Simmons First National Corp (SFNC) 2012 Q2 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen. Welcome to the Simmons First National Corporation second-quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Garner. Please go ahead, sir.

  • David Garner - IR

  • Good afternoon. I am David Garner, Investor Relations officer of Simmons First National Corporation. We want to welcome you to our second-quarter earnings teleconference and webcast. Joining me today are Tommy May, Chief Executive Officer; David Bartlett, Chief Operating Officer; and Bob Fehlman, Chief Financial Officer.

  • The purpose of this call is to discuss the information and data provided by the Company in our quarterly earnings release issued this morning. We will begin our discussion with prepared comments, and then we will entertain questions. We have invited institutional investors and analysts from the investment firms that provide research on our Company to participate in the question-and-answer session. All other guests in this conference call are in a listen-only mode.

  • I would remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from our current expectations, performance, or achievements. Additional information concerning these factors can be found in the closing paragraph of our press release and in our Form 10-K.

  • With that said, I'll turn the call over to Tommy May.

  • Tommy May - Chairman & CEO

  • Thank you, David, and welcome, everyone, to our second-quarter conference call. In our press release issued earlier today, Simmons First reported second-quarter earnings of $6.5 million or $0.38 diluted EPS, which represents a $0.02 or 5.6% increase over Q2 2011 core EPS.

  • On a year-to-date basis, net income was $12.9 million or $0.75 diluted EPS, an increase of $0.09, or 13.6% from last year's core EPS.

  • On June 30, total assets were $3.3 billion, and stockholders equity was $407 million. Our equity to asset ratio was a strong 12.5%, and our common equity ratio was 10.8%. The regulatory Tier 1 capital ratio was 12.1%, and the total risk-based capital ratio was 22.6%. Both of these regulatory ratios remained significantly above the well-capitalized levels of 6% and 10%, respectively, and I might add range in the 92nd percentile of our peer group based on March 31 peer versus our June 30 actual.

  • As we have previously reported, we continue to allocate our earnings less dividends to our stock repurchase program. Year-to-date we have repurchased approximately 436,000 shares at an average price of $24.36. We believe our stock at its current price continues to be an excellent investment. Because of our repurchase plan which substantially completed, earlier this week our Board of Directors approved a new stock repurchase program authorizing the repurchase of up to 850,000 additional shares of stock, which is approximately 5% of shares outstanding.

  • Beginning with the first quarter, we increased our quarterly dividend from $0.19 to $0.20 per share. On an annual basis, the $0.80 per share dividend results in a 3.4% return based on our recent stock price.

  • Net interest income for Q2 2012 was $27.3 million, which was relatively unchanged compared to Q2 2011. As discussed in previous conference calls, interest income on covered loans includes additional yield accretion recognized as a result of the updated estimates of the fair value of the loan pools acquired in our FDIC acquisitions.

  • In Q2 actual cash flows from our covered loan portfolio exceeded our prior estimates. As a result, we recorded a $3 million increase in interest income. The increases in the expected cash flows also reduced the amount of expected reimbursements under the loan-sharing agreements with the FDIC, which are recorded as indemnification assets. The impact to non-interest income for Q2 2012 was a $2.7 million redemption. The net pretax benefit of these adjustments is $267,000.

  • Non-interest income for Q2 2012 was $11.1 million, a decrease of $3.2 million compared to the same period last year. As we just discussed, there was a $2.7 million decrease due to the reductions of the identification assets, resulting from increased cash loans expected to be collected from the FDIC covered loan portfolios.

  • Looking back to Q2 2011, non-interest income also included a nonrecurring item of $1.1 million, a gain from the sale of MasterCard stock. Normalizing for these items, non-interest income increased $631,000 or 4.8%. The primary driver of this increase was mortgage lending income, which increased $596,000 or 70% compared to last year. This improvement was primarily due to lower mortgage rates, leading to a significant increase in residential refinancing volume.

  • Let me go on to the expense category. Non-interest expense for Q2 2012 was $28.2 million, a decrease of $415,000 or 1.5% compared to the same period in 2011, obviously where we have had a very good expense control, coupled with our ongoing efficiency initiatives.

  • Concerning our combined loan portfolio, we reported total loans, including covered loans, of $1.7 billion, a decrease of $98 million compared to the same period a year ago. However, as anticipated, the majority of this decrease is related to a $79 million decrease in FDIC-covered loans and $14 million decrease in our student loan portfolio.

  • Now let me take a moment to discuss our linked quarter loan growth. When compared to last quarter, our legacy loan portfolio increased $71 million. Of this increase, $54 million relates to the seasonality of our agricultural and credit card portfolios. Our student loan and consumer portfolios decreased a combined $7 million.

  • So, on a positive note, our real estate portfolio increased $27 million. We saw growth in each of our major real estate portfolio segments -- construction and development, commercial real estate, and single-family homes. In fact, when we normalize for seasonality and the continued decline in student loans, our legacy loan portfolio saw a significant improvement from previous previous seasonally-adjusted link-quarter discussions, dating back as far as Q4 2008.

  • While each of our eight banks are beginning to report some improvement in the local economy, the credit liquidity, as we've said before, will be in the pipeline. But, during the last quarter, we have seen some slight improvement in our pipeline, primarily from the Central Arkansas region. However, we have also seen reports that the economy and loan demand is showing some improvement in the Northwest Arkansas region, and the Northeast Arkansas region continues to show a modest loan growth.

  • While it is still early to call, we are cautiously optimistic about the beginning of a somewhat improved loan pipeline. We continue to have good asset quality. As a reminder, covered assets acquired from the FDIC are recorded at their discounted net present value, and the resulting FDIC long-share indemnification provides significant protection against possible losses. Thus, FDIC-covered assets are excluded from the computations of the asset quality ratios of our legacy loan portfolio.

  • The allowance for loan losses equaled 1.76% of total loans and approximately 222% of nonperforming loans. Nonperforming loans as a percent of our total loans decreased from 89 basis points to 79 basis points when compared to the last quarter. Nonperforming assets as a percent of total assets were 113 basis points, down 1 basis point. Nonperforming assets, including TDRs as a percent of total assets, were 1.48%, unchanged from the first quarter. These ratios continued to compare favorably to the industry and our peer group. In fact, our nonperforming assets to total assets puts us in the 78th percentile within our peer group based on March 31 peer versus our June 30 actual.

  • The annualized net charge-off ratio for Q2 was an amazing 18 basis points and 42 basis points year-to-date. Excluding credit cards, the annualized net charge-off ratio was only 2 basis points for the second quarter and 27 basis points year-to-date.

  • Our credit card portfolio continues to compare very favorably to the industry. In fact, our Q2 annualized net credit card charge-off for loans increased 33 basis points to 1.42% compared to 1.75% for Q1. Our loss ratio continues to be almost 350 basis points below the most recently-published credit card charge-off industry average of 4.9%. We are very conscious of the potential problems associated with high loss of unemployment and continue to reserve accordingly.

  • Primarily due to our improving asset quality and low charge-off rates, the provision for loan losses, again, considerably lower than in previous quarters. For Q2 the provision was $775,000 compared to $771,000 for Q1.

  • Bottom line, we're beginning to experience good asset quality compared to the industry, highlighted by our low credit card charge-offs, allowing for lower-than-normal provision expenses, also efficiency that has driven improvement in our noninterest expense, and most importantly, an extremely strong capital base with a 10.8% tangible common equity ratio and risk-based regulatory ratios that rank in the 92nd percentile of our peer group.

  • Before we go to Q&A, let me update you on FDIC acquisition opportunities. During the quarter we participated in due diligence on five FDIC projects. One of the projects was polled by the FDIC, and we submitted unsuccessful bids on the other four. While all of our bids included loss share protection, three of the winning bids did not. Two of the banks were small but were certainly in our footprint. Our intention in bidding on one of the banks was to ultimately liquidate, thus a pure economic bid.

  • While this represents an addition to our normal FDIC acquisition strategy, we feel like there will be some unique FDIC opportunities that will need to be liquidated, and we can leverage our loss share infrastructure. We continue to actively pursue FDIC acquisition opportunities, and our infrastructure will certainly support that effort. Simmons First is well positioned based on the strength of our capital, asset quality, and liquidity to capitalize on opportunities that will come with increased loan demand, rising interest rates, and/or acquisition opportunities.

  • Now, in closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and credit card portfolio. Quarterly estimates should always reflect the seasonality.

  • Now, this concludes our prepared comments, and we would like to now open the phone lines up for questions from our analysts and institutional investors. Let me ask the operator to come back on the line and once again explain how to queue in for questions.

  • Operator

  • (Operator Instructions). Dave Bishop, Stifel Nicolaus.

  • Dave Bishop - Analyst

  • A question for you in terms of the agri lending. I know there's obviously some seasonality in the second-quarter numbers, but seeing some headlines related to the potential rise in crop prices there over time in your neck of the woods, is that something that you see having a large impact in terms of the lending base and maybe in terms of loan portfolio or asset quality?

  • Tommy May - Chairman & CEO

  • Your question specifically is about agri lending for (technical difficulty).

  • Well, first of all, let me just say -- and I'll let David Bartlett -- he has talked to the three agri banks that we have. Let me just start off by saying that we're very pleased with where we are relative to our agri portfolio. As you know, in our area we, generally speaking, are fully integrated, and this is obviously a good time to be fully integrated. While that impacts the input cost as far as the crops, I recently traveled at least half of the state and saw the crops, and they look very, very good.

  • And there are several things that can affect the agri demand, and I'll let David just mention what he has found out in his conversation with our banks. David?

  • David Bartlett - President & COO

  • Thanks, Mr. May. Dave, thanks for the question.

  • We've got three of our banks that are very active in agricultural lending, and that's our Simmons First National lead bank, and we've got about a $70 million outstanding portfolio at the bank currently. Our Northeast Arkansas Bank, headquartered in Jonesboro, and they've got a little over $30 million, and our South Arkansas Bank in Lake Village with about $20 million outstanding currently. So a total portfolio of crop loans, if you would, of around $120 million. And right now, somewhere in the neighborhood of $10 million to $15 million of commitments still left to fund for the rest of the input costs, to cover the rest of the input costs of some of our borrowers.

  • And when you look at our ag lending, I think it's important, as Mr. May has already said, especially with the drought that a lot of the country is experiencing, is to kind of look at what type of products we finance. And of those crops, what kind of irrigation opportunity we have to support drought situations.

  • Let me start off by saying that obviously the south part of the state plans earlier than the north part of the state, just because of Mother Nature and the dynamics of the warming process in the spring. And this spring was an unusually warm spring. So all of the state got about a three- or four-week headstart on what we normally do.

  • We're starting to see crops, corn crops in the south part of the state, which represents about 7% to 10% of our total acreage that we loan, we are starting to see those harvest. About 90% of the corn crops are irrigated, and I will tell you right now, it looks like it's going to be a great year for the corn crops of somewhere around 180 bushels per acre, which is outstanding.

  • The next sequence of harvest will occur with our rice crops, and that accounts for about 40% of the acres that we finance. Rice is 100% irrigated, obviously, and another good crop yield off of that, about 175 to 180 bushels per acre.

  • Then we go to the soybeans, and soybeans amount to about half of our acreage. And of those, about two-thirds of the acres are irrigated. And we're expecting about a 40 to 60 bushel per acre yield off of those row crops. And they won't start harvesting until the latter part of August or early part of September.

  • And really, the last crop to come of the field is cotton, and we're just not very active in cotton. Again, but half of our crops are in soybeans; about half of our acres are in soybeans; about 40% in rice; and somewhere around 7% to 10% is in corn. And all those look fairly good as far as yields, prices and the irrigation systems that are protecting primarily now the soybeans because the other two are ready to start being harvested.

  • Tommy May - Chairman & CEO

  • And Dave, one thing also is we introduced two loan programs for agri equipment. One we introduced several months ago in the $20 million range, and it was fully funded. And then we are going to be introducing another program. And just based on the aging of equipment and based on the activity over the last three or four years, we believe there's going to be some more than normal opportunities on the agri equipment piece after the harvest is over. So that would be, I guess, a pickup.

  • Generally speaking, in the agri industry, the farmers are terribly loyal, and so to get new business is a challenge. Fortunately, we have a pretty good percent of the market, and so keeping ours is very important, and we have done that. So we've probably given you a whole lot more color than you wanted, but does that help?

  • Dave Bishop - Analyst

  • Yes, I appreciate the color. The ladder initiative, in terms of the equipment, would that show up on the commercial side of things, or would that be billed or sort of segmented under the agri category?

  • Tommy May - Chairman & CEO

  • Commercial (technical difficulty) agri equipment. Then again, a lot of it might not show up until the first quarter of 2013. Just depends on the timing of the harvest. They're going to spend their own money before they spend ours. And so --.

  • Dave Bishop - Analyst

  • And a final question, Tommy, related to credit you alluded to in terms of the improvement of the credit outlook here, a couple quarters in a row, about $750,000 in terms of loan loss provision. I hate to put a crystal ball under you, but do you think that is going to represent the new normal going forward at least over the near term?

  • Tommy May - Chairman & CEO

  • Well, like you say, a crystal ball provision is a challenge because it's not only the asset quality piece. From the asset quality piece, my answer, I think, would clearly be yes.

  • Obviously if we are able to see some more improvement in our loan pipeline, then we might have to adjust accordingly. But I would just tell you at this point in time, I think the answer would be yes, based on everything I know. As you know, we have been very proactive in reserving, and make no apologies for that. But I think based on our asset quality numbers continuing to improve, and they're already very good, and our credit card portfolio holding its own with our charge-offs dropping to 1.47, that it's very likely that that would be the new norm, and it could be even a little bit high.

  • Dave Bishop - Analyst

  • Great. Thank you.

  • Operator

  • (Operator Instructions). Derek Hewett, KBW Financial.

  • Derek Hewett - Analyst

  • Could you guys talk a little bit about the relatively flat linked quarter change in deposit service fees? Typically we see deposit service fees increase from the first quarter to the second quarter. But this time it was relatively flat. So could you talk around that and give a little color on what's going on there?

  • Tommy May - Chairman & CEO

  • Well, I guess we still are seeing some impact from Reg DD, and I don't think we've been fully influenced by it yet. So I guess there are some adjustments that we're seeing there, and I'm looking at everybody else, and we're kind of looking at one another here.

  • Bob Fehlman - EVP & CFO

  • This is Bob. I mean we would like to tell you exactly what it is, but it is in the overdraft protection, NSF, and this quarter was down more than we expected it to be. There wasn't any driving factor. Those are one things. When it's showing up on the statement and different disclosures that you have, they just tends to be less predictability in the numbers right now. And that's what we're seeing. We were a little surprised by the quarter, but it wasn't anything else related to any other service charges or any other factors. It was all the effects of the Reg DD and so forth.

  • Tommy May - Chairman & CEO

  • The interchange.

  • Bob Fehlman - EVP & CFO

  • Yes, now you did notice, if you'll notice also, down in the credit card area, the fees were down a little bit in that area. And in that area we've seen every month a couple of hundred thousand. That's all debit interchange. The debit -- what was the provision that was put in from Illinois, the --?

  • Tommy May - Chairman & CEO

  • The amendment.

  • Bob Fehlman - EVP & CFO

  • Well, the amendment that was --

  • Tommy May - Chairman & CEO

  • Last year --

  • Bob Fehlman - EVP & CFO

  • We don't like it, so we try not to talk about it. But anyway, that was not supposed to affect the smaller banks and it obviously did. Visa renegotiated with everybody on their fees back in the middle of the year. And as we reported earlier, toward the end of 2011, it was probably about a $600,000 impact. So we did see some impact. It was the Durbin Amendment, is what we're talking about.

  • Derek Hewett - Analyst

  • Great. And then, could you guys provide an update on the progress of your efficiency initiatives and where you are in the process?

  • Tommy May - Chairman & CEO

  • Bob, I will let you --

  • Bob Fehlman - EVP & CFO

  • Yes, I would tell you we're substantially completes with the project. Now, we still have some residuals. We've done this through attrition as we put any positions that were lost on this had gone through attrition. So it's taken us a little longer, but we'll still see another $0.5 million impact this year; next year, another $0.5 million to $1 million impact.

  • But as you can see, when you normalize, we looked at this just recently and you look at the last three years, our non-interest expense when you normalize for acquisitions and the burdens related to that, we've been relatively flat on a $105 million base. So that -- you can see the impact in those numbers are about $4 million to $5 million that we've seen in there.

  • But I would tell you we're relatively close and complete with the process. We still have a little bit of cost savings we will achieve toward the balance of this year and then into next year another, say, $1 million total.

  • Tommy May - Chairman & CEO

  • I think the other thing is that I'm not sure we'll ever be through with efficiency initiatives. We'll be spending time in the balance of this year looking at where we were, where we are, and looking for other opportunities. Obviously, with the change in the industry, we do have to be more efficient. And so we will continue to look at those at the balance of the year. And if we specifically identify some that we will be introducing in 2013, we will be talking about that prior to the end of the year.

  • Did you hear that okay?

  • Derek Hewett - Analyst

  • Yes, I did, and thank you very much.

  • Tommy May - Chairman & CEO

  • Thank you, Derek.

  • David Bartlett - President & COO

  • Thanks, Derek.

  • Operator

  • Matt Olney, Stephens.

  • Matt Olney - Analyst

  • Tommy, going back to your commentary and your prepared remarks on the failed bank bidding, I believe you said you've been on five projects. Was that a year-to-date number or a last 12 months number?

  • David Bartlett - President & COO

  • That was just the last quarter. Not to interrupt, but that was just for the last quarter, Matt.

  • Matt Olney - Analyst

  • I'm sorry, so that was in 2Q.

  • David Bartlett - President & COO

  • That's correct.

  • Matt Olney - Analyst

  • And if I understand this right, within your failed bank strategy, I think you said you're now looking at more transactional opportunities, not just strategic; did I understand that right?

  • Tommy May - Chairman & CEO

  • Yes. Let me just try to clarify that a little bit. Obviously, our goal in deployment of capital is still going to be the FDIC opportunities, and we actually saw more in Q2 than we anticipated. We were very proactive in the bidding on those.

  • And, as we said, one was withdrawals of -- in two or three were non-loss share and one loss share. So the competition, even in these markets, was a little bit greater on the non-loss share piece than we had anticipated, though we are still seeing some play there. So we're still going to be very proactive in that area.

  • What we have also been doing -- and David has been working on this for some time -- is, again, quantification, identification, qualification and making -- having some conversations with potential producers of acquisitions. We don't see that in the immediate future, but we still see it in part.

  • I think the area that we have not really changed, we just simply added to our strategy and, to a certain degree, to our footprint, and that is, if we believe there are certain banks out there that have some excess ratio numbers like we have not seen in the past and that truly are banks that are going to be liquidated one way or the other and that we believe that we have put together a really good infrastructure and that we want to leverage that infrastructure. And we think we can do that by possibly bidding and getting some of these things that we would not necessarily manage on a go-forward basis. We, in fact, attempted one of those and was not successful. It was very small, but it was, again, part of our history of putting our toe in the water before we jump in. And, obviously, if it were successful, it can leverage the offshare to connect to the front-end profit, and it can be accretive for that period of -- for the time of liquidation.

  • So does that answer your question, or David, do you want to add anything to that?

  • David Bartlett - President & COO

  • I'm fine. I'm just trying to -- Matt has --.

  • Tommy May - Chairman & CEO

  • Did that clarify it?

  • Matt Olney - Analyst

  • It does. And you also alluded in your response to traditional M&A, and is it fair to say that given the pipeline of the sales bank opportunities that you see, the opportunity for you in live bank M&A could be pushed out another six months or year, or is that not quite fair?

  • Tommy May - Chairman & CEO

  • I would just say this, that the immediate reaction would probably say yes, six months or a year. But it would be pushed out there, not because necessarily of FDIC-assisted transactions, but I think still there's this issue of the seller coming to grips with value, and I think it's going to take a while for that to happen.

  • We've had some banks, six to 10 banks, that have contacted us over a period of time to have some conversation. And so I see it being pushed out, David, a little bit longer, primarily because of that versus capacity.

  • David Bartlett - President & COO

  • I agree with that, Mr. May. And you know, Matt, with the traditional side, we talked about this before, we're going to look on the traditional side to fill-in footprint that we acquired through the FDIC or go into markets where we're going to look for partners to expand into a market versus waiting on the FDIC to open up the market for us.

  • So the traditional M&A, we're starting to look and define the top of bank with asset quality, and we've developed a list of somewhere around 40 to 50 banks with a footprint expansion or into markets we are looking to -- somewhere around $350,000 to $500,000 in size.

  • Tommy May - Chairman & CEO

  • I think the other thing, just laying it on the table is, the spot price has a lot to do with how aggressive and how active we're going to be on the traditional M&A. If we found the right cash deals, we would obviously be interested, but we always see it as a mixture of stock and cash. So there's several things that we've kind of pushed that out a little bit. And I think priority would be FDIC-assisted and looking at the economic opportunity through some of the others that I just talked about. And along the way, if somebody approaches us and we find that it is right for them and it is right for us and we can make it work from a seller price standpoint, I think we will be all over it. And we obviously have the capacity, manpower-wise, as well as infrastructure, to support all three of those initiatives.

  • Let me just add one thing, if I might. Before we made the decision that we might want to acquire a failed bank that was going to be liquidated instead of part of our go forward growth strategy, we very carefully analyzed our loss share capacity. To make sure that that peaks with the business, which it may or may not yet, will not interfere with the other FDIC-assisted opportunities.

  • Bob Fehlman - EVP & CFO

  • Matt, we talked about the experience and the qualifications of that loss share team. And I told you before, there is an accounting component, and there is a loss share workout component. And bragging on our people, we've got those two components very well organized. And then the third piece of it is the due diligence component. And although you're given a short time, we've got that team in a place where they can go in and do a pretty thorough understanding, although not a full review of asset quality, looking at the challenges we would have if we wanted.

  • So we needed to utilize those resources and continue to give that timeframe of maybe 24 months, whatever it would be for a traditional merger and acquisition to work by filling in with some of these FDICs.

  • Matt Olney - Analyst

  • That is understood. I appreciate the color. And I also wanted to put you over to the margin, probably more of a Bob Fehlman question, the margin was down sequentially more than I expected. I know there could be some noise quarter to quarter from the impact of the covered loan cash flow issues, so can you help me out and talk about the margin sequentially and what the drivers there were at the drop?

  • Bob Fehlman - EVP & CFO

  • And margin was down. As we gave guidance at the end of last year, we did expect the margin to be closer to 4%. So the biggest impact in that was the covered loans coming down a little more than we expected.

  • Now we have the accretion from the benefit of accreting the credit market over the life, as we've gone over, but that portfolio going down $79 million and while our legacy loans on a linked quarter did go up, as we said, you are moving money that is at 8.25% into either lower rate loans on the books or it's going into basically overnight money.

  • So that impact right there is the biggest impact that we had overall was the covered loans going down.

  • Matt Olney - Analyst

  • And do you have the breakout of the loan yields covered versus non-covered?

  • Bob Fehlman - EVP & CFO

  • Yes, I would tell you the loan yield on the covered is about -- the yield is actually about 8.25%, but when you accrete out the credit markets we have done, it goes up to about 16%. So the true yield, I would say, is 8.25%, but because of the accounting adjustment on the accretion of the credit market, it goes up to about 16%.

  • On the rest of the portfolio, it's probably below 6%, right at about 6%, 6.10%, somewhere in there. Below 6%, I'm told.

  • Tommy May - Chairman & CEO

  • I would also guess that the impact that you saw, the decrease in the covered loans at that $70 million is not likely to be a number that you're going to see going forward because that covered loan level has dropped significantly.

  • Bob Fehlman - EVP & CFO

  • That's exactly right, and our covered loans are down to some $128 million. And we believe we're getting close to the $114 million. We believe we're getting close to the relationship balances that are out -- even though they'll be covered, we consider most of those relationships that are left, there's a few others, but we should not see the dramatic drop that we've seen. That portfolio, we're probably down already maybe 65% from acquired balances. So they've run off quite quicker. Our loss share guys have moved through some of the troubled loans a lot quicker than we thought they could. They've really pushed us out and moved through those quickly. But we've believe we'll get them to more of a core base right now, Matt.

  • Tommy May - Chairman & CEO

  • So really, going forward, stay in part the level of optimism for us --

  • Bob Fehlman - EVP & CFO

  • Should hit a base, yes.

  • Tommy May - Chairman & CEO

  • Should we -- we are sort of at the bottom of that, and we're very optimistic this leveraging process we are talking about should be additive.

  • David Bartlett - President & COO

  • One last comment I'd say on the margin is we did expect our liquidity to be able -- at some deposit, more deposit run off than we did have. Our liquidity is still close to $450 million to $500 million overnight. It's not costing a lot on the bottom line, but it is significantly impacts the margin number.

  • Matt Olney - Analyst

  • And I believe in Q3 seasonally, that liquidity comes down sometimes. Should we expect that again in the third quarter?

  • Bob Fehlman - EVP & CFO

  • I wouldn't expect a lot right now because agri has funded up. We probably only have about $10 million, $20 million left in agri at this point. We will have a little bit, but I wouldn't expect a whole bunch, and it will begin to pay down toward the end of the quarter.

  • Tommy May - Chairman & CEO

  • I do think just once we go forward and we said this before is that our levels of liquidity and from the standpoint of interest rates and the potential of interest rates rising, the economic impact to that is very significant.

  • On the other hand, there's nothing on the horizon that would give us the belief that rates are getting ready to go up. So I'm not sure that either the latter part of the year that they won't start to see some disciplined reduction of that liquidity. It won't necessarily be because of the seasonality, but it may be more of a strategy.

  • Matt Olney - Analyst

  • And that's interesting. And my next question is in that same topic, in some of your recent presentations, you list I think you call them your long-term targets as far as ROA, margin, EPS, and that's helpful to see that. We appreciate that. And I think the margin was around [420] longer-term, so how should we think about that margin in terms of what that assumes to increasing to that level?

  • Tommy May - Chairman & CEO

  • Well, are you asking what are we going to do to get it to those levels, or are you saying that, when is it going to get to that level?

  • Matt Olney - Analyst

  • Well, I guess I'm saying, I can see a few levers to do that, one being bringing down the liquidity, and two, the interest rate movements, and one you can control and one you can't. And I just want to know how you think about both those things and what the impact of those would be from your point of view?

  • Tommy May - Chairman & CEO

  • I think what you said is exactly 100% right. Actually, there are three drivers in that process and to get to those levels. One is going to be liquidity reduction, and the other is rising interest rates. And I think the third, obviously, is improved loan pipeline. And I think the issue of improved loan pipeline and reduced liquidity are the high -- focused, highly probable of the three. Obviously we would love to see the third one kick in because we are so, from an outgoing standpoint, we are cost so well for, say, a 300 basis point shock.

  • And so I would see the most immediate impact in moving us toward that margin and that margin number was, if you'll remember, that margin number as an internal target was, yes, [420] and the ROA was [110] and the efficiency was 63%. And all of that was primarily driven by -- with the 300 basis point shock of the interest rate.

  • And the other, I guess, had to do with the M&A side relative to the FDIC.

  • So we are not going to get to those internal targets just with liquidity and existing loan pipeline, but certainly we ought to be moving from where our margin currently is toward that target with an improved loan pipeline and a reduced liquidity and that lane gap would come with rising interest rates.

  • Does that answer your question?

  • Matt Olney - Analyst

  • It does, yes. It answers the questions, and I appreciate your time, and thank you.

  • David Bartlett - President & COO

  • Matt, have a good day.

  • Matt Olney - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions).

  • And with no one else in the queue, I'd like to turn the conference back over to Mr. Tommy May for any additional or closing remarks.

  • Tommy May - Chairman & CEO

  • I just want to thank all of you for being here and being patient with my voice, and we'll look forward to our next meeting. And we're very positive and upbeat about our quarter. So thank you and have a great day.

  • Operator

  • Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation, and have a good afternoon.