Simmons First National Corporation (SFNC) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Simmons First National Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I will now like to hand the conference over to your speaker today, Mr. Steve Massanelli. Thank you. Please go ahead, sir.

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 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 was to discuss the information and data provided by the company on 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 a 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 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 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, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to 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 website, simmonsbank.com.I will now turn the call over to George Makris.

Thanks, Steve, and welcome to our first quarter earnings conference call.I'd like to begin today's call by thanking the 3,000-plus Simmons associates for their commitment and dedication during these very trying times. Many of our associates could not work from home because they were serving our customers who needed our help. A special debt of gratitude goes to our branch, call center, and digital banking support staff who are here every minute to fulfill the needs of our customers. Later, I will mention the efforts of our bankers as they address the credit needs of our customers during this crisis. I'm very proud of our team and their demonstration of our community banking values.In our press release, we reported net income of $77.2 million for the first quarter of 2020. Diluted earnings per share were $0.68 for the quarter. Included in the first quarter earnings was net income of $3.4 million related to a gain on the sale of our branches in South Texas and merger related and branch rightsizing expenses. Our return on average assets was 1.5% and our efficiency ratio was 56.4% for the first quarter.As of March 31, 2020, total assets were $20.8 billion. Our loan balance was $14.4 billion and our deposit balance was $15.6 billion. During the quarter, we moved $115 million of loans and $58 million of deposits held for sale based on our agreement to sell our Colorado branches which we expect to close in the second quarter. Our loan pipeline remains steady at $313 million at the end of the quarter excluding payroll protection program loans.In response to the economic hardships associated with the coronavirus pandemic, through April 16 we have completed or in the process of modifying over 3,000 loans, totaling over $1.8 billion. In addition, as of that time, we have obtained approval from the SBA for over 3,100 PPP loans totaling over $725 million.During the first quarter, we sold approximately $1 billion of securities and recorded gains totaling more than $30 million. At March 31, our cash position was $1.7 billion which were used to fund the PPP loan demand. As those loans payback or are forgiven, we expect re-embezzled funds in our securities portfolio.Our net interest margin for the quarter was 3.68% and our core net interest margin which excludes accretion was 3.42%. We continue to re-price our deposits in line with the substantial rate cuts during March and our index loans totaling approximately 50% of our loan portfolio have re-priced.During the first quarter we repurchased approximately 4.9 million shares of Simmons stock and an average price of $18.94. No shares have been repurchased since March 31. The remaining authorized repurchase balance is $76.5 million and the current termination date of the program is October 31, 2021. Market conditions and our capital needs will drive decisions regarding additional future stock repurchases.We adopted CECL on January 1, 2020. As of December 31, 2019 our allowance was $68 million or 0.47% of total loans. After the CECL related adjustments on January 1, 2020 our allowance was $220 million or 1.52% of total loans. During the quarter, we added $23 million net of charge-offs to the allowance which totaled $243 million or 1.69% of total loans on March 31.In addition, our reserve for unfunded commitments was $29 billion at quarter-end. Our capital remains very strong. Our total risk based capital ratio was 14%. Our common equity Tier 1 ratio was 11%, while our Tier 1 leverage ratio was 9% at the end of the quarter.This quarter, because of the extenuating circumstances associated with the pandemic, we have published our quarterly investor presentation contemporaneously with our press release including the supplement section specifically addressing certain income statement and balance sheet statistics and commentary. I would encourage you to go to simmonsbank.com and access this information under our Investor Relations tab. This information can also be found at sec.gov.On behalf of Simmons Bank, our customers, and communities we serve, I would like to thank our health care professionals along with our federal, state, and local officials who have all responded quickly and with great care to the challenges presented by the pandemic. While full impact of the coronavirus pandemic remains uncertain, I believe the timing of a return to normal is a critical factor but even more interesting will be the new normal.Based on the programs available to the marketplace today, I suspect we will not fully understand the longer-term effects of this crisis for several months. We are prepared to monitor the progress during that time and believe we as a company are well-positioned to help our customers and communities as we come out of these unprecedented times. Once again, I encourage you to access more information on our website.I will now turn the line over to our operator and invite questions from our analysts and institutional investors.

[Operator Instructions] I show, our first question comes from Woody Lay from KBW. Please go ahead.

Just a question on the technology side. It was great to see 11% increase [indiscernible] the banking app. Just wanted an update on how the technology has performed after all the investments in 2019?

Well, I would say that it’s performed very well. In fact, our mobile app has a 4.7 rating in the apps store. So we’re pretty proud about that. We're going to continue to enhance our mobile offerings. So we're going to continue to roll in new optionality into our mobile app. And I think the chart that you may be looking at shows the trend away from branch transactions into digital transactions which is pretty pronounced especially during this period of time.Now, we expect that there will be permanent consumer habit changes as a result of the economies' locked down. And we think that one of them is going to be the way they access banking services. So, we're taking a good hard look at how we continue to enhance our digital offerings to our customers not only consumer but business in anticipation that they will use our branch locations less for typical deposit transactions. So I would say, we’re really pleased with the way things are going and better things to come.

That’s great color. And then, so looking at the new customer habit, do you think you [feel branch to right-sizing further] in 2020 or is it more or less a 2021 event?

Well, as you probably know, we've already announced that we're going to close 12 branches in the second quarter. We're continuing to look at other possible branch consolidation throughout our footprint. I would say that it's possible that some other consolidation could happen in 2020. It could roll in first and second quarter of 2021. But we do believe that other branch consolidation is probably going to be borne out by our customers’ utilization.

All right, and then last from me, just with the impact of COVID [do you expect this to impact I mean the cost saves with the Landmark] acquisition?

That was breaking up, I couldn’t.

Yes that was - your call is breaking up, so we’re having a hard time. It was a question on Landmark and the COVID cost savings related to the COVID-19.

Yes I mean will be impacted?

No, not at all, that conversion happened on February 14 and everything's moving along there very well.

Yes.

Good thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Matt Olney from Stephens, Inc. Please go ahead.

You noted in the slide deck that the ACL ratio is now a pretty big jump that the 169 as a percent of overall loans. Can you just talk about where you expect this to go based on where we sit today? Thanks.

So Matt, we’ve obviously spent a lot of time talking about that. I would tell you the one area that over the long-term that gives us a little pause would be our energy portfolio. I mean, I think we've got quite a bit of coverage now. And quite honestly, most of our energy production is well hedged through 2020 and quite honestly a lot of it through 2021. So the current volatility in oil and gas prices is not that concerning to us today.But if it continues, we're going to have probably more exposure in our energy portfolio. We have taken a look at the rest of our portfolio. As you probably noted, we have already modified 20% of our outstanding loan balances. And we work with those customers one on one to make sure that we understand their game plan going forward. And just give you a little more color on our modified loans, we had two options.One was six months interest only. The other was defer payment for three months then interest only for another three months so both of them had a six-month deferral plan. When we're dealing with our customers, we have to make sure they're currently in compliance with our loan agreement. We take in consideration of payment history, their available liquidity, their financial performance prior to the crisis and their emergency business plan along with projections when they come out of the crisis.We have no cash out, dividends or distributions allowable in any of the loan modifications, and no rate adjustment. So, we feel like our customers should be all in before we modify their loan agreement. And I think that's a generally accepted good business practice, and our good customers certainly understand that. So, I would tell you that we're fairly comfortable where we are today.And with the loan modifications and with the PPP liquidity that we're injecting into our customers’ balance sheets it's going to be a few months before we can really tell what the long-term effect is going to be. Not to mention, when we start coming out of the lockdown. I mean, that's all over the board today. So in Arkansas, as you know we've had really good success with planting that curve.It could be that we start coming out in Arkansas early to mid-May. What that means, we're not exactly sure yet. But I mentioned this and I want to emphasize it once again. Through the PPP program, we are going to inject more than $1 billion of liquidity that has the potential to be forgiven into our customers’ balance sheet. So that's, as far as we're concerned, a better scenario than we were looking at early in March.

Okay, that's great commentary, George. I appreciate that. And one of the big variables that you mentioned what was the energy portfolio. And I think your slide deck has some great details in there about the anticipated payoffs for the remainder of 2020. I'm curious what consideration are you giving to stress in the industry within that payoff amount?And you mentioned the borrowers have a healthy level of hedged production that's great. Can you put some numbers behind that as far as the - what percent of hedge in 2020 and then how much of that fall to in 2021? Thanks.

Matt do you want?

Yes.

[Start with that].

Matt, this is Matt. A couple comments there on the hedging. As far as 2020, it’s about 60% are hedged through of true. Now, you got to understand when you look at those numbers in the deck and you see the overall $380 million. Of that there is really $220 million that's through production, that's where you would have hedging in place. And of that, that 60% is on average hedged for 2020.And what's important also, remember once you get underneath that production of 60%, the remaining 40% is made up of smaller production loans that have - personal guarantees behind them that is essentially like a hedge because they had to wherewithal to make those whole. Now, in 2021, well I have to get you that number but 60% for 2020 and then a lot of those 6% moves into 2021.

Matt just a little more information, the weighted average swap price for oil is $55; for natural gas it's $2.66.

Okay that's great color. I appreciate that. And then I want to switch gears on the deposit cost. It sounds like you guys have some nice momentum bringing those costs down in the next few quarters. Is there any color you can give as far as spot rates that you see more recently? Just trying to appreciate where this could land over the next few quarters? Thanks.

Matt, I’d just tell you we worked on deposits pretty hard starting in early March. I would expect - we had a nice pick up in our rates or lowering of our rates for the first quarter. And I'd expect to see that continued into Q2 and into the balance of the year.So - and we're seeing good deposit growth from the end of the quarter obviously with stimulus checks coming in, PPP loans coming in. We're seeing good loan - I mean, deposit volume coming on also from quarter end. But our expectations would be that we'd have a nice pick up in the second quarter.

Matt, I'll just tell you this, I'll be disappointed if we don't manage our deposit cost in line with our loan pricing. So we were pretty successful in the first quarter doing that, and I would expect that we will be successful in the second quarter keeping that spread pretty neutral.

Yes. And one other number I'd give you, too, that we didn't have in the release is about 80% of the variable rate loans repriced in the first quarter. Now granted all the deposit and loan repricing happened in - basically in March, somewhere in that month, but 80% of our loan - variable rate loan pricing happened in the first quarter. So we'll have another 20% lagging over the next couple of months to the balance of the year. But the deposit pricing will pick up obviously the transactions very quickly. The time will be lagging over a period of time.

Matt, I may just mention one other factor in our deposit pricing. As we have acquired banks in the past, we've been very cognizant of some deposit products that they had in place and we had deposit pricing all across the board. We have to the best of our ability at this point in time standardized that deposit pricing, so we're going to see a downward momentum in a lot of those different markets.

Understood. Okay. Thanks for that. And then just lastly, it sounds like the liquidity build towards the end of the quarter, it sounds like the excess or the higher the liquidity levels that will continue at least for the next few quarters. Am I interpreting that correctly?

Well, so our liquidity was about $1.7 billion in cash. We’ll fund $1.2 billion in PPP loans. We are actively reinvesting now in our securities portfolio. And as those PPP loans pay off, we will also invest that back into the securities portfolio. So, we're finding our own PPP loans right now. I know there are other programs available out there but that's what we've chosen to do, just take care of our own business and we think that's going to work out well.I would say that our current liquidity level is higher than we would ever have under normal circumstances but these aren't normal circumstances and we believe lots of liquidity is very, very important right now. We started building that because we didn't know if there was going to be a run on deposits. Before the stimulus was announced, we knew that this is - we're going to have some issue.So, we tried to be prepared for that. If we stay on lockdown for a period of time, even the stimulus money is not going to stem the tide. So, we've got to always be aware of the risk associated with our customers needing to access their deposits and liquidity is why we’re going to do that.

Okay. That’s very helpful. Thanks for the commentary and thanks for the slide deck. That was very helpful.

[Operator Instructions] I show our next question comes from Gary Tenner from D.A. Davidson. Please go ahead.

[indiscernible]?

Yes, Gary. As George mentioned, when we got early into March, we didn't really know what stimulus plans were going to come out by the government and we decided early on that we were going to take care of our own liquidity issues if they did come up. We didn't have any idea what was going to be out there, a lot of unknowns.So when the 10-year hit below 40 basis points and 35, we decided it's time to take advantage of the price, the gains that we had in our security portfolio and de-risk the balance sheet basically by taking $1 billion of securities and putting it into cash, and a big chunk of that was in mortgage backs and CMOs, a small portion of it, a couple of hundred million was in munis. So, we selectively pulled some out there, picked up 30-sub million dollars in gain, built up a $1 billion in liquidity so that we were able to take care of ourselves.Well, since that time, the government came in, has put in a lot of stimulus plans. So, towards the end of the quarter, we came back and said, well, we're going to use this cash and liquidity to - as these PPP loans fund up. And, as you know, those yields on those were, first, the rates 1%. But when you put that loan fee and it gets accreted over the life of those loans, we calculate those yields are going to be anywhere from 4% to 6%, 7% depending when they are forgiven or paid off.Those - and I would tell you also those rates - the effective yield is what I would call is going to be very lumpy. You're going to have some periods that's 3%, 4%, 5%. If they're forgiven or paid off in the second and third quarter, you're going to have substantially higher rates as those fee income is recognized during that period.So, for us, it was very good timing. We can then choose to go back into the securities portfolio back in the back side of this, hopefully, when the markets more stabilized down the road. But it gave us a lot of optionality that we controlled our own destiny instead of relying on somebody else.

[indiscernible]?

Well, our intention is to exit all $71 million of that. As redeterminations come around, that’s going to be the logical time for us to determine whether or not we can exit. And quite honestly, you’ve seen on our slide deck what we expect to exit in Q2 and Q3. I will tell you, last quarter, most of that $163 million was in Q2. So, we think we’re very realistic about our opportunity to exit some of those loans, but our intention is to get out of every national credit we’re in the energy portfolio.

[indiscernible]?

Yes. You bet. So, $33 million increase in energy loans including the Southwind royalty bankruptcy which is something you were probably aware of. Way too early for us to tell exactly what that exposure is there. We had $5 million in consumer nonaccruals. And then during the first quarter, we converted Landmark Bank into Simmons Bank. So, all of their loan portfolio fell into the appropriate categories in our loan portfolio. So, all of their non-accruals that were in our acquired bucket previously are now in our regular loan portfolio. So the bulk, the vast majority of the increase were in those three categories.

Yes and as you know under CECL, there no longer is an acquired loan bucket. So and how it was reported before only the acquired loans were not part of our - nonperforming loan bucket. So, now it’s all in the same playing field, they're all in there and it's reported because now the ACL covers all of loans instead of just legacy loans.

And so our next question comes from David Feaster from Raymond James. Please go ahead.

I just wanted to get your thoughts on capital. You’ve got a lot capital, I appreciate the commentary about preserving capital and putting the buyback on hold [indiscernible] but I guess how do you think about capital. What do you think you're comfortable, what would you want to have to grow to before coming to the repurchase program and just any thoughts on that topic would be helpful?

Yes I appreciate those and so on capital there’s - I always look at it two different ways. What is your TCE and your equity capital and then what is your regulatory. On the regulatory side, our leverage ratio was 9%, our Tier 1 was 11% and total risk base 14%. So we're very comfortable with those ratios especially given this quarter that we implemented and adopted CECL that was $120 million drag on GAAP capital.Fortunately, the regulators gave us the five-year phase-in which we obviously took advantage of that. So it will give us a period of time to grow into that for regulatory purposes. And as we also noted we repurchased some $100 million worth of stock during the quarter. So they have a period like that and to maintain those capital levels we were very happy and were very pleased with our capital levels today.The stock buyback plan as we mentioned, we haven't repurchased since March 31. We did buy quite a bit in the first quarter due to the pricing there. And if you look at that when we looked at it and said, basically, this repricing, we have less than - right at a year earn back period on that - buying back those shares. That's about as good as you can do on a stock repurchase plan.We have not ceased or stopped the stock buyback, but we have not bought any and we'll just keep looking at it and decide basically look at economic times, see where we are there. We’ll look at our capital structure, our balance sheet structure and we'll just continue to monitor it. But right now, we have not purchased any and don't have any plans in the near term, but we'll just keep monitoring it.

Okay, that’s helpful. And then just on loan growth, I’m just curious what does your loan pipeline look today obviously [indiscernible] talking to some people that all activity is going to come to a halt. But exclusive of the PPP program, how do you think about loan growth and just most of your customers? Do you see this as an opportunity to gain some share and actually drive growth or would you expect balance to be flat to down?

So David, I'm going to set Matt up by talking a little bit about some restrictions that we've put in place recently on new loan consideration. And that is we think it's time to strictly adhere to our credit policy. It’s in - it’s policy for a reason. And the reason is in times like this, it shares risk appropriately with our customer. The second thing is we are very interested in shortening maturities.With the uncertainty in the marketplace, we're not willing to go out too far and I would say more than a year except on certain types of loans like equipment loans and things like that which make perfectly good sense. And then, we’re restricting cash out loans. So where we have customers who want to take money out of their business, put in their bank account. We don't think that's an appropriate action for us to participate in during these uncertain times.So knowing that that's sort of our philosophy currently I'm going to turn it over to Matt, then let him talk about how that’s translating into what's actually happening on the street.

Yes thanks, George. David, I tell you if you look at our pipeline approved rate close at while it says $312 million. Really since that point in time even before we really started having conversations with our bankers and our customers, we had a fall out taking that to about just over $200 million. Of the $200 million and approved rate at close bucket, we feel like that - most of that bucket will close out.However, on new opportunities, we are pushing the pause button and adhering to higher underwriting guidelines around specifically commercial real estate on values. We're not going to be putting our neck out there too far on any new projects unless it makes complete sense and it’s a customer we know very well. So I wouldn't - we don't have big expectations on loan growth in any way until we see some clarity on what the economy looks like moving forward.And your question regarding PPP loans I would say, a vast majority some 95% is on our existing customer. But I would say, we have been known SBA preferred lender in the marketplace. And so, there was a flight to quality when we stood up our PPP program and I absolutely believe there will be some new customer acquisition through that. But quantifying that to a big number, I would not because 95% or more were existing customers.

Okay. And on the PPP program, just a - I have one quick one. Do you expect those fees to flow through NII? Or are you going to hold those loans for sale and flow through fee income?

Yes they’ll flow, David, through the NII and they’ll be over - accretive over the life of the loans. And so how that will get set up under the accounting rules is they’ll be accretive like this is a two-year loan. And then when they get paid or forgiven in - let's say, it's July or June, July, August, whatever timeframe they come in, the balance balances paid, there’ll be a pro rata amount of that fee taken to income.That's why I say in the months that were - they’re paid, that yield on those loans is going to be very lumpy. So we could be this period of time that we're at 3%, 4%, 5%, 6% on the yield and you get that one month, we may see a much higher yield in that bucket.

Okay. Last one from me just any thoughts on the Ag portfolio? I know this is a core competency for you all. What are you hearing from your customers is this an opportunity for you to gain share just any comments on that book? Thanks, guys.

Good question on the Ag book. I would say so far, our Ag customers are very focused on what the stimulus package which is still being defined for our Ag customers. So that's going to - if you look at our book right now, you'll see we're, over last years, same time, same quarter, about $37 million, and that's from our Ag customers holding onto their crops due to the price - severe but significant decrease on prices.So they're very conscious of what that stimulus package will do for them. We've also had them - they were able to participate in the PPP loans. We had over 50 Ag farmers participate in the PPP loans. So, from that perspective, we feel good where they’re at but they are very anxious to see what the stimulus package would be for new customer acquisition.I would say there are some of that there, but also everyone’s a flight to quality where they know they have the ability to gain capital. So, I don't think we have any expectations on significant Ag growth from new customers in this current climate.

Thanks guys.

Thank you. I show no further questions in the queue. At this time, I’d like to turn the call back over to Mr. George Makris, Chairman and CEO, for closing remarks. Please go ahead.

Well, thanks to all of you for joining us today. These are certainly unusual times and we feel very good about our preparation for weathering the storm. It's been the tradition Simmons Bank that as a conservative community bank we are normally positioned well during times like this. So, we think we are - again, we think we're putting policies in place to make sure that that happens. We appreciate your support and your time today. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.