interest income. Our non-interest income for the quarter was $34 million. As of July 1st 2018, we became subject to the interchange rate cap as established by the Durbin amendment, resulting in a $2.8 million reduction in debit card fees for the first quarter of 2019, when compared to the same period in 2018. Mortgage and SBA lending premium income decreased $1.1 million, when compared to the first quarter of 2018. Mortgage lending income during the first quarter of 2019 was lower by $649,000 compared to 2018. SBA lending premium income decreased by $476,000, due to fewer loan sales in the current quarter compared to the first quarter of 2018. Non-interest expense for the first quarter was $101.4 million. Core non-interest expense for the quarter was $99.5 million which represented an increase of $3.2 million when compared to the first quarter of 2018. Software and technology costs increased approximately $1.8 million over the same period in the prior year. Our next-generation banking technology initiative is progressing on schedule. And our incremental IT expenditures during the first quarter were primarily related to this initiative. We expect more incremental expenses related to NGB throughout this year and into the first half of 2020. During the first quarter, we offered qualifying associates an early retirement option. 91 associates took advantage of this offer. Most of the positions will not be replaced. We expect expenses of $2.5 million in the second quarter, based on those who will retire during the second quarter. We expect ongoing net annualized savings of $4.4 million from this program beginning in the third quarter of this year. At March 31st the allowance for loan losses for legacy loans was $59 million with an additional $1 million allowance for acquired loans. The loan discount credit mark was $42 million for a total of $103 million coverage. At the end of the first quarter, nonperforming assets were $80.7 million, an increase of $20.1 million from the year-end. This balance is primarily made up of $61 million of non-performing loans and $19.5 million in other real estate owned, which includes $8 million in close bank branches held for sale. Non-accrual loans increased $27 million during the quarter, while OREO decreased $7 million. During the quarter, our credit risk management practices identified loans specific to the acquired portfolio of Bank SNB's Dallas market which were poorly structured or poorly managed post funding and were primarily linked to an individual lender. As a result, we made provision for acquired loans of $2 million related to the Bank SNB acquired pool of loans. We will carefully review these loans for potential losses and believe we have adequately identified any new risk associated with the loans. Unfortunately based on purchase accounting rules, the credit mark associated with the declining Bank SNB acquired pool is a stand-alone amount not related to Simmons overall allowance for loan losses and must be managed specific to that pool of loans. Our annualized net charge-off for total loans were 20 basis points. The provision for loan loss was $9.3 million. Our capital position remains very strong. As of March 31 common stockholders' equity was $2.3 billion. Our book value per share was $24.87, an increase of 8.8% from last year, while our tangible book value per share was $14.78, an increase of 17.1%. The ratio of tangible common equity was 9% at March 31, compared to 8.4% at the end of 2018. Our total risk-based capital ratio at the end of the quarter was 13.6%, compared to 13.4% at the end of last year, while our Tier one leverage ratio was 9.07% at the end of the quarter compared to 8.78% at year-end. We'd like to welcome our new Reliance Bank associates to the Simmons family. We closed the transaction on Friday, April 12, and performed the system conversion over the weekend. All our associates worked very hard to make this happen and ensure a seamless transition for our new Reliance customers. We are excited by our merger with Reliance Bank in St. Louis and the opportunities we now have in that market due to our increased presence. As we mentioned for some time, our commercial team in St. Louis has provided significant growth for our company, and we expect building on that momentum. We're looking forward to another prosperous year in 2019. I previously mentioned, our NGB or Next Generation Banking initiatives, which will involve the upgrade of most of our IT systems and applications, including our digital bank offerings. We expect to have not only a better product for our customer, but also the opportunity to achieve efficiencies associated with more integrated systems. We will continue to focus on increase in our market presence in all the communities we serve. Deposit growth will certainly be a priority as deposits are critical to fuel our loan growth potential. We will continue to work to diversify our loan portfolio, and deepen relationships we have with our customers. We will mark our concentration of C&D and CRE loans to ensure we abide by regulatory guidance. And we will continue to pursue partnerships with banks that will enhance our collective value in the marketplace. This concludes our prepared comments. We'll now take questions from our research analysts and institutional investors. I'll ask the operator to come back on the line and give instructions, and open the call for the questions.

Thank you. [Operator Instructions] And our first question comes from Stephen Scouten from Sandler O'Neill. Your line is now open.

Hey. Good morning, everyone.

Hey, Stephen.

Good morning, Stephen.

I wanted to see if you could give some further color on what led the decline in loans quarter-over-quarter on an end of period basis? I know you've talked about the guidance going lower from some non-bank lenders. But wondering what other dynamics were at play here if there are any other intentional reductions in certain segments or -- versus the elevated pay downs?

Well, Matt Reddin is with us, and I want him to take the first crack at that.

Sure, George. Thank you. Great question. Really, I think this has shown really good management from the standpoint of the interest rate environment today that we're seeing here in the short-term funding cost higher than what we can get a rate that gives us the margin, we're looking for versus what the market will take it at is, and at a very high level. But also you got to remember too, this is first part of the year for us with the ag portfolio. It's down. We've also had a wet season as related to ag, so we're now building that back up, and that also kind of impact that slow growth in the first -- for the year.

Okay. That's helpful. And may be thinking a little bit more about the -- kind of intentional reductions to meet higher cost deposit. It seems like most of that came from the brokerage and public funds that you mentioned, I think, $557 million. Can you give us an idea of what those deposits rolled off from a cost basis at? And what you would tend to replace those with overtime and what the theoretical cost will be there just to give us an idea of the moving parts?

Yes. Steven, so we ended the year -- we had about $400 million or $500 million in excess liquidity at the end of the year and we intentionally in the first quarter, reduced some of our higher cost broker deposits and other deposits. Those were rolling off in the 240 range, 250 range. We had most of that invested overnight at 250, 260. So we have a very small spread on that in the liquidity. So we really just managed the balance sheet in the first quarter. We saw a good core deposit growth, I think, that was in the $130 million-$140 million in this first quarter. So we are pleased with that. So we believe our core deposits are on the right track for the growth. They're coming in much lower obviously on the costing side. And we'll only use the deposits from the broker when we have the loans that we need to offset it as we did last year. And we talked about several times last year in the calls that we've built-up the growth to deposit side to fund the $1 billion of loan growth that we did have last year.

Sure. That makes a lot of sense. Thanks. And then just last one for me maybe now that Reliance is closed I know, you guys weren't quite sure how that would impact your NIM guidance last quarter. But do you have any further clarity on what that looks like on a combined basis whether it'd be GAAP or core, however, you guys are thinking about it? Any direction there would be helpful.

Well, I'll give you the core. I would say there is going to be about 3 basis point to 5 basis point negative impact to the NIM for just the Reliance piece. That assumes no management of those numbers. We think there's opportunity in there rebalancing the securities portfolio and so forth. We'll -- so -- and again keep in mind first quarter is our lowest NIM from the company in the year. So we would expect to pickup in the second quarter offset a little bit by this 3 basis points to 4 basis points, 5 basis points from the Reliance impact. On a GAAP basis, you know, that's pretty much anyone's guess on what accretion here is and where it is. But it will be accretive in the GAAP NIM going forward. We'll have much more accretion coming out related to the Reliance. You know those numbers came in at/or above what our estimates were from the due diligence side. And it was all related on the interest rate portion of the mark.

Okay. Very helpful, Bob. Thanks guys for the color. I’ll let somebody else jump-up.

Okay.

Thank you. Our next question comes from David Feaster from Raymond James. Your line is open.

Hey good morning guys.

Good morning David.

Just I want to start on the loan growth. It was notably driven by CRE and construction and we've been hearing some mixed reviews about what the CRE and construction market. Just wanted to hear your thoughts on that where concentration issues might be inclusive of Reliance and maybe what drove the strength in CRE an construction this quarter.

Let me clarify you said the growth of our construction in the first quarter or--?

Yes, CRE and your construction portfolios, yes.

Well, our construction portfolio actually for the first time and the first quarter our overall commitments in construction went down in recent quarters. So, for the first time we saw an overall commitment that were done, but we've had a current construction portfolio that's funding out about $209 million a quarter. So, that's why we're seeing the increase in construction, but our overall commitments went down for the first quarter.

Okay. And where are your concentration ratios in CRE and construction?

Right now I think it's about 98% at corporation level and C&D.

Right and CREs right at the 290.

Okay. And then just on these credit issues that arose at Bank SNB. Could you give us a little bit more color on that? And has this changed the way that you're going to approach M&A and your due diligence process? Is there anything in hindsight that you think you could have done to maybe catch this? Or did you see any other risk in potentially any of your other acquired portfolios?

Well, yes David, I'll address that. I think that we have learned a lesson here. We are very careful between the time we announced the transaction which reflects our diligence on the loan portfolio and the time we actually close it and then the time we had actually merges into the bank. So, those are two periods of time that we have the most risk. We are very conscious of some regulatory requirements that somewhat limit our ability to influence credit decisions during those periods of time. However, we also understand the risk and we believe that this illustrates what that risk is. We will be more diligent in our efforts to manage credit between the time we announce the transaction and the time we actually merge it into the bank and all of our credit metrics actually kick-in. Most of the problems occur during those periods of time. Fortunately for us we have really good credit review process. We think we found these problems very early in the process. I'll also tell you that at the end of last week, we have $5 million loan of that pool payoff that resulted in $1 million recovery. So, we think we're well on top of the issues. We think we'll manage through those very well. But you're right, it did point out an opportunity for us to be a little more aggressive in our oversight credit decisions between the time we announced the transaction and the time that actually falls in to Simmons Bank. This is not dissimilar to what we experienced in our Wichita market a couple of years ago, with the single lender in their portfolio that was really just not managed very well. So, these things happened from time to time and fortunately for us happened in an acquired pool of loans and I don't want to get too specific about the details of purchase accounting. But that pool of loans at Bank SNB it has to standalone. And if we didn't have enough credit mark left in that pool to cover the downgrades of those credits, we are required to specifically reserve additional funds to cover that portfolio. So, whether or not we had sufficient allowance in our overall portfolio is irrelevant. Those all standalone. And I remind you we've got about 15 separate acquired loan portfolios on our books, each one with a separate credit mark. Unfortunately, this is the first one that's really taking us to a point where we have to make a significant provision to cover a shortfall.

Okay. Last one for me. I wanted to follow-up on expenses. Could you just remind us of the seasonal impacts in the first quarter from -- that are going to come out in 2Q from FICA and payroll taxes? And how much of the $10 million of annual expenses were actually in the first quarter? And is this $99.5 million of core expenses a good baseline before layering in Reliance?

Well, I would say that I personally would not be satisfied with the $99 million run rate. We had about $2 million of the $10 million that we expect in NGB expense in the first quarter. We offered an early retirement program. I think I've mentioned before that as we put our NGB program in place, our skill set is really going to change internally. We'll expect some efficiencies. And we just felt like the right thing to do is to give folks who had spent most if not all of their careers at Simmons Bank, an opportunity for an early exit if they chose. So we had eligible associates took advantage of that 91 as a matter of fact. Really the only positions that are going to be replaced out of that 91 of those in the retail markets where we just absolutely have to have certain coverage in certain branches. We expect that that initiative by itself will save us a little over $4 million a year beginning in the third quarter. So we’ll have some severance costs associated with that initiative in the second quarter, which we believe will be about $2.5 million. We will continue to push from an expense standpoint to make sure that our investment in technology provides capital efficiency in the marketplace that we're expecting. However, we do have some investment opportunities to grow some markets organically. So, we will continue to examine our efficiency ratio and believe that we can still operate between 50% and 55% over a 12-month period that will give us some flexibility with regard to investments in certain markets. So we still think we're on track. $99 million is probably too high in my mind. I can't tell you exactly what we expect that to be going forward but something less than that.

David this is Bob. One thing just to give you a little guidance on the Reliance expenses going forward. We're still working through those numbers but the ballpark is going to be in that $5 million to $6 million per quarter is what I would estimate right now.

Okay, terrific. Thank you.

Thank you. Our next question comes from Gary Tenner from D.A. Davidson. Your line is open.

Thanks. Good morning.

Hi, Gary.

I joined a few moments late -- good morning. But just was hoping to get some more color on the reduction in the loan growth guide for the year. I think you had reduced the last quarter to the high-single digits looks to be more mid-single-digit now. So I'm just wondering what the changes are driven by?

Well, and I'll let Matt talk about that specifically. But I would say this that there are other opportunities for some of our large CRE customers in the marketplace today and our job is not necessarily just to make loan and put it on our books, it really is to advise our clients on the best opportunity for them. We've put in place a pretty significant correspondent banking group that has growing context in the secondary market as well as our ability to sell loans to participating banks. And that's going to be necessary for us as we control our concentration in CRE and construction lending. So there are tremendous opportunities out there with our existing customer base in both of those categories. It just depends on what's in the best interest to the customer, whether or not we put it on our books, whether or not we help them access to secondary market or whether we sell participations to make sure that our concentration level stay where they are. We're very hopeful that our C&I business and our Agri business and our other lines of business pickup during the year, but a big mistake not to acknowledge the opportunities that we still have in CRE and construction line items on our balance sheet. Matt, you may want to speak more specifically to that.

No, I think that's really good, George. I would point you to our pipeline increase over the end of the year almost a $200 million increase there. Also, we've seen in our approved rate close at 17 basis point increase in our net average rates. So – and another point of our pipeline you'll be aware of 50% of approved rate close in C&I. So you're really seeing our bankers kind of repositioning our balance sheet overall and so the growing curves on where that stays for the remaining part of the year.

So, Gary, if we look at year-over-year so December 31st on December 31st we had a flat first quarter, so 5% growth for the year is going to be more than 5% for the remainder of the year.

All right. Thank you very much.

Thank you. [Operator Instructions] And our next question comes from Garrett Holland from Robert W. Baird.

Thanks for taking the questions. I just wanted to follow-up on the credit outlook and sorry, if I missed this. But is the $28 million provision guidance for 2019 still accurate in light of some of the moving parts of the asset quality and the loan growth?

Yes. We think it certainly is. It would have been that run rate this quarter, if it hadn't been from the $2 million special provision for the acquired budget. So yeah, we're still very comfortable with that, we don't see any overall credit deterioration in our portfolio. In fact, I think we're making substantial progress in managing that portfolio down. Now, if you take a look at where we were at the end of the first quarter in 2018 our asset quality numbers are better than what they were. So we consider this one portfolio in Dallas market to be a blip on the screen and nothing that signifies any deterioration in our credit quality legacy loans.

It's good to hear the focus on the risk-adjusted growth and the credit track record is historically have been great. So just curious if you could provide some more detail for CRE lending? And what LTV or debt service coverage there do you enforce? And have those standards changed at all over the past couple of years?

Yes. Garrett, that's a great question. Yes, so we definitely with the prolonged growth cycle especially in commercial real estate, we've implemented a program now where we are may be heavily concentrating in certain product types, we're still doing business with our good customers, but had a lower loan to value higher DSC to create an overall better portfolio from a credit metric standpoint. And also as you know as George mentioned earlier, the churn on that portfolio is pretty aggressive right now, as our customers are seeing access to the capital markets with long-term rates well below anything we need to be doing. So, overall, I think, our CRE portfolio is in a much better position from a credit metrics standpoint, as we are getting those lower LTVs and better DSCs.

That's helpful. Thanks for the detail.

Thank you. And I'm showing no further questions from our phone lines. I'd now like to turn the conference back over to George Makris for any closing remarks.

Okay. Well, thanks to all of you for joining us today and a big welcome to our Reliance associates in St. Louis. We really look forward to the opportunities we have in what is now our largest single-deposit market. So, congratulations, and we'll do this again three months from now. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.