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 Second 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 be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.
I would now like to turn the conference over to you Mr. Steph Massanelli. Sir, you may begin.
Good morning, and thank you for joining our second quarter earnings call. My name is Steph 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 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 with prepared comments, 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 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 than 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 U.S. Securities and Exchange Commission.
Forward-looking statements made by the Company and its 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 Steve and welcome to our second quarter earnings conference call. In our press release issued yesterday, we reported net income of $53.6 million for the second quarter of 2018 an increase of $30.5 million or 132.2% compared to the same quarter last year. Diluted earnings per share were $0.58 an increase of $0.22 or 61.1% from the same period in 2017.
Included in the second quarter earnings were $1.1 million in net after-tax merger related and branch right-sizing costs. Excluding the impact of these items, the Company's core earnings were $54.7 million for the second quarter of 2018 an increase of $27.9 million or 104.3% compared to the same period in 2017.
Diluted core earnings per share were $0.59 an increase of $0.17 or 40.5% from the same period in 2017. Our loan balance at the end of the quarter was $11.4 billion an increase of $379 million from last quarter.
During the quarter, our portfolio increases included $201 million increase in real-estate loans, $131 million increase in commercial loans, $58 million increase in seasonal agricultural loans, $12 million increase in other loans and a $23 million decrease in our liquidating portfolios of indirect lending and consumer finance.
Our loan pipeline which we define as loans approved and ready to close was $612 million at the end of the quarter. On a consolidated basis, our concentration of construction and development loans was 86.6% and our concentration of CRE loans was 280.8% at the end of the quarter. Our Dallas Fort Worth, Denver, Nashville, Northwest Arkansas, Oklahoma City and St. Louis markets all experienced good loan growth during the quarter.
The Company's net interest income for the second quarter of 2018 was $136.8 million a 78.2% increase from the same period last year. Accretion income from acquired loans during the quarter was $10.1 million compared to $4.8 million in the same quarter last year. The accretion income in the second quarter was approximately $3.7 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 of approximately $30 million. Our net interest margin for the quarter was 3.99% compared to 4.17% previous quarter. The Company's core net interest margin which excludes the accretion of 3.70% for the second quarter compared to 3.82% previous quarter.
The sub-debt issuance at the end of the first quarter had a five basis points impact on our second quarter margin. The timing of existing subject prepayment had an additional five basis points impact. We have experienced long-term deposit growth of $3.8 billion over the last year and $145 million from last quarter related to acquisitions and our focus on internal growth.
Total deposits at June 30th were $12 billion an increase of $4.8 billion over the last year and $296.5 million from last quarter. Costs of interest bearing deposits increased 10 basis points from the prior quarter, this increase is driven by the pressure of increases in funding costs from the recent Fed rate hikes. We do expect deposit cost to continue to increase.
Since last quarter the Federal Reserve Board increased Fed Funds target rate by 25 basis points. Company's deposit beta was 40% and the core loan beta was 36%. Looking back to March 2017, the Fed has increased target rate by 100 basis points. The Company's deposit beta was 51% and core loan beta was 45% during that period of time.
Our non-interest income for the quarter was $38 million an increase of $2.3 million for the same quarter of 2017. We had an increases in trust income, service charges and in other phase due to our fourth quarter 2017 acquisitions. Non-interest expense for the quarter was $98.5 million while core non-interest expense for the quarter was $97 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 quarterly target non-interest expense run-rate is approximately $95 million. Our efficiency ratio for the quarter was 52.7%.
Income tax expense was lower for the second quarter due largely to discrete tax benefit related to tax accounting for equity compensation. At June 30, 2018, the allowance for loan losses for legacy loans is $51.7 million with an additional $2.1 million allowance for acquired loans. The loan discount credit mark was $68.3 million with the total of $122.1 million of coverage. This equates to a total coverage ratio of 1.1% of gross loans.
At the end of the second quarter non-performing assets were $75.9 million, a slightly decrease from the first quarter. This balance is primarily made up of $44.9 million in non-performing loans and $30.5 million in other real-estate owned, which includes $7.2 million in closed bank branches held for sale.
During the second quarter, our annualized net charge offs total loans were 17 basis points. Excluding credit card charge offs, our annualized net charge offs to totals loans were 13 basis points. Provision for loss during the quarter was $9 million, which includes an increase due to strong legacy loan growth and an increased loan migration during the fourth quarter of 2017, which is consistent with the previous guidance.
I'm pleased to announced that we successfully completed the conversion of Bank SMB in May and we are excited about turning our focus to creating a stronger and more efficient organization as we expand all of our product lines into the new markets.
Our capital position remains very strong. At quarter end, the common stockholders' equity was $2.1 billion. Our book value per share was $23.26, an increase of 21.4% from the same period last year. Our tangible book value per share was $13.05, an increase of 5.6% from the same period last year.
In March, we announced our offering of $330 million of aggregate principal amount of subordinated notes due in 2028. As of June 30th we have paid off $173 million of outstanding indebtedness and we will pay another $50 million in the third quarter.
Asset growth due to the subordinated debt offering in the time related to paying off approximately $104 million in parent company debt, reduced tangible common equity six basis points at quarter end.
During September, we plan to close to 10 of our branch locations. We continuously evaluate our branch network to determine the locations that are meeting the gross needs of our customers. We look at many factors including market and economic considerations before making the decisions close branches.
Our brick and mortar locations serve the important customer need. However, our customers continue to take advantage of the convenience of our digital channels that we provide. We will continue to look forward to invest in new and innovative channels to meet the ever changing needs of our customers.
As a reminder, now the total assets have surpassed $10 [million] (Ph), we retain subject to the interchange rate cap, as established by the Durbin 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 will now take questions from our research analysts and institutional investors. I will ask the operator to please review the instructions and open the call for questions.
Thank you. [Operator Instructions]. And our first question comes from the line of David Feaster from Raymond James. Sir, your line is now open.
Good morning guys. I appreciate the updated expense guidance. Could you maybe just talk about what kind of drove the increase from 92 million to 94 million guidance we talked about before? And may be remind us how much of the cost savings from the two deals are in the run rate and how much of that $25 million digital build out that we talked before is in that run rate?
David, I will attempt to address them and I will let Bob pipe in a little bit. One of the things that I think is important to realize is that last September, October is we got deep into the budget process. We just prepared to close on two large acquisitions of Southwest Bank and Bank SMB.
During that period of time, over the next nine months until today, we have converted both of those banks. Our assets have grown from 9.5 billion at the end of September of 2017 to 16.1 billion today. What is important to note about that is that 1.6 billion of that came from organic growth during the time that we were integrating two large banks.
So whole 10% of our entire asset base today has come from organic growth since September 30, 2017. And I think that's pretty impressive number, and what it points out is that our original expense base needed to be expanded for that growth. We have no problem today attracting and hiring really good producers in every market we serve and we will continue to invest in that production throughout our entire footprint.
So early this year, before we understood what the organic growth potential was going to be and what the actual results were, we thought a run rate between $92 million and $94 million was reasonable. Today, we believe $95 million is a reasonable run-rate.
Most of the cost saves from those acquisitions have already been achieved. We have a few like servants agreements and things like that that will be in the third quarter, but it's not going to be a significant number. We believe we manage that $95 million of run-rate for the rest of this year and we will evaluate our organic growth and see what we need to invest to support that.
I would say that our IT spend is right on track. This year we have just get ready to put the switch on the complete new accounting system and new HR system that will affect all 2600 of our associates.
We are going to a work day product and put it - effort that's been given all year on that. We have got other transformational projects in IT round that will start in end sometime in 2019. So we believe all of that's right on track.
The difference in our original expectation on expense and where we are today is pure organic growth.
Okay, that's very helpful. I appreciate that. And we talked last quarter about your desire to lead more syndicated credits and use that to help drive deposit growth. Could you talk about the success that you have had and maybe how much of your growth in the quarter was mixed and how many mix you have led and maybe your thoughts going forward.
Yes, so answer is the zero, or the growth as a result of that, we just put that program back in place in the last 30 days. So Matt Redd is here with us now, I will let him talk a little bit about our expectations with regard to our corresponding banking group.
Sure, thanks George. The Corresponding Banking Group, the strategy there we will be selling down participation for our loan growth which we have as opportunities, in return we should be getting deposits from those corresponding to partners. We are not leading any syndication, we are not purchasing loans relating that effort to generate deposits.
Okay. Last one for me, we have kind of talked about the construction portfolio waying on the NIM. Could you maybe quantify the drag in the quarter and how much longer that's going to be? And then maybe just on the core NIM more broadly. I know the timing of the sub-debt negatively impacted about five basis points, but is that 370 to 380 range exclusive of that five basis points it looks like you are kind right in the midpoint of that. Is that still a good range for it going forward?
Yes, it is. I might let Matt talk in a minute about our construction portfolio. But I don't think that's a major factor one way or other today, because we are looking at new construction loans at higher rates today, so they sort of counter-balance each other.
Let’s talk about the NIM a little bit, because last quarter we were at 382 million. As you know we issued $330 million sub debt at the end of March, so at the very end of the quarter. $220 of that was to refinance the current debt. So we have added $100 million or so to us more than we did but that’s at a fixed price of 5% for the next five years.
We think that’s good long-term strategic move. So that $100 million of additional permanent financing if you will, will be a drag on our net interest margin. So the timing - and that’s a five basis points we referred to earlier.
The other five basis points was because we were not able to pay off all of the trust preferred immediately, we had going to the next interest payment period which occurred at the end of June or a portion of it and actually some of it is going to be in July. So we felt full burden of that extra debt during the second quarter that we would have paid off if we could have. So that’s the other five basis points.
So we believe that 3.75 would have been our normal margin considering the permanent debt effect. So we still think 3.70 to 3.80 is a range that we feel comfortable with.
Okay. Great, thanks guys.
Sure.
Thanks David.
And our next question comes from the line of Brady Gailey from KBW. Your line is now open.
Hey good morning guys. So the 10 branch locations that will be closed in September, I’m guessing that would save expenses of around five million to seven million on annualized basis starting in the fourth quarter. May be just talk about the cost saves that we could expect to see in 4Q from those branch closures?
Yes, this is Bob. I would tell you these are smaller branches, so you are not running at a $500,000, $600,000 expense run rate like the bigger branches run at. These are running more at $200,000 to 250,000 to $300,000. So they are low performing branches and they have less overhead in there.
Two of the 10 are mobile branches which have very negligible operating expenses, just kind of a cleanup that we need. So I would say more on annualized basis in the $2 million to $2.5 million range on the expense side. We don’t think there will be much attrition related to these because they are relatively close to other locations.
Okay, alright. And then about three weeks ago, you all became subject to Durbin. I know we have talked about Durbin in the past being roughly at $7 million impact for the back half of this year, $14 million for next year. Is that still the right way to think about the decline in fee income that’s starting this quarter?
Yes, we actually got to experience it on day one on July 1st and we got it rather right towards the end of June that kind of made it all real. But right now our best estimate is in that $14 million on annualized basis, $7 million for the balance of the year. We will have a better idea when we get to the end of September what actual performance.
Those are all based on run rates from history from putting the three banks, four banks together, what our debit income is and trying to get our best estimate as we work with these and MasterCard on those. So we will see what comes in. We are hopeful that is a conservative number that we hit that or better. But we also just see it's little bit uncontrollable at this point.
Alright. And then a question for George, last year you guys were very active on the M&A front. Year-to-date this year you have done a good job of putting these deals together and get the cost savings out. If you kind a feels like now it's the time that I expect you guys to be active on the M&A front again and we saw a big deal in Texas this morning, we see another big deal in Florida. Maybe just talk about your appetite to do M&A in the back half of this year and into next year.
Well thanks Brady. We are still very interested for non-strategic acquisitions with cultures that fit ours, but I think it's evident because of our ability to grow organically, we don't have to have acquisitions in order to grow our Company profitably. But we are still very interested in the right acquisitions and we have talked about markets that we would like to expand our presence and we have done a very good job from a commercial lending standpoint.
We don't have the ability to rollout all of our retail products, new consumer lending, give our credit cards and from a people have an active treasury management organization. So where we have excellent commercial lending, we are very interested in expanding in those markets one way or the other.
So yes, you know we are having some really good conversations with some potentially good partners. We have watched some of the acquisitions earlier this year or even further day and we are sort of scratching our head, trying to figure out exactly what the financial benefits of those are.
I will tell you I saw a survey the other day that say 30% of the banks bigger than us, pay no attention to doing some tangible book value. I think it really does not matter in acquisition accounting, but I'm not sure we agree with that, but it certainly appears that that is in the back of some people's mind.
So and M&A landscape is changing, there are some things going on. I quite honestly don't understand that but we are going to be very disciplined in our approach, because ours is truly a long-term proposition and the folks that we are talking to understand that, they all have invested in the combined company and I would expect us in 2019 be back in the M&A business.
Got it. Thanks for the color guys.
Thanks.
And our next question comes from the line of Stephen Scouten from Sandler O'Neill. Your line is now open.
Hey guys good morning. So I wanted to talk a little bit more about the NIM. just in some of the moving part I would expected from your liquidity to come down this quarter or it was little elevated last quarter, but it looks it increased even further this quarter cash balances and such. So can you tell me what is going on there. I mean is that a new level that you look to hold from a liquidity standpoint or could we see that move back down as that subject repayment occurred I guess late in the quarter and then early July?
Yes you are going to say the liquidity that's not our intent to leave those levels of liquidity. It just at the quarter end. We did have both quarter in we have some large deposits coming towards the end of the quarter. so they were invested short-term. They come in and out during the month actually during the quarter at various times.
So we have left that shorter term as we get a better handle on that we'll reinvest that either one in the loan portfolio obviously with the growth we have seen or two with our security portfolio. Our security portfolio is down at about 13% of assets. Our target would be in that 14% to 15%.
So over time I could see a little bit build up in the security portfolio there also, but we did have a little excess cash right at the end of the quarter, but I would say invested for the length of the quarter the liquidity was not at that high level.
Okay. And just thinking about the loan and deposit betas, in this current quarter obviously the deposit beta was slightly ahead of that core loan beta, which would presumably put some negative pressure on your NIM moving forward. So as I think about the NIM if we believe what the fed is saying and they are going to keep getting kind of consistent rate hikes, with those incremental rate hikes, would you expect to see incremental pressure on your NIM or is the goal may be to try to keep that flattish and just grow [indiscernible] through the continued strong loan growth, how can we think about that?
Well, obviously our objective is for loan betas to outpace our deposit betas. I think till the first half of the year we have been very satisfied in fact and both of those are relatively close to each other. Some are building right loans like our credit card portfolio has somewhat of a delay built in before we can actually realize the benefit of interest rate increases. So there is a little lag in that portfolio.
But I’m pretty pleased with where we are today and we believe that our deposit costs have risen quietly at level and maybe we are at a point where we can sustain those deposit costs for a period of time while our loan yields catch up. That is sort of where we are looking ahead today, but once again if we continue to grow like we have we intend to fund that with core deposits.
And we will do what we need to do to bring those deposits into the bank. So long-term our objective is for loan betas to outpace deposit betas but as long as they are equal during our growth period we think that is a good long-term strategy.
I think it’s also important to note that we kept them pretty equal for the quarter. The interest bearing deposits moved up very fast, those reprice almost instantly, because bulk of that is in transaction type accounts, not CDs. The loans, only 40% to 50% repriced during the quarter and as George said, some of that is timed, you don’t get the full quarter impact.
So we believe in the long-term the loan yield will have a better pick up comparatively, but in the short-term we are pretty pleased with what’s been matched, especially coming from a low rate environment that we have been in low deposit costs.
Okay. That’s helpful. And then may be one last thing, just on the [indiscernible] bill kind of regulatory thoughts, any real tangible benefits that you guys are starting to see in terms of regulatory oversight, any changes in terms of how you are thinking about incremental expenditures or people additions, I guess anything you could speak to or is just a general environment, is it slightly better, how would you frame that?
Well I would say really the only tangible benefit we have so far is that we won’t be required to go through the formal DFAST process and publish that. That will have some cost savings, but I think our regulators still expect to bank our size have substantial stress testing all the economic conditions. So a lot of new construction we build to do with deep assets and same quality and net cost will be in our run-rate going forward.
I don't know what changes we can expect from a regulatory perspective going forward. I don't think we are counting on any significant reduction and regulatory oversight. We are of the size today that we are expected to do more things to monitor our risk than we did before we were $10 billion bank.
And I will say that since we have experienced it there is a clear differential between banks below $10 billion and those above $10 billion and it was expected the ramp of reverse standpoint. I think we have all the calls built in today for the most part with our risk management programs, I don't expect any incremental costs associated with it, but also don't expect any [indiscernible] if you will all costs already incurred in the regulatory environment going forward.
Got it George. Thanks so much for the color and congrats on a really nice growth.
Thanks.
[Operator Instructions] And our next question comes from the line of Will Curtis from Piper Jaffray. Your line is now open.
Hey good morning everyone. Just one quick question here and I wanted to go back to go back to expenses and I appreciate the color that you provided on the run-rate. But just wanted to make sure I understood. That $95 million run rate that you talked to does that include the September branch closures or would that be incremental savings to the 95 run-rate.
As I said it's about $2 million on an annual basis. So I would say in that $95 million ballpark and that could be 94.5 and 95.5. so I don't think it will be material impact on that number, but I would say we are looking at a go-forward run-rate today at George said at $95 million is our best estimate.
And in addition you take to get putting together in addition to the $1.6 billion of growth that we had in organic growth and then you put the banks of the $9 billion and the two acquisitions of five to figure out where all of our back office cost is and our regulatory compliance.
I think we are right in that line we believe 95 is a good number to start with. We will continue to look for non-interest expense savings on a go-forward basis and we think that's our level though that we will be starting at - we believe we are pretty comfortable that way in third quarter going forward.
Okay thank you. Everything else has been answered. I appreciate it.
Thanks Will.
Thanks.
And our next question comes from the line of Matt Olney from Stephens. Your line is now open.
Hey good morning guys. This is actually [indiscernible] on for Matt.
Good morning.
So I wanted to go back to the discussion about the sub debt pay down, the impact on the core margin. You mentioned that the core margin within the 375 was at the debt that you weren't able to pay down until late in the quarter. So I think you mentioned $50 million remaining to be pay down in the third quarter. are you able to quantify the impact of the drag that $50 million will have on the core NIM 3Q, 2018?
It's going to be negligible because it's already been paid off. so we paid it off during the first two weeks of the quarter.
Yes. I would say if we just put it relative terms 10 basis points overall five being permanent more permanent, the temporary, we should get most of that back in the third quarter. We have 40 million, 50 million that was paying off in the first couple of weeks of July and then we have the remaining 18 million, 20 million that’s at a high rate of 6% that would be paid off on the last day of September. So we won’t receive some of that benefit till then. But I would say it would be two basis points of the five that we will see in the third quarter negative impact.
Got it. That is really helpful. Thank you. And then just one more from me. I think last quarter you talked about 10% to 12% loan growth being still a good number, I’m wondering is that still your expectation going forward?
Well, obviously, we have outpaced that in the first six months. So in our pipeline says that we can outpace that going forward. However, we want to be very disciplined in our growth. Rising rate environment sort of echo on 101 is keeping and that’s fine to me.
And it has been official to our organization to keep fixed rates and NIM, make sure that pricing is commensurate with the risk associated with the loans and I think Matt may want to talk to this that we are certainly encouraging and very disciplined approach to our loan growth going forward for the rest of the year. Matt, do you have any comments?
No George, that said, you said it right. And we are very focused in this current rate environment that we are focused on getting more variable rate loans in which we have successful doing that month-over-month and in shorter term our fixed rates, so we can’t get that pricing we need, we must teach our guys on that.
Yes. So Matt we have got opportunities, it’s just we will restructure that is required to get the loan to meet our current requirements.
Got it. Really helpful guys. Thanks a lot for taking my questions.
You bet.
[Operator Instructions]. And I’m currently showing no further questions. I will turn the call back to George Makris for any closing remarks.
Okay. Thanks to each of you for joining us this morning. I will say this and I’m very proud of our associates here at Simmons and what they have been able to accomplish over the last nine months to be able to grow 10% of our balance sheet organically during that period of time, just quite pleased. We are looking forward to continue the good performance and with that, have a great day.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program and you may all disconnect. Everyone, have a great day.