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#Good morning, everyone.
My name is <UNK> <UNK>, and I serve as Investor Relations Officer of Simmons First National Corporation.
We welcome you to our first quarter earnings teleconference and webcast.
Joining me today are <UNK> <UNK>, Chairman and Chief Executive Officer; Bob <UNK>, Chief Financial Officer; <UNK> <UNK>, Chairman and CEO of Simmons Bank, one of our wholly owned bank subsidiaries; Barry Ledbetter, President of Southeast Division; and Matt <UNK>, 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.
(Operator Instructions) 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 risk, 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 as 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 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 insight.
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.
<UNK> <UNK>.
Thank you, <UNK>, and welcome to our first quarter earnings conference call.
In our press release issued yesterday, we reported net income of $51.3 million for the first quarter of 2018, an increase of $29.2 million or 132% compared to the same quarter last year.
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 right-sizing 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 into 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 payoffs.
We also had an $82 million net increase in loans at Bank SNB.
Our subsidiary bank's combined loan portfolio, which we define 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, Nashville, 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, an 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% in the same quarter of 2017.
We have experienced non-time 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, an 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 noninterest 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 acquisition.
Noninterest expense for the quarter was $98.1 million, while core noninterest expense for the quarter was $96.3 million.
Incremental increases in all noninterest 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 the end of the first quarter, nonperforming assets were $77.7 million, down from $79 million at year-end.
This balance was primarily made up of $47.7 million in nonperforming loans and $29.1 million in other real estate owned, which includes $8.1 million in closed bank branches held for sale.
During the first quarter, our annualized net charge-offs to 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 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 events.
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 SNB planned to be completed over Memorial Day weekend.
We're excited about creating a stronger organization, and we're 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 held-for-sale 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 in 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 subordinated debt offering caused tangible common equity to temporarily dip below 8%.
With the anticipated payoff 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 that total assets have surpassed $10 billion, we'll be subject to the interchange rate cap that is 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 pretax basis.
This concludes our prepared comments.
We'll now take questions from our research analysts and institutional investors.
And I'd like to ask the operator to please come back on the line and review the instructions and open the call for questions.
Yes, I would say that range is probably $92 million to $94 million.
As you can see, we had 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.
Yes.
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 ought to help the core NIM.
However, we're still funding some construction loans that were obligated some 9 to 12 months ago at a little lower rate.
So as those fund up, that'll be a negative pressure on that.
And you've already mentioned the subdebt, which is also going to be maybe a couple of cents 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.
We'll 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 wildcard here is what is it going to cost for core deposits.
We see significant pressure in the market today, taking those core deposit rates up higher than we really expected, and you saw the results of ours in the first quarter, and we would expect something similar to that to continue.
We're very focused on core deposits as the 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.
We think it's just good growth from the new markets.
We gave the new markets some new tools to use, and they were very effective.
Our treasury 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.
With legacy Simmons, we had a 60% loan-to-deposit ratio.
Those weren't quite as important to us, but we have great relationships, particularly in some of the rural communities that we serve.
We're able to go back to those public entities now, being very successful there, and we'll continue that strategy through the rest of the year.
Well, It's not likely that we'll come significantly below that because what we're trying to forecast are regular cash flows based on current payoffs and renewals.
And generally, we see accelerated payoffs or some decisioning process that accelerates that cash flow.
And that's 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, it's going to exceed that and not be below that.
Now the flip side of that is, as you saw in 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 marks on those portfolios are much less than we've experienced at Simmons when we had FDIC and 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, now that'll be offset by additional provision, generally speaking.
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 of both Southwest Bank and Bank SNB 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 an earn-back period of less than 3 years is appropriate.
Any acquisition we do must be accretive to earnings from the get-go.
So our financial metrics are still pretty solid and disciplined as you witnessed over the past 5 years.
I don't think that's going to change.
Well, here's what I can tell you.
We hope the beta on the increase in our interest rates exceeds the beta on the increase in the deposit rates.
That's how (multiple speakers).
So I think we've positioned ourselves fairly well to make sure that, that happens.
As you can see, our beta on deposits is close to 50%.
Our beta on our NIM has been sort of the same, exceeding it by 1 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.
Yes, and <UNK>, 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 probably 15% ---+ almost 18% now that's variable rate.
So we've been positioning for this over the last 12 months.
And so, as <UNK> said, we're going to have deposit increases, but our goal is to offset that with the earning asset increase.
I'm going to tackle the ---+ get to the tax cut.
I don't think we believe that tax cuts have 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 <UNK> address that issue.
So Matt.
Yes.
I would say, we continue to see good, strong growth, as you can imagine, out of the DFW area, very strong, and then also Nashville, Middle Tennessee continues to do very well; St.
Louis, Kansas City, and then also Northwest Arkansas showing really good growth over the last quarter.
Your question about our approved, ready to close being down.
I think that reflects, well, 2 things.
We had a really big closing in March on just gross production.
So a lot of build-up in the pipeline, but also, it just shows you the attention and focus on Southwest Bank's conversion.
We've got that done and now that pipeline is reloading, but we're still very optimistic on overall loan growth.
I think so.
Yes, it ought to give you comfort that I'm going to let the accountant handle that question.
So I'm going to turn over to Bob.
Yes, <UNK>, we had a ---+ 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 onetime 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 put in place.
And as you get into that program, there's a fair value adjustment on the front end from how you do business going forward.
So likewise, there was a $700,000 onetime benefit or so.
So those 2 kind of offset each other, just happened to be relatively close in amount.
But as <UNK> said, it's just an accounting change when you're going into a new line of business or a conversion from one trust system to another trust on the way we book them.
So overall, both business lines were relatively close to their normal expectations from this quarter to the last quarter.
<UNK>, 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 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.
Yes, I'll touch that, and then I'm going to ask <UNK> <UNK> 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 by ourselves in 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.
That's one real benefit to our footprint is that we have deposit sources outside of metro markets so that we don't get caught up fully in having to depend on those markets for our deposits.
But <UNK> may want to talk a little more granularly about what we're seeing.
<UNK>, 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 rate 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 on CDs ---+ short-term and longer-term CDs running anywhere from 2% to the 2.40% range.
We're seeing money market accounts also aggressively priced in newspaper rate ads in the 1.50% to 1.75% range.
So we are seeing signs of more aggressive pricing by competition.
Okay.
Great.
That's very helpful.
And then the last one from me.
I know you guys mentioned and I just had a hard time hearing it, but the full quarter impact from the subdebt on the core NIM.
This quarter, no impact at all.
The subdebt wasn't ---+ we didn't book it till last 3 or 4 days of the quarter, so really no impact at all on the NIM.
We would expect it'll be a 2, 3 basis point impact on the NIM for full year impact.
Yes, Matt.
As you know, we issued about $330 million in subdebt.
It was a 5-year ---+ 5% 5-year fixed and it moved to floating at I think 2.15% over LIBOR, after that for the remaining 5 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 TruPS that we'll be paying off, there's 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 years on some of that debt.
Well, of course, we have payroll expenses in the first quarter that elevate first quarter expenses, so all the payroll taxes pretty well hit during that 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.
The majority of it ---+ yes, I'm trying to think back on that question, but most of it is accretable.
The 2 acquisitions had very few impaired loans, and so the nonaccretable portion of that is very small.
I don't have that dollar amount, but it's a small piece of it.
I will say that our closed branches, we would expect to be breakeven as we liquidate those.
The other pieces of OREO, particularly raw land pieces, boy, that's a good guess.
We believe we have been 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 an example.
So we have some raw land at ---+ that we had under contract, but the city would not cooperate with regard to some variances with 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 there.
Okay.
Thank you.
I just want to take this opportunity to thank all 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 nonbanking business that we went through during that quarter: a stock split, a subdebt offering and conversion of Southwest Bank and planning for the conversion of Bank SNB.
And the folks responsible for all of that have their regular day jobs in addition to what they accomplished in the first quarter.
It's a monumental task, and we just appreciate all their efforts, and I just want 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 3 months from now.
Have a great day.
