Simmons First National Corp
NASDAQ:SFNC
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Simmons First National Corp
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Good day, ladies and gentlemen. And welcome to the Simmons First National Corporation's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded.
I'd now like to introduce your host for today's conference, Mr. David Garner. Sir, please go ahead.
Good morning, everyone. My name is David Garner and I serve as Investor Relations Officer at Simmons First National Corporation. We welcome you to our first quarter earnings teleconference and webcast.
Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, Chairman and CEO of Simmons Bank, one of our wholly-owned bank subsidiaries; Barry Ledbetter, President of 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 our Company's outlook for the future. We will begin our discussion with prepared comments, followed by a question-and-answer 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 on our website simmonsbank.com under the Investor Relations tab.
During today's call and in other disclosures and presentations made by the Company, we may make certain forward-looking statements about our plans, goals, expectations, estimates and outlook. I remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed during this call may constitute forward-looking statements, and may involve certain known and unknown risks, uncertainties, and other factors, which may cause actual results to be materially different from our current expectations, performance or estimates.
For a list of certain risk associated with our business, please refer to the Forward-Looking Information section of our earnings press release and the description of certain risk factors contained in our most recent Annual Report on Form 10-K, all is filed with the US Securities and Exchange Commission. Forward-looking statements made by the Company and it's management are based on estimates, projections, beliefs and assumptions of management at the time of such statements, and are not guarantees of future performance. The Company undertakes no obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise.
Lastly, in this presentation, we will discuss certain GAAP and non-GAAP financial metrics. Please note, that the reconciliations of these metrics are contained in our current report filed yesterday with the SEC on Form 8-K. Any references to non-GAAP core financial measures are intended to provide meaningful insights. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
I will now turn the call over to Mr. George Makris.
Thank you, David. And welcome to our first quarter earnings conference call. In our press release issued yesterday we reported net income of $51.40 million for the first quarter of 2018, an increase of $29.2 million or 132% compared to the same quarter last quarter.
Diluted earnings per share were $0.55, an increase of $0.20 or 57.1% from the same period in 2017. Included in the first quarter earnings were $1.3 million in net after-tax merger-related and branch rightsizing costs. Excluding the impact of these items, the Company's core earnings were $52.6 million for the first quarter of 2018, an increase of $30.1 million or 133.5% compared to the same period in 2017. Diluted core earnings per share were $0.57, an increase of $0.21 or 58.3% from the same period in 2017.
Our loan balance at the end of the quarter was $11 billion, an increase of $208 million from the last quarter. During the quarter, our portfolio increased due to the following items; $126 million net increase in loans at Simmons Bank which includes the Southwest Bank loans that merged in the Simmons Bank as of February 20, 2018; $25 million of decrease in our liquidating portfolios of indirect lending and consumer finance and $24 million decrease from seasonal agricultural loan pay-offs. We also had an $82 million net increase in loans at Bank SMB. Our subsidiary banks combined loan portfolio which we defined as loans approved and ready to close was $458 million at the end of the quarter.
On a consolidated basis, our concentration of construction and development loans was 80.9% and our concentration of CRE loans was 268.7% at the end of the quarter. Our Dallas Fort Worth, Denver, National Northwest Arkansas, Oklahoma City and St. Louis markets had exceptional loan growth during the first quarter. The Company's net interest income for the first quarter of 2018 was $135 million, and 86.5% increase from the same period last year. Accretion income from acquired loans during the quarter was $11.3 million compared to $4.4 million in the same quarter last year. The accretion income in the first quarter was approximately $2.7 million more than our original estimates due to accelerated cash flows of acquired loans.
Based on our cash flow projections, we expect total accretion for 2018 to be in the range of $25 million to $28 million with more accretion income during the first part of the year and declining during the latter part of 2018. Our net interest margin for the quarter was 4.17% which was up from 4.04% in the same period last year. The Company's core net interest margin which excludes the accretion was 3.82% for the first quarter of 2018 compared to 3.80% the same quarter of 2017. We've experienced non-term deposit growth of $3.9 billion over last year and $295 million from year end related to acquisitions and internal growth. Total deposits at March 31 were $11.7 billion and the increase of $4.9 billion over last year and $564 million from year end.
Cost of interest bearing deposits increased 41 basis points from the prior year and 11 basis points from the prior quarter. This increase was driven by higher cost of funds at the acquired banks and the pressure of increases on funding costs from the recent Fed rate hikes. We do expect deposit costs to continue to increase throughout the year. Our non-interest income for the quarter was $37.5 million, an increase of $7.5 million from the same quarter of 2017. We had increases in mortgage income, trust income, service charges and in fees due to our acquisitions. Non-interest expense for the quarter was $98.1 million, while core non-interest expense for the quarter was $96.3 million. Incremental increases in all non-interest expense categories over the same period in 2017 are the result of our acquisitions over the last year. Our efficiency ratio for the quarter was 53.2%.
At March 31, 2018, the allowance for loan losses for legacy loans was $47.2 million with an additional $407,000 allowance for acquired loans. The loan discount credit mark was $79.1 million for a total of $126.7 million of coverage; this equates total coverage ratio of 1.14% of gross loans. At end of the first quarter, non-performing assets were $77.7 million, down from $79 million at year end. This balance is primarily made up of $47.7 million in non-performing loans and $29.1 million in other real estate owned which includes $8.1 million in closed bank branches [indiscernible].
During the first quarter, our annualized net charge-offs, total loans were 24 basis points. Excluding credit card charge-offs, our annualized net charge-offs to total loans were 20 basis points. The provision for loan loss during the quarter was $9.2 million compared to $4.3 million during the same period last year. The larger provision was due to the increased loan migration during the quarter from the fourth quarter of 2017 acquisitions which is consistent with previous guidance. In addition to very successful financial results in the first quarter we have managed through other significant advance. I'm pleased to announce that we successfully completed the conversion of Southwest Bank in February and we're full steam ahead on the conversion for Bank SMB planned to be completed over Memorial Day weekend. We're excited about creating a strong organization and are looking forward to continuing to serve our new customers.
Also during the first quarter we completed the sale of certain deposits, loans and branch facilities related to the Heartland Bank assets and liabilities. We continue to explore liquidating options for the few remaining assets. We completed the 2-for-1 stock split effective February 8. In March, we announced our offering of $330 million an aggregate principal amount of subordinated notes due in 2028. We're expecting to use approximately $222 million of the net proceeds to repay outstanding indebtedness and we'll use the remainder for general corporate purposes.
Our capital position remains very strong. At quarter end, the common stockholders' equity was $2.1 billion. Our book value per share was $22.86, an increase of 22.6% from the same period last year, while our tangible book value per share was $12.62, an increase of 2.9% from the same period last year. Asset growth due to the subordinated debt offering caused tangible common equity temporarily net below 8% with the anticipated pay-off of approximately $104 million in parent company debt during the second and third quarters. Along with earnings growth, this ratio will increase to a range of 8% to 9% which reflects the normal operating range for the Company.
As a reminder, now the total assets have surpassed $10 billion, we will be subject to the interchange rate cap, there is established by the Durban Amendment beginning July 1, 2018. We estimate that we will receive approximately $7 million less in debit card fees in 2018 and $14 million less in 2019 on a pre-tax basis.
This concludes our prepared comments. We'll now take questions from our research analysts and institutional investors. I'd like to ask the operator to please come back on the line and review the instructions, and open the call for questions.
[Operator Instructions] Our first question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is now open.
First question here, I'm just curious are you still thinking the expense guidance I think that you gave last quarter, the $92 million, $93 million in 3Q '18; is that still a range that you think is pretty accurate after all the expected cost saves and the conversion on Memorial Day there?
Yes, I would say that range is probably $92 million to $94 million. As you can see we have pretty significant organic growth in the first quarter and if that continues for the rest of the year our third and fourth quarters will be in the $92 million to $94 million range.
And then thinking about the core NIM briefly, you know, 1Q is usually the low for your core NIM but obviously it had a nice bump here and saw a nice jump in the core loan yields; was that primarily just from the full quarter inclusion of the deals or is there anything else unusual going there? And as a result, do you guys expect to alter kind of that $3.70 to $3.80 range on the core NIM or we'll kind of -- or with the sub-deck kind of mitigate any of that additional upside?
Well, obviously the acquisitions had a positive effect on our NIM and we expect that to continue. We are expecting to fund up our Ag lending which often helps the core NIM. However, we're still funding some construction loans that were obligated some 9 to 12 months ago with little over rate, so as those fund up that will be a negative pressure. And you've already mentioned the subject which is also going to be -- maybe a couple of census [ph] points. On that, we have been very conscious of converting our loan portfolio to as much variable rate as we possibly can, so we won't be susceptible to fixed rates over a period of time, it will be more floating rates which is very good. So we would still expect $3.70 to $3.80 to be a good long-term range because the real wild card here is what is it going to cost for core deposits.
We see significant pressure in the market today, taken those core deposit rates up, higher than we really expected new solid results of ours in the first quarter and we would expect something so much similar to that to continue. We're very focused on core deposits as main funding source for our continued growth, so we're going to be a player in that game. And we just don't know exactly what that effect is going to be for the rest of the year.
Sure. And just one last one for me, you mentioned core deposits obviously and you had some really good deposit growth on an end of period basis here in the quarter, was there anything particularly large seasonal effects there that drove the higher core deposit levels or is it that just kind of good customer growth, good growth from the new markets that you're seeing?
We think it's just good growth from the new markets. We gave the new markets new tools to use and that were very effective. Our treasury and management group has done a really good job of getting out in front of some of our commercial customers, bringing some of those deposits into the bank, we're back in the public funds business, at leg of Six Simmons we have 60% loan to deposit ratio, those work quite is important to us but we have great relationship, particularly in some of the world communities that we serve. We're able to go back to those public entities now, have been very successful there and we'll continue that strategy through the rest of the year.
Our next question comes from the line of Brady Gailey with KBW. Your line is now open.
So I recognized you have a core NIM guidance of $3.70 to $3.80; I mean on top of that you'll have the accretive yield, it was $11 million this quarter but you're still gave -- what I think is fairly conservative number of the $25 million to $28 million for 2018, I'm just wondering is it likely that you'll come well on top of that high end of the range of $28 million?
It's not likely that we'll come significantly below that because what we're trying to forecast on regular cash flows based on current pay-offs and renewals, and generally we see accelerated pay-offs where some decision in the process that accelerates that cash flow, I'm not sure what happened in the first quarter. So we -- based on what we know today that $25 million to $28 million is reasonable, but I would say if it goes in any direction that's going to exceed that and not be below that. Now the flipside of that is, as you saw in the first quarter as we experienced those increased cash flows from that migration, a lot of that additional accretion will end up in our provision. We've mentioned this from time to time that our current acquisitions have excellent quality loan portfolios, the more excelled [ph] loan portfolios are much less than you've experienced at Simmons when we had FDIC in Metropolitan Bank marks. So if it's acceptable today as a mark, it's probably going to be very close to what the provision needs to be when we migrate those loans over to our legacy portfolio. So while our revenue may show a spike with regard to additional accretion, that will be offset by additional provision, generally speaking.
That's helpful. And then on the M&A side, I know you are continuing to work to integrate the 3 deals you've done over the last couple of years. When do you think you will be in a point to reengage in the M&A market? And can you just remind us as you're looking to price acquisitions, what you guys consider a reasonable earn back period?
Okay. Well we're having some -- I think very healthy discussions right now with some potential merger partners, we've been very clear that it's not on our agenda in 2018 to close any other acquisitions, we're very focused on making sure that our integration about Southwest Bank and Bank SMB go as planned. We're also very interested in sort of establishing a base performance level for Simmons in the third and fourth quarters, and that's our real focus for the rest of this year. I would say that our financial metrics on deals has not changed, we still believe in earn back period of less than 3 years as appropriate, any acquisition we do must be accretive to earnings from [indiscernible]. So our financial metrics are still pretty solid and disciplined as you wouldn't have installed [ph] for the past 5 years, I don't think that's going to change.
Our next question comes from the line of David Feaster with Raymond James. Your line is now open.
Given the shift towards more variable rate loans and the inclusion of the two deals now. Could you just remind us of the impact that you expect in the next 25 basis point hike on the NIM and what kind of beta you're assuming in those calculations?
Here is what I could tell you; we hope the beta on the increase in our interest rates exceeds the beta on the increase in the deposit rates. So I think we've positioned ourselves fairly well to make sure that happens. As you can see, our beta deposits is close to 50%, our beta on our NIM has been sort of the same, exceeding it by one basis point in the last quarter. So as long as we can keep that trend going up, sooner or later it will balance out but that's our objective is to keep both of them close to the same with loan rates exceeding deposit rates.
And David, we've got almost 50% of the portfolio is variable rate or repricing in the near term, also we've moved the security portfolio to more variable rate. We have 15% -- almost 18% now that are variable rate; so we've been positioning for this over the last 12 months and so as George said, we're going to have deposit increases but our goal is to offset that with the earning asset increase.
And then on loan growth, the growth was pretty good in the quarter. Bank SMB was notably strong but it looks like your pipeline is down a bit from where it was heading in the first quarter. Could you maybe just give us the pulse of the markets and what you're seeing and where you are seeing strength in terms of segment and region? And maybe just whether you think you've actually started to see tax reform translate into additional loan growth or whether it's still just optimism at this point?
I'm going to tackle the tax cut. I don't think we believe that tax cuts having much of an effect on loan demand at this point. I think that still needs to be proved out for the rest of the year. As far as, which markets -- which segments are really strong today, I'm going to let Matt Reddin address that issue. Matt?
Yes. I would say we compete to see good strong growth, as you can imagine now the DSW area is very strong and then also Nashville, middle [ph] Tennessee competes to do very well. St. Louis, Tampa [ph] City, and then also Northwest Arkansas has done really good growth over the last quarter. Your question about our approved rate of close being down, I think that's reflected of two things. We had a really big closing in March on just growth production, so a lot of buildup in the pipeline, but also this shows you the attention and focus on Southwest Banks conversion. Well, we've got that done and now that pipeline is reloading but we're still very optimistic on overall loan growth.
Okay. So that 10% to 12% is probably still good target?
I think so.
Okay. Last one for me, just -- I want to talk about fee income for a second mortgage. It was surprisingly strong and what's typically a weak quarter, trust was a little bit off from what I would have expected. Could you just talk about some of the dynamics that you're seeing in your fee income lines of business and your thoughts on fee income going forward?
Yes, I want to give you comfort, so I'm going to let the accountant handle that question. So I'm going to turn it over to Bob.
David, we had -- as we got into the trust side with the Southwest acquisition -- Southwest Bank acquisition, as we converted them from their trust accounting to our trust accounting system there was a little difference in the accounting, so there was a one-time adjustment of about $600,000, a negative adjustment in the first quarter. Basically this year we'll have 11 months of income versus 12 months and then we'll be on core; so it's really just part of the process, you have some things moving favorable, some negative but as we converted there was a difference in our trust accounting versus theirs.
On the mortgage side, it was the opposite side. We had a decent mortgage revenue for the quarter but the reason we were up about $700,000 of it or so was related to our mandatory delivery program we've put in place; and as you get into that program there is a fair value adjustment on the front-end from how you do business going forward. So likewise, there was a $700,000 one-time benefit or so. So those two kind of offset each other, just happen to be relatively close an amount, but as George said, it's just an accounting change when you're going into new line of business or conversion from one trust system to another trust on the way we book.
So overall, both business lines were relatively close to their normal expectations from this quarter to the last quarter.
[Operator Instructions] Our next question comes from the line of Will Curtis [ph] with Piper Jaffray. Your line is now open.
George, I know you mentioned that maybe in response to another question and also kind of just your comment about deposit cost continuing to increase; can you just provide a little bit of more color on what you're seeing in your markets and from a competition and pricing perspective and just kind of how you guys are countering or reacting to what's taking place?
I'll touch and then I might ask Marty Casteel to give a little more color on that. We're really seeing in the metro markets a real aggressive approach to deposit pricing and that's in all segments; we're talking about money markets, we're talking about CDs. We're not about our sales and focusing on deposit growth, that is a real premium in today's market as you probably know and principally in the metro markets it's a real issue. So that's one real benefit to our footprint is that we have deposit sources outside of metro market so that we don't get caught up, only it having dependent on those markets for our deposits that Marty may want to talk a little more granularly about what we're seeing.
George, that's exactly right on the metro markets and I would tell you that just anecdotally we're seeing similar aggressive approaches for deposit acquisitions from some of the community banks now. You're back to seeing right ads in the Sunday newspapers which I think is a good indication that people are aggressively trying to acquire deposits but we're seeing rates, CDs, short-term and longer term CDs running anywhere from 2% to 2.40% range, we're seeing money market accounts also aggressively pressed in newspaper right ads in the 1.50% to the 1.75% range. So we are seeing signs of more aggressive pricing by competition.
And then the last one from me, I know you guys mentioned and I just had a hard time hearing; but the full quarter impact from the sub-debt on the core NIM?
This quarter no impact at all, the sub-debt wasn't winning bucket [ph] to the last 3 or 4 days of the quarter, so really no impact at all on the NIM. We'd expect it will be a 2 to 3 basis point impact on the NIM for full year impact.
Our next question comes from the line of Matt Olney with Stevens. Your line is now open.
Going back to that sub-debt that we just discussed, is that at all impact your overall interest rate positioning as you guys move forward? It looks like you changed some of the debt that's falling in rate from over fixed rate?
Matt, as you know, we issued about $330 million in sub-debt, it was a five-year -- on 5% five-year fixed, then it moved to floating, I think 2.15% over LIBOR after that for the remaining five years. With the $330 million, we'll pay-off roughly $220 million of debt, we did pay-off about $110 million or $115 million in the first quarter, the line of credit that we had open and also some notes that we had downstream. When you look overall, most of the troops [ph] that we'll be paying off -- there is a little bit of a negative arbitrage today but as rates move up, we'll be almost at breakeven and then we think we're well positioned for where it looks like rates are heading in the long-term. So it will be a little bit of a negative impact on it but overall most of this will give us interest rate protection over the next couple of years on some of that debt.
And then going back to the operating expenses, I appreciate that the third quarter guidance calls for $92 million to $94 million of operating expenses. Remind me, are we going to trend down towards that number in 2Q like in the $95 million range or -- and just remind me again with the investments you're making off -- that -- make that elevate in the first half of the year?
Well, of course we have payroll expenses in the first quarter that elevate first quarter expenses, all the payroll taxes pretty well hit their net period of time; that will go away as we get into the second quarter. So I would say, yes, we would expect that our second quarter expense run rate will be below our first quarter; there were just several early in the year expenses that won't reoccur during the year.
And then on the $79 million of discount accretion, do you know how much of that's going to be accredible [ph] versus non-accredible [ph]?
Of the majority of the -- yes, I'm trying to think back on that question but most of it is accredible [ph], you know, the two acquisitions had very few impaired loans and so the non-accredible portion of that is very small. I don't have that dollar amount but it's a small piece of it.
And my last question I guess would be on the OREO and full closure expense. I'm trying to figure out if that's going to trend down throughout the year? I think you know there is about $8 million that you have of OREO or closed branches that you're beginning to write-off and consequently where we see that expense come down overtime as well? Thanks.
I will say that our closed branches -- we would expect to be breakeven as we liquidate those. The other pieces of OREO, particularly they are all land pieces, that's good guess. We believe we have them marked appropriately but we've had surprises on both sides, we've been able to liquidate some OREO at above book value and then we've had to take some additional write-downs. And let me give you the examples, so we have some raw land that we had under contract but the city would not cooperate with regard to severances to their city code and therefore the contract went away and we had to mark down a piece of OREO by another $0.5 million. So those things, we just work through as we get there. We believe that our OREO portfolio is marked appropriately today, particularly from a branch standpoint, we don't think that we're going to be taking any additional losses.
[Operator Instructions] I'm not showing any further questions at this time. I would like to turn the call back to Mr. Makris for any closing remarks.
Okay, thank you. And I just want to take this opportunity to thank all of the associates at Simmons for a lot of hard work that's gone into a very successful quarter. We went through several of the elements of non-banking business and we look for during that quarter of stock split, sub-debt offering and conversion of Southwest Bank and planning for the conversion of Bank SMB and the folks responsible for all that have their regular day jobs and doing [ph] what they've accomplished in the first quarter. It's a monumental task and we just appreciate all their efforts and I just wanted to make that known on this call today.
Thanks to all of you for joining us today and we'll look forward to doing this again about three months from now. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.