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 Fourth 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 is being 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 fourth 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 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’ll 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, the reconciliations of those 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’ll now turn the call over to George Makris.
Thanks, Steve and welcome to our fourth quarter and 2018 annual earnings conference call. In our press release issued yesterday, we reported net income of $216 million for 2018, an increase of $123 million or 132% compared to 2017. Diluted earnings per share were $2.32, an increase of $0.99, or 74.4% from the previous year. Included in 2018 earnings were $4.5 million in net after-tax merger-related and branch right-sizing costs. Excluding the impact of these items, the company’s core earnings were $220 million for 2018, an increase of $101 million or 85% compared to 2017. Diluted core earnings per share were $2.37, an increase of $0.67, or 39% from last year.
During 2018, total assets grew $1.5 billion to a total of $16.5 billion at December 31, 2018. Our return on average assets for 2018 was 1.4% compared to 0.98% in 2017. Our efficiency ratio was 52.9% for 2018, compared to 55.3% for the prior year.
Fourth quarter 2018 net income was $55.6 million and diluted earnings per share were $0.60, increases of $36.7 million and $0.38 respectively, compared to the same period in 2017. Excluding the impact of non-core items, core earnings were $56.5 million for the fourth quarter, an increase of $14.4 million or 34% compared to the fourth quarter of 2017.
Our loan balance at the end of the quarter was $11.7 billion, an increase of $944 million or 8.8% since the last year-end. Loans decreased from September by $135 million. Of the decline in the fourth quarter, $86 million was related to the seasonality of our Agri portfolio warehouse lines of credit. We also had continuing decreases of $19 million in our liquidating portfolios for indirect lending in consumer finance.
The remaining decline was due to loan payoffs greater than new loan fundings during the quarter. Our loan pipeline, which we define as loans approved and ready to close, was $277 million at the end of the quarter. We expect our loan growth to be in the 7% to 7.5% range in 2019.
On a consolidated basis, our concentration of construction and development loans was 98.4% and our concentration of CRE loans was 295% at the end of the quarter. Total deposits at year-end were $12.4 billion, increases of $310 million from last quarter, and $1.3 billion or 11.8% from year-end 2017.
The company’s net interest income for the fourth quarter of 2018 was $137.8 million, an 8.6% increase from the same period in 2017. Accretion income from acquired loans during the quarter was $3.9 million, compared to $10 million in the third quarter and $15 million in the fourth quarter of 2017.
Total accretion income for 2018 was $35.3 million, compared to $27.8 million in the prior year. For 2019, we are projecting $12 million of accretion income excluding any estimate for upcoming Reliance Bank acquisition.
Our net interest margin for the quarter was 3.76% compared to 3.98% the previous quarter. The company’s core net interest margin, which excludes the accretion was 3.66% for the fourth quarter compared to 3.71% for the previous quarter. In a stable rate environment, we would expect our net interest margin to expand. Since December 31, 2017, core loan yield has increased 50 basis points while cost deposits has risen 45 basis points and our cost of borrowed funds has risen 86 basis points.
Our noninterest income for the year was $143.9 million, an increase of $5.1 million compared to last year. We had increases in trust income and service charges on deposit accounts mostly due to our fourth quarter of 2017 acquisitions that were partially offset by reductions in debit card fees and SBA lending income. As of July 1, 2018, we became subject to the interchange rate cap has established by the Durbin amendment. Consequently, during the back half of the year, debit card fees decreased $5.9 million, which contributed to the net $2.4 million reduction in debit card fees for 2018 when compared to 2017. We expect a similar reduction in debit card fees in the first half of 2019 compared to the first half of 2018.
SBA Lending premium income decreased $1.8 million when compared to the 2017 as a result of remaining selective in our decisions regarding loan sales as premium rates have continued to be lower in recent months compared to the first quarter of 2018. We expect this trend to continue into 2019.
Noninterest expense for the year was $392 million. Core noninterest expense for 2018 is $386 million, which represented an increase of $101 million when compared to 2017. The incremental increases in all noninterest expense categories over 27 primarily the result of our acquisitions in the fourth quarter of last year. Noninterest expense for the quarter was $95.4 million, while our core noninterest expense was $94.3 million. The full fourth quarter results included a positive impact of the true-up of year-to-date accruals on various incentive points.
Income tax expense was lower in 2018, largely due to discrete tax benefits related to tax accounting for a cost segregation study in a state deferred tax asset adjustment. We estimate our tax rate for 2019 to be approximately 22.5%.
At December 31, 2018, the allowance for loan losses for the legacy loans was $57 million. The loan discount credit mark was $49 million for total of $106 million of coverage. At the end of the year nonperforming assets were $60.5 million and $18.4 million decrease from the previous year. This balance is primarily made up of $34.4 million in nonperforming loans and $26.1 million in other real estate owned, which includes $8 million in closed bank branches held for sale. Our nonperforming loans to total loans ratio declined by 40 basis points during 2018.
During 2018, our annualized net charge-offs total loans were 29 basis points, of which 7 basis points were related to our third quarter loan sales. The provision for loan loss was $38.1 million, which includes an increase due to strong legacy loan growth and increase to loan migration during the year from the 2017 acquisitions, which is consistent with previous guidance. Due to acquired migrated loans in 2018, our provision was elevated. for 2019, we’re projecting $28 million provision.
Our capital position remains very strong that year-end common stock holders’ equity was $2.2 billion. Our book value per share was $24.33, an increase of 7.4% from last year. Our tangible book value per share was $14.18, an increase of 14.9%. the ratio of tangible common equity was 8.4% at year-end compared to 8.1% at the end of 2017. Our total risk-based capital ratio at December 31 was 13.3% compared 11.4% at the end of 2017.
We’re very proud of our associates and their accomplishments in 2018. In addition to the achievement of record earnings; we converted systems for both Southwest Bank and Bank SNB during the first half of the year. We converted our accounting in human resources systems to a new IT platform work day in August. We grew our assets by $1.5 billion organically. We completed the evaluation of IT systems and are ready to be in our next generation banking initiative and we announced the acquisition of Alliance Bank in St. Louis. The regulatory applications for the alliance merger had been filed and we hope to close the transaction and merger operations on April 12. In the meantime, we continue to plan the activities associated with the conversion.
We’re looking forward to another prosperous year in 2019. I mentioned the beginning of the next generation banking initiative, which will involve the upgrade of most of our IT systems and applications, including our digital banking offerings. We expect to have not only a better product for our customers, but also the opportunity to achieve efficiencies associated with more integrated systems.
The incremental costs in 2019 associated with this initiative are expected to be $10 million pretax. We will continue to focus on the 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 diversify our loan portfolio and deepen the relationships we have with our customers. We will monitor 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.
I’d like to acknowledge the retirement this month of Vernon Bryant, our Division President for the North Texas division and Former CEO of Southwest bank. Under Vernon’s leadership, Southwest Bank developed an excellent reputation in the Fort Worth Metroplex. We’re very fortunate to be associated with his legacy and wish Vernon all the best as he enjoys a well-deserved change of pace.
This concludes our prepared comments. We’ll now take questions from our research analysts and institutional investors. I’ll ask the operator to please come back on the line and give the instructions for the call in questions.
[Operator Instructions] And our first question comes from Brady Gailey with KBW. Your line is now open.
Hey, good morning guys.
Good morning, Brady.
When you talk about the NIM expanding in 2019, but maybe, just add a little color, are you talking about the reported NIM or the core NIM and then how much expansion do you think we could see like is that five basis points to 10 basis points or just help us frame that out a little bit?
Well Brady, I think first, this is Bob, if you look at this quarter; we obviously dropped a little below our guidance. A lot of that was due to the seasonality and also some loans that paid off right at the end of the quarter. So, if you look at our cash balances, they were about $300 million up on the quarter, securities, we put some money into more short-term securities in the quarter. So that did have an impact for a seasonality was a big piece of it in this quarter. Our look – outlook for next year is we still feel comfortable in that $370 million to $375 million range. And as we said this quarter, there was a lot of focus on relationship lending and bringing in deposits in there. So, our guidance going forward is still in that $370 million to $375 million range.
And that’s the core margin, right?
That’s correct, yes. Okay.
Okay. And then you have the loan growth guidance 7% to 7.5%, historically, I think I’ll talk about something closer to the 10% to 12% range. So, a little lighter on the loan growth. What are some of the dynamics with the lower loan growth guidance?
Brady, I’ll start with that and then I may ask a couple of guys to play it on that. During the year 2018, our loan growth met our expectations. At the beginning of the year, we anticipated loan growth of about $1 billion and it was right at $1 billion. during that period of time, particularly in the first three quarters, that pace was much faster than we had anticipated. We allowed that to happen, because there were all good loans, we’re glad to see them coming into the bank. before the fourth quarter, which certainly during the fourth quarter, we had the opportunity to sit back and evaluate the diversity in our loan portfolio from a risk management standpoint, from a concentration standpoint. And our conclusion at that point in time was if we needed rebalance some of our loan portfolio, not necessarily, all along our balance sheet, but certainly in certain markets, where concentrations of certain loans, probably exceeded our comfort level.
So, I think our group did a very good job of recognizing the need for that diversity. We had several loans move out of the bank, some went to the permanent markets, which you would expect with the yield curve as it is today. Some of them left bank, because we were asking too. And that’s part of risk management and something that we do very well at this bank. I think, as we take a look at next year’s loan growth, I think the 7% to 7.5% is reflective of today’s economy. You’re not reading a whole lot about economic expansion, you see housing going south, you have an inverted yield curve, which sometimes is the beginning to sign of a recession cycle. So, we just don’t think the markets are strong as it was earlier in the year.
Our loan pipeline looks still very respectable. But we’re much more selective today and the relationships that our customers have with our bank, and I’m not just talking about deals and I’m talking about broad relationships are much more important. And as we take a look at how we’re going to allocate our capital, that’s going to be to those customers, who can send a rush to be a primary bank of theirs. So all that transition has happened during the second half of the year culminating in the fourth quarter, I think we’re at a good starting point of 2019 today. I’m going to let Matt Reddin talk a little bit about some of the dynamics in our loan portfolio in the fourth quarter.
Yes. Thanks George. Well, Brady, there’s a couple of things to know outside of the seasonality that was discussed on ag and a mortgage warehouse, which is some of our higher yielding portfolio, as it paid down as expected. We also saw, from the payoff standpoint a good thing. We saw diversified good payoffs in real estate showing our ability to see larger projects come to completion and all of our balance sheet and a pruning concentration categories, where we needed to. Also, we saw some C&I payoffs, but they were low-priced transaction loans. They were not relationships. And so we got to see those come off our books. So that should help us moving forward.
from the standpoint of production, I’d tell you that the fourth quarter we saw a great production out of North Texas, which is to be expected with their economy. We saw almost $600 million in gross – new loans, half of that being unfunded. So, they had a big fourth quarter to help offsetting those payoffs, but now they’re reloading that pipeline, which based on that mark I feel they’ll be able to do.
Also, we saw middle Tennessee continued to do well. Oklahoma City’s and other market that’s doing well for us. And so we actually saw some growth in San Antonio and Austin, which is a newer market for us, but all relationship based. So, those are some highlight from the growth. And the markets we know that are declining our Southeast Arkansas, Northeast Arkansas and Midwest, Tennessee, where we know those payoffs are going to be coming to be expected. So overall, I think we came in like we expected to George’s point on making sure our balance sheets, where it needs – it needs to be.
Brady, let me make one more point with regard to our loan portfolio. Well, I think we’ve been clear for some time now that our comfort level is not as 99% loan-to-deposit ratio. We allowed it to stay there during the first three quarters of the year, hoping that our deposit growth would accelerate and keep up with our loan growth. It didn’t, we had very respectable deposit growth during the year, in fact, met our expectations. It just didn’t keep up with the pace. Now, our loan deposit ratio was 95%, which is our comfort level. So, we will manage our loan portfolio in the 90% to 95% range. If we allow it to get higher than that, unless deposits – core deposits keep up with that growth. We will manage that back down into a reasonable range. Reasonable to us is 95% or less.
All right. And just to clarify, the 7% to 7.5% excludes any loans acquired through Reliance, correct?
That’s correct.
That’s all organic. All right, great. Thanks for the color guys.
Thank you. And our next question comes from David Feaster with Raymond James. Your line is now open.
Hey, good morning guys.
Hey, Dave.
Could you maybe just quantify the level of payoffs that you saw in the quarter? And talk about the impact of pay downs on the NIM, how much in interest accruals and free payment fees positively impacted NII in the quarter. And I guess whether we should expect that to kind of continue with that same run rate going forward.
Yes. I can definitely speak to the payoffs. We saw in excess of $300 million in unexpected payoffs. Some as we just discussed were planned. We ask them low margin business to leave that that equate almost $50 million to $60 million that we asked. And they were glad to do that because of our – not bank credits, but credits that needed to go. And then also we also saw a lot of our larger real estate projects, multifamily, just the spit specific in some hotels that completed their projects and moved on, as planned to the permanent market. Really and that’s – I wouldn’t say it was concentrated to one market as it was diversified throughout the footprint, which is good thing.
Okay. And then just the interest accruals and the positive benefits on the NIM in the quarter, do you have that number or…
Can you repeat that again?
With pay downs that you typically get – the interest accruals and prepayments fees and stuff that positively impacts NII from higher…
I’d just tell you on this quarter, when you take $100 million in ag and mortgage warehousing seasonality and you take the payoff set, Matt just talked about $300-some-million over that. That’s probably in the four basis – five basis point range that impacted this quarter. That’s where our impact was this quarter, we’re definitely on the change.
Okay. Could you quantify the impact of the positive impact from the incentive plan accruals in the quarter and maybe what you just think to be a good run rate for core expenses in 2019?
Well, I’ll tell you for the quarter as we trued-up the incentives and that included all incentive plans across the company. So that would be the Executive Management Group, it’d be the profit sharing and equity grants. The true-up was about $3.5 million to $3.8 million in the fourth quarter. And part of that was, we had been accruing up at significantly over our expectations. We still paid out above the expectations. So it was a great year, just for the year, the fourth quarter was a true-up, so it was about $3.5 million in the fourth quarter.
On a go forward basis, I mean our expectations as we finished up our budget this year was for our non-interest expense base to be about a 1.5% increase over next year. So there’ll be a lot of focus on non-interest expense. Now on top of that would be the IT costs that George talked about earlier in the script part of the discussion. And as we said, that’s about $10 million annual spend next year. And you would expect a lower amount in the first quarter and it building throughout the year. But that would be in addition to the 1.5% growth on the non-interest expense base.
Okay. That’s helpful. Last one from me, core fee income was pretty strong in the quarter notably in the other income category. Could you just talk about what drove that? And maybe your thoughts on fee income as we head into 2019, trust, obviously could have some pressure given the pullback in the market in the quarter and mortgage given higher rates, and then SBA. So just want to get your thoughts on fee revenues heading into 2019.
Well, I’ll talk about other and Mart if you talk about fee income. But on the other, that was primarily recoveries that we had in the quarter and also some OREO gains. You noticed our foreclosure expense down in expense category was up. But on the other side, we had some gains in the quarter. So the net of those kind of offset, but we then also had some recoveries from other loans that been charged off at some point. So there was some recovers. We see that each quarter, you can see that other category it’s kind of lumpy goes up and down throughout the year. But historically you would expect it to be similar levels as time goes on.
Okay.
David, this is Marty. And I would say, from a standpoint and probably mortgage SBA lending, I think the fourth quarter is seasonally one of our lower quarters and I would not expect any further declines from where we are today. Mortgage rates have recovered a little, seasonality is always going to impact mortgage production. But I think we’re probably at a low point as far as seasonality in the mortgage.
In SBA, we’re just not – we’re not selling, we’re retaining that SBA production. So that just be in our interesting condominium. I would say that we’ve got a little delayed potentially with SBA loan fundings from the government shutdown. But as far as trust, I don’t see any retreat from where we are in trust income either. I think we’ll see pretty steady results on the run rate on trust income.
David as a reminder on the debit and credit card fees, we’ll have the Durban impact for the first two quarters of next year and it’ll be in that $2 million to $2.5 million.
Okay, got it. Thanks guys.
Thanks.
Thank you. [Operator Instructions] Our next question comes from Stephen Scouten with Sandler O’Neill. Your line is now open.
Hey, everyone, good morning.
Good morning.
Hey, I appreciate all the color around loan growth and kind of what were some of the drivers. But the one thing I’m still curious on is, you mentioned kind of moving away from certain concentrations or maybe even concentrations to certain markets. Can you talk a little bit about what that is specifically? If it’s certain geographies you were over concentrated too or if some of that was the kind of rapid growth we’d seen year-to-date in the construction book. And just any color around that would help.
Yes, absolutely. We saw a good – I wouldn’t say we have any markets, we look geographically and we look by product type and also geographic concentration, but we definitely are trying to manage our multifamily and our hotels. We see that as a product type that’s getting not soft, but there’s a lot of opportunities late in the cycle and we’re being prudent on those opportunities throughout the footprint, not one specific market that we see overall concerns and were exiting a market. We are still doing business with – customers that we’ve always done business with, or new customers that’s relationship based in those markets to make sense.
And the concentration management is reflected in enhanced underwriting and pricing.
So yes, that’s a great point, Marty. So also note, so if you really look at – if you got under the hood and looked her credit quality from Q3 to Q4, those real estate loans that we did put on the books are much better quality. We got lower leverage, better pricing due, if from a concentration management standpoint.
Stephen, let me mention one other thing too, and that is that, we don’t intend to pullback on lending, under any circumstances, what we do intend to do is diversify our portfolio in each market. So to the extent that we might have a market that’s heavy in CRE lending, then we’re going to encourage that market to consider more C&I lending to balance that out. So it’s not a pullback necessarily the uncertain areas, it’s a diversification that we’re looking for. So our emphasis maybe in a different area in a certain market than it has been in the past.
Okay. That’s helpful. Tell me if this assumption sounds correct. It seems to me like maybe from the two recent acquisitions, maybe this was a lot of the re-mixing and that maybe some of those loans that had been migrating from the acquired book into the legacy book didn’t migrate at the same pace as you kind of rebalance the portfolio from those new markets from the two most recent deals. Is that fair to say?
Well, yes, I think the early year of migration was certainly coming from those new markets that came into our legacy book. I think Matt mentioned earlier that particularly in those two markets, we had a lot of construction loans and we mentioned during the year that we had a lot of unfunded construction loans on the book that we’re going to fund at the end of the year. A lot of those dead and a lot of those moved out at the end of construction period.
So yes, most of that migration out of the bank was from construction loans, primarily from the two new markets. They’re still filling the pipeline, so, you probably saw that our construction development concentration was still just under 100%. So as those move from construction to permanent, we’ll replace it and we’ll continue to do that primarily in those two markets.
Okay, helpful. And maybe just one last for me. There’s a pretty big jump in time deposits in the quarter. And obviously Bob, I heard some of your color to Brady’s question around the NIM trends and how that might recover. But I’m wondering how much pressure you think could occur within the NIM on the continuation of any negative mix shift within the deposit competition more into these higher costs and time deposits and other categories versus non-interest bearing?
That’s a great question for this quarter, because that’s kind of a distorted number. What that really was some deposits that we had with various state agencies that was in the $400-plus million range. Those were classified previously as money market accounts. We – those funds, the expectations were to go up significantly on the pricing with the rate changes. We were able to find those at lower rates, basically in the brokered market. So we replace those with classified as CDs. So that was really about $400 million move from the money market savings category down to the time investments. So it really, it didn’t have an impact on the cost of funds from that move. The rest of – the cost funds increases what it is the market that we’ve had from one quarter to the next, but don’t read it that we went out to raise a lot of time deposit. It was really about a $400 million reclass.
Okay. That’s really helpful Bob. And wouldn’t you have to do that, what sort of term are you taking on those brokered CDs?
You cut out, what did you say with the…
It sort of like term or duration, are you taking on those brokered CDs?
Generally, we’re pretty short term on those. Because our goal was still to replace those with retail and customer and commercial deposits, so we’re relatively short. But there was basically, almost 50 basis points differentiation going, staying with the state versus going with the brokered.
Okay, perfect. Thanks for all the color guys. I appreciate it.
Sure.
Thank you. [Operator Instructions] Our next question comes from Matt Olney with Stephens. Your line is now open.
Hey. Great, thanks the morning guys. Want to go back to the discussion on operating expenses, and Bob, can you clarify, what’s the base expense run rate that we should start with before we add that 1.5% growth that you mentioned previously?
We’re kind of a little hesitant to give the base, because we’ve kind of talked about that a lot each quarter. But if you take this quarter and you add about $3.8 million as we talked about it for the true-up on incentives, and if you grow that number at about 1.5% per quarter, that’s what on an annualized basis, not on a quarterly basis, but that’s what you’d expect for core growth. And then on top of that is the $10 million for the IT related for the NGB product, what we call the Next Generation Banking IT system.
And will that $10 million will that entire amount be captured in 2019, are you ramping up in towards that and we won’t capture the entire amount until the following year?
Yes, it is a ramp up. And it’ll be – I’ll give you first quarter estimate from budget is about $1.5 million and it’ll ramp up towards the end of the year to total $10 million. That’s our estimate. You never know on these timings, when you actually finish it and it goes into production. But that’s our estimate as of today.
Okay. That’s helpful. And then on the margin, it sounds like you’re iterating the guidance of 3.70%, 3.75% for the core for 2019. Help me think about the seasonality of that margin in 2019 in terms of what we should expect? And of course, I guess the Reliance impact in 2Q?
Well, obviously, in the first quarter, we’ve still got seasonality. So, we’ll have some more Agri [ph] pay downs. We’ll also have credit card pay downs in the first quarter. Both of those are fairly high yielding portfolios. So we would extract our first quarter as it always, it has to be little lower than the year run rate. The Reliance transaction, where we’re in the process of going through higher integration plans for Reliance prior today, and it’s probably a little premature up to know exactly what effect that’s going to have on our margin going forward. I think that they’re heavily invested in CRE.
We think we have a chance to diversify that portfolio as well. And that diversification is obviously going to take their current net interest margin. But remember, they have a lot of expensive interest expense, so they still have $40 million of 9% money on the books. It will pay off. So there are a lot of pieces to their net interest margin that we have to examine before they hit our books. But we’re not quite to the point that we’re absolutely comfortable with what that run rates going to be. It ought to be higher than their current one when we put it that way.
Okay. Thank you for that George. And then on the purchase accounting accretion, I think, you said, $12 million for the full year in 2019 ex-Reliance. What will that be in the first quarter? What’s that projection in 1Q?
I don’t know, if I have that number, but it’s – but what did you say?
It’s going to be roughly $3.5 million is what we’re projecting in the first quarter. Certainly, it’s going to be front loaded a little bit, but our projections moving forward or it’ll decline slightly each quarter.
And also Matt, when we give you that guidance, that’s our scheduled payments, if we have early payoffs, it’ll be higher than that. And you would expect there would be. But right now that’s our scheduled payments that we have. And again, that does not include the Reliance transaction.
And Matt, I know it’s in our relation, it’s in our numbers, but I think it’s worthy to point out one more time that our accretion income in the fourth quarter was only $3.9 million. It was $10 million from the third quarter. So if expectations were that we would continue on that same pace accretion income, we missed that by a lot. So you have to really break that out as you guys have done positively and negatively, and we believe that our core results not including the accretion will vary substantial in the fourth quarter. And we don’t hang our hat on long time accretion income. We don’t control the timing of that. We know it’s out there. We know it’ll come into income, but we really take a look at our core performance.
And I think it’s good to point as a reminder how much the provision expense was up this year related to the migrated loans. So while we did have significant accretion income, there was a significant amount of provision expense buildup for the migrated loans from the acquired bucket to the legacy buckets.
And what – we’ve said earlier, what we expect our provision expense to be, which is substantially below what it was in 2018, based on the fact that we don’t believe that the migrating loans will be nearly at the pace they were in 2018. So there is a positive offset going forward in 2019.
Okay. That was my next question on the provision expense. So the $28 million, so help me understand that because that’s a number that’s well below consensus forecast right now. If we do get paid downs and payoffs in excess of expectations now, would you say that there would be a positive or a bias towards a higher number than that $28 million?
Now, you’re saying payoffs in the acquired bucket?
Yes, yes.
If we had – we will go down the same strategy as if we have payoffs in acquired and there’s a significant accretion, not that it’s even related, but if those loans migrate over, we will have to build the allowance up for that. So there will be a correlation there. But based on what we were projecting for migrated loans and our normal loan growth in our portfolio, we’re expecting right now and we’re budgeting for a $28 million provision next year. And again, if we have more loans migrate over, that provision would go up.
And then within that $20 million provision guidance, I believe that would imply or assume that the allowance ratio would continue to move down in 2019?
I would expect the overall allowance ratio, is that what you’re saying? I would expect it to stay flat to moving up.
Okay. But maybe, we can follow up after the call on that, because I’m little confused by that point.
Yes. I think, we’re building more into the allowance than the expected charge-offs that we have.
Matt, I stay confused on that, because we’ve got these two buckets. We’ve got our legacy loans that have the allowance associated with them and then we’ve got the mark associated with our acquired loans. We have to look at those together. So, it’s really hard to tell how one is going to relate to the other, as we adjust our portfolio with some loans migrate over. So, it’s a great point. Once you figure it out, please give me a call and let me know. I’d appreciate it.
All right guys. Well, thanks for color. I appreciate it.
Thanks, Matt.
Thanks, Matt.
Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to George Makris for any further remarks.
Thank you. And I do have a few remarks to make, and I want to make sure that we properly recap our 2018 year. We’re pretty pleased with our results and I want to take us back a year ago when we announced that we would not close any other acquisition in 2018, which would allow us to concentrate on the full integration and benefit of the previous bank mergers. At the time, we’ve made those announcements, so I believe the consensus of our analysts based on our performance was $2.29. We exceeded that this year. I think we were clear that we expected our loan growth to be $1 billion. We expected our deposit growth to be an equal amount. We achieved both of those targets for the year.
I also wanted to talk about our company a little bit from the fundamental standpoint, and that is, our primary objective is to manage risk and first and foremost is asset quality. We didn’t spend much time talking about how our asset qualities improved during 2018. I’ll take you back even further than that. We’ve done four FDIC acquisitions. We’ve purchased a couple of trouble banks that had significant, particularly OREO balances. One bank in particular, had $80 million of OREO when we took them over.
When you take a look at where we are today at a company, that’s five times its size five years ago. To see our asset quality, particularly nonperforming loans to total loans were reduced by 50% in 2018 is a substantial improvement to our overall asset quality and one that sort of demonstrates fundamentals of our bank. I also mentioned that as Bob said earlier, we pay very close attention to an appropriate allowance. And while we had a lot of accretion income during the year associated with migrated loans, our allowance went up appropriately based on those migrated loans. So, all that accretion income over net effect basis didn’t trickle down to the bottom line. So we do see that in other organizations, but you’re not going to see that here at Simmons. We’re going to provision appropriately as our loans grow.
I also mentioned regulatory compliance, because this year for the first time, we were examined as a $10 billion bank. And for those of you who are familiar with that milestone, that’s a whole new ballgame. I think we came through that meeting our expectations and we feel very good about where our risk management programs are and the scalability of those going forward. So, we don’t see that as a deterrent to future growth. But I can tell you, it was an all hands-on deck effort during the last year typically.
So congratulations to our associates, who with that extra mile to make sure that we were appropriately managing risk as a $10 billion organization. We also want to point out that we’re very conscious of the regulatory guidance with regard to construction and CRE limit. Then you can see that while we’re willing to push that guidance. So far, we haven’t been willing to go over that guidance on a permanent basis. Not that we wouldn’t, we believe we have proper loan risk management programs in place, but that guidance is in place for specific purpose. And we appreciate why it’s in the place and we want to manage our portfolio based on that guidance.
During the year, we grew organically $1.5 billion that is a full 10% of the size of our company we were able to accomplish in 2018. We have mentioned before that we are very conscious of relationship banking and that has been driven down to the field and they have responded extremely well. Our loan-to-deposit ratio comfort level for us is 95% or less. It exceeded that most of the year. We’ve already talked about that a little bit.
Our efficiency ratio was 52.9%. We’ve mentioned that we’re going to fluctuate between 50% and 55% as we continue to invest in our business to create long-term shareholder value. And you can see a part of that this year with our next generation banking program, where we’re investing what’s going to hit our bottom line of $10 million this year to improve our treasury services, our digital bank, our data analytics and to create operational efficiencies that we’ve not been able to accomplish with our IT programs today.
So we continue to look forward, we continue to invest, and we continue to encourage our excellent bankers in the field to find and develop those relationships in the market that are going to be significant to our organization, but also significant to our customers. We are in this for the long-term. Our objective is to create long-term shareholder value. And I think our record speaks for itself.
So, I appreciate all of your participation in our call today. I will look forward to having this again, in three months from now.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. And you may all disconnect. Everyone, have a wonderful day.