Simmons First National Corp (SFNC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation First Quarter Earnings Call and Webcast.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. David Garner.

Please go ahead.

Good morning.

My name is David Garner, and I serve as Chief Accounting Officer for Simmons First National Corporation.

We welcome you to our first quarter earnings and teleconference webcast.

Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, President and CEO of Simmons Bank, our wholly-owned bank subsidiary; and Barry Ledbetter, Chief Banking Officer.

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 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 risks 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 SEC.

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 reconciliation of those metrics is contained in our current reports filed with the U.S. Securities and Exchange Commission yesterday 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.

With that said, I'll now turn the call over to George Makris.

Thanks, David, and welcome to our first quarter earnings conference call.

In our press release issued yesterday, we reported net income of $22 million for the first quarter of 2017, a decrease of $1.4 million or 5.8% compared to the same quarter last year.

Diluted earnings per share were $0.70, a decrease of $0.07 or 9.1%.

Included in the first quarter earnings were $412,000 in net after-tax merger-related and branch rightsizing costs.

Excluding the impact of these items, the company's core earnings were $22.5 million for the first quarter of 2017, a decrease of $653,000 compared to the same period last year.

Diluted core earnings per share were $0.71.

For the quarter, our efficiency ratio was 60.9%; return on assets, 1.07%; return on equity, 7.7%; and return on tangible common equity, 12.2%.

During the quarter, the following items impacted pretax earnings compared to the same quarter last year, which I will discuss later.

First, accretion income decreased by $3.7 million; compliance and audit costs increased $2.1 million; a onetime equity grant expense of $840,000; an allowance on the bulk sale of nonperforming loans of $676,000.

Our loan balance at the end of the quarter was $5.8 billion.

Total loans increased by $144 million during the quarter, which included seasonal reductions in our credit card portfolio of $12.6 million and agricultural production loans of $9.3 million.

The legacy portfolio grew by $306 million, of which approximately $50 million migrated from acquired legacy and $112 million of acquired loans paid off during the quarter.

We continue to be encouraged by the growth trends in our loan portfolio.

Our loan pipeline, which we define as loans approved and ready to close, was $287 million at the end of the quarter.

And our SBA pipeline was $64 million, and we have an additional $465 million in construction loans not yet funded.

Our concentration of construction and development loans at the end of the quarter was 50.5%, and our concentration of CRE loans was 233.7%.

All regions are experiencing good loan growth.

The company's net interest income for the first quarter of 2017 was $72.4 million, a 3.1% increase from the same period last year.

Accretion income from acquired loans during the quarter was $4.4 million, a decrease of $3.7 million from the same quarter last year.

Based on our cash flow projections, we expect total accretion for 2017 to be approximately $14 million compared to $24.3 million in 2016.

Our net interest margin for the quarter was 4.04%, which was down from 4.41% in the same period last year.

The decline in net interest margin was significantly impacted by the decrease in accretion income.

Also, during the first quarter, agricultural loans and credit card balances, which have higher yields, declined due to the seasonality of those portfolios, and the loan balance from our consumer finance division continues to decline as we deplete that portfolio after closing that division.

The company's core net interest margin, which excludes the accretion, was 3.80% for the first quarter of 2017 compared to 3.92% in the same quarter of 2016.

Because of the very competitive rate environment and our loan mix, we expect our margin to remain in the 3.70% to 3.80% range.

We have experienced positive core deposit growth of $721 million over the last year.

We do project that our cost of funding will marginally begin to increase as a result of the recent and expected Fed rate hikes.

There are some significant differences in our noninterest income that require some comparison of both quarter-over-quarter and linked-quarter results.

Our noninterest income for the quarter was $30.1 million.

Trust income continues to be very positive on both the quarter-over-quarter and the linked-quarter basis.

Fees on deposit accounts increased primarily due to the addition of Citizens Bank during 2016.

On a linked-quarter basis, we are down due to the seasonal nature of those service charges.

Since 2015, loan fees have grown to a significant level.

In Q1, we assessed $2.5 million in commercial loan origination fees, of which $2 million was deferred.

On a linked-quarter basis, mortgage lending income was down $800,000, and SBA lending income was down $1.4 million.

Gains in our securities portfolio have diminished after the recent rate increases, and we do not expect to repeat last year's gains on sales of securities.

Noninterest expense for the quarter was $66.3 million, while core noninterest expense for the quarter was $65.7 million.

Included in noninterest expense was a onetime equity compensation true-up of $840,000 2016 restricted share grants as well as $2.1 million in incremental compliance and audit cost over the same period in 2016.

Included in the $2.1 million increase was a onetime data aggregation project cost of $1 million.

We continue to prepare for crossing the $10 billion asset threshold as a result of closing our 3 pending acquisitions.

The costs of that preparation are significant, and most of the costs will be incurred prior to the benefit of the business combinations.

As an example, our audit regulatory affairs cost has grown from $4.1 million in 2015 to $7 million in 2016, and we're projecting to exceed $9.2 million this year.

This does not include an additional $1.5 million to $2 million remaining cost for DFAST.

We expect these costs will increase as we add the pending acquisitions.

ASU 2016-09 stock compensation accounting became effective in Q1.

As a result, we recognized an income tax benefit of approximately $1.2 million during the quarter.

At March 31, 2017, the allowance for loan losses, for legacy loans was $37.9 million, with an additional $435,000 allowance for acquired loans.

The company's allowance for loan losses on legacy loans was 0.82% of total loans.

The loan discount credit mark was $28.9 million, for a total of $67.2 million of coverage.

This equates to a total coverage ratio of 1.16% of gross loans.

During the first quarter, our annualized net charge-offs, including credit card charge-offs to total loans, were 18 basis points.

Excluding credit card charge-offs, our annualized net charge-offs to total loans were 11 basis points.

The provision for loans during the quarter was $4.3 million compared to $2.8 million during the same period last year, but equal to the fourth quarter of 2016.

Based on our projections, we expect total provision for 2017 to be approximately $15 million compared to $20.1 million in 2016.

In February, we executed the sale of 11 substandard loans, which were primarily acquired loans with a net principal balance of $11 million.

We recognized the loss of $676,000 on this sale.

We continually explore options to manage problem assets remaining from the acquired FDIC and Metropolitan portfolios as well as options to further reduce problem loans and expect to execute additional sales of assets.

Our capital position remains very strong.

At quarter end, common stockholders' equity was $1.2 billion.

Our book value per share was $37.30, an increase of 5.5% from the same period last year, while our tangible book value per share was $24.51, an increase of 7.3% in the same period last year.

On January 17, we merged our finance company into Simmons Bank.

We have ceased making new loans in that group.

At March 31, loan balance in this portfolio was $44 million compared to $51 million at year-end.

The average remaining life expectancy of these loans ranges from 15 months for direct consumer loans to 53 months on rural state consumer loans.

We project an annualized impact earnings of approximately $1 million from discontinuing these types of loans as a result of the declining loan balance, lost noninterest income and ongoing expense of servicing the remaining loans.

During March, we also exited the indirect lending market.

The balance in this portfolio is $237 million, with an average yield of 2.44%, including fee income.

Indirect lending is a low-margin unit, and we made a financial decision to reallocate our capital resources.

We announced the acquisition of First Texas BHC, Inc., headquartered in Fort Worth, Texas, on January 23, 2017.

This acquisition, along with our previously announced acquisitions of Hardeman County Investment Company and Southwest Bancorp, will increase our total assets by approximately $5 billion and allow us to move into the attractive Oklahoma, Texas and Colorado markets while expanding our market share in Tennessee and Kansas.

We are currently progressing through regulatory application and shareholder approval processes for each of these mergers as well as planning for the integration.

In the first quarter, we announced purchase of the former Acxiom building in River Market District in Downtown Little Rock.

The 175,000-square-foot-plus building and its adjacent park will provide an excellent opportunity for Simmons to consolidate its Central Arkansas locations and to provide space for our additional expected growth.

We will transition our current associates in the Central Arkansas area into the new building over the next 12 months.

This concludes our prepared comments.

We'll now open the phone line for questions from our research analysts and institutional investors.

At this time, I'll ask the operator to come back on the line and once again explain how to queue in for questions.

(Operator Instructions) And our first question comes from David Feaster of Raymond James.

So I want to start off on credit quality.

I know you guys sold some problem loans and talked about working through some others, but nonaccruals ticked up in the quarter.

And I just wanted to hear what drove this and maybe your general thoughts on credit, and if there's anything specifically you're seeing in your book that might be causing you any concern.

Okay, great.

So the first thing I want to mention, David, is that all the asset ratios that we published are based only on our legacy loan portfolio, which is $4.6 billion of the $5.8 billion.

So that ratio did rise primarily because of 2 loans that went to nonaccrual, both of them in the Wichita market, both of them managed by the same loan officer.

I will say that we've had some personnel changes in that market during this quarter.

Both of those have not deteriorated to the point that we have any specific reserves against them, we're still working through those.

One of them was a first-year start-up business that missed their first-year projections.

The beginning of the second year is looking better.

The other was a floorplan loan that had additional collateral associated with it.

The floorplan was not managed appropriately on our end of the deal.

Our loan review crew caught that and, therefore, those have been conservatively placed on nonaccrual at this point.

Otherwise, our legacy portfolio continues on a steady state.

Now, I think it's important that we talk about our total loan portfolio, so we're going to add some numbers today with regard to the acquired loans.

So, our nonperforming loans in our legacy portfolio went up from $39 million to $53 million during the quarter, an increase of $13.7 million.

However, when we include nonperforming loans in our acquired portfolio and add them to our legacy portfolio, that total actually went down from $85.5 million to $84.5 million, so our nonperforming loans in total went down $1 million during the quarter.

On nonperforming assets in our legacy portfolio, that went up from $66.8 million to $79.9 million, an increase of $13.1 million.

But when we add the progress in our acquired portfolio, that total went down from $112.9 million to $111.3 million.

So it actually went down $1.6 million.

I know it's awfully confusing, it is to us when we have these 2 buckets of loans to address, but because our allowance in our asset quality only deals with legacy loans, sometimes, those numbers are a little bit misleading with regard to the overall picture.

So once again, the increase in our legacy nonperforming loans were primarily 2 loans out of Wichita, which totaled $11 million.

But overall, it actually improved for our company.

So I hope that gives you a little more color about the asset quality.

Yes, that's great color.

Your legacy loan growth has been very strong, notably in CRE this quarter.

I know you're still well below the thresholds, but could you just talk about what you're seeing here, what's the competitive environment like and maybe by segment and region as to what's driving the CRE growth?

Well, I'll sort of take it overall and Barry Ledbetter might want to pipe in on the regional approach.

But I will say that we're still learning how to take advantage of our new size and scope.

And we are developing relationships with customers that previously we just didn't have the capacity to take care of.

And there are several residual effects on our company from those relationships, and we're going to talk about commercial loan origination fees here in just a little while and how that's grown within our company and what that means to our noninterest expense.

But we're pretty pleased with what we're seeing in our CRE opportunity.

It's a pretty diversified CRE portfolio, it's diversified not only from segment, but also by geography.

We monitor very closely geographic concentrations.

We experienced that during the downturn in 2008.

While we didn't have concentrations overall, we did in some markets that had specific problems.

So we're pretty in tune to that geographic concentration.

We continue to see really, really good opportunities, not only from moving some existing business into our bank, but from some new relationships as well.

We've been very successful in hiring an excellent team of commercial lenders as a result of our size, and those hires are really paying off.

And Barry, I don't know if you want to mention more specifics about geography or type.

But overall, we're real pleased with not only our past performance, but also the outlook in our loan pipeline.

And George, I would say most of our loan growth the last quarter has been in Arkansas and Missouri.

In Arkansas, it's really been in Central Arkansas as well as West Arkansas.

In Missouri, we've seen tremendous loan growth in Kansas City.

In fact, their loan growth increased about 45% from the fourth quarter of '16.

We've added new leadership; there is a new market president there.

We've added 2 new commercial lenders in the last 30 days in Kansas City that we think is going to continue to improve our loan growth there.

We continue to have very strong loan growth in St.

Louis and limited loan growth in Tennessee.

But as we look forward in the pipeline, we talked about $287 million of loans.

In the past, it's always been really Arkansas and Missouri that's really spurred that loan growth.

But now with Tennessee, we've added a very strong commercial loan manager there.

And as we look at our pipeline report of $287 million, that's really evenly distributed between all 3 markets.

So we're starting to see the benefit of adding the commercial lenders in Kansas City, the new leadership there.

And I think we'll continue to see strong loan growth in middle of Tennessee with the addition of the commercial loan manager.

Okay, that's helpful.

Last one for me.

Could you just give us an update on the Hardeman deal that got delayed?

Is there any update there as to the timing and thoughts about any potential delays for your other pending acquisitions in Texas?

Sure, David.

I think I expressed my frustration on the last call with the process that is in place currently for public comments.

Not that all public comments are without merit, but we have addressed all of the Federal Reserve's questions regarding not only the comments, but other questions that they had having to do with our application.

We generally get 8 days to respond when they ask a question.

They have no set time line to respond to us with their decision.

We're hopeful that a decision on the Hardeman transaction will be forthcoming in the near future.

We have not filed our applications on either Bank SNB or Southwest Bank yet.

We have some planning to do that needs to go into those applications.

And quite honestly, we're a little hesitant to file those until the resolution on the Hardeman application comes through.

It is an extremely frustrating process, not only to us, but especially for the acquired bank.

If you can imagine the indecision in the minds of the associates of that bank about their future and the future of whether this transaction will actually transpire or not, the risk that this current process puts into the M&A system and the financial system in the United States is an unbelievable experience to me.

Now the questions we got, we feel like we addressed very well.

We don't think that there are any issues that would hold up positive resolution to the application.

But because ex parte rules kick in as soon as that comment comes through, we really can't have those discussions to find out.

All of our communication is in writing.

So until we get that back from the Washington Fed, we're just in limbo now.

So I think you can tell that it's a frustrating process, not only for Simmons, but other banks that have to go through this.

We're very hopeful that a more streamlined approach might be developed in the future because the risk associated with this delay is extreme.

And our next question comes from Brady Gailey of KBW.

So is $500 million of annual loan growth still the right way to think about the growth opportunity for you all this year?

Well, Brady, I guess I would tell you today, we would expect at least $500 million of loan growth.

The only downside to our loan growth are the 2 business units that we've exited.

So we've got now $44 million left on our books in our consumer finance portfolio.

It will continue to deplete over the years.

We have also discontinued indirect lending.

That particular portfolio increased several million dollars last year.

It will also wind down and not produce any additional growth for us.

But I can tell you from our pipeline, which you heard in our prepared remarks, it's very, very healthy.

And if the same percentages of that pipeline fund that have over the last 2 to 3 quarters, that $500 million number should be surpassed.

So conservatively, yes, I would say that $500 million is a good number.

And Brady, there's probably about a $5 million a month paydown on both the consumer and indirect.

So as George said, that's the headwind we're overcoming, is about $5 million a month on paydowns from those 2 units.

Okay.

All right, that's helpful.

And then I know there -- the tax rate was a little lower, you'll have some moving pieces there.

But what's the best way to think about the forward tax rate?

I think -- well, first off, going forward I think our average rate is about 33.5% to 34% is a good go-forward rate.

As we said, we had a onetime adjustment this quarter for the accounting change, so you kind of have to back that $1.2 million out of the number to get your go-forward rate.

Brady, this is David Garner.

Q1 is always our biggest equity comp divesting period because of incentive plans.

So that number is significantly higher than it will be in future quarters going forward.

I would estimate that 90% of our vestings occur during the first quarter.

And we also had some previously acquired companies that vesting happened in the first quarter, so it's a little larger impact.

Great color.

All right.

And then finally, just circling back on the 3 pending deals.

I mean, hopefully, Hardeman will close this quarter.

And then for the Texas deal and for OKSB, do you think that 3Q is still a realistic time frame?

Or do you think it's more pushed towards the end of the year?

Well, I will say this, as far as we're concerned, on our end, the third quarter is certainly still a realistic goal.

The wildcard, Brady, once again is any delays that we may have as a result of any public comments or any questions that come up in our application process.

I will say this from an application standpoint, these applications are going to be looked at a little differently, we expect, than the ones in the past because these are the ones that will get us past $10 billion.

We expect to put in these applications some very specific detail around organizational design and specifically around risk management organization design, not only at our current level, but that, that is projected after we integrate our acquisitions.

So it could be a little more back and forth on this application process than what we have been used to in the past.

But we will certainly be prepared on our end to move forward with a Q3 closing.

But as I said before, it's probably not going to be up to us on whether that happens or not.

And our next question comes from Stephen Scouten of Sandler O'Neill.

So I'm curious maybe just as it pertains to the NIM, what sort of benefit you have seen so far from the December hike that's kind of embedded within your current net interest margin and what incremental benefit you expect to see from the March hike maybe in your 2Q NIM?

And it didn't sound like your guidance has really changed, still looking at that 3.70% to 3.80%.

But any color you can give around the benefits or puts and takes on those rate hikes.

Most of the rate hikes will affect our floating rate portfolios, particularly things like our credit card portfolio.

That usually has a 30-day delay.

And of course, it came during a time when our credit card portfolio is declining instead of increasing.

So I'm not sure we saw much benefit overall from that increase in that particular portfolio.

We are seeing some upward movement in rates as we're renewing loans into new loans.

We have not seen much of a need to increase deposit rates thus far, but we expect that, that will change somewhat in the near future.

We just hope that we're able to raise our loan rates a little faster than we raise our deposit rates.

But on a conservative basis, we're looking at those going up relatively close to each other throughout the rest of the year.

Okay, great.

And then maybe thinking about the expense run rate a little bit.

I think you guys have given kind of a $64 million kind of run rate number last quarter on the call.

And I know there were some puts and takes in the number that was reported this quarter, but trying to figure out, where do you feel that run rate is today moving forward?

And do you think you can get down to that $64 million number still?

Well, I still think $64 million is a good run rate.

Let me mention 2 items that were onetime expenses in the first quarter.

We've already mentioned a little over $800,000 in an equity true-up in 2016.

We just failed to capture that cost appropriately in 2016.

We caught it in our audit process, it was immaterial and we booked it in the first quarter of 2017.

Without that, if you'll look at our personnel cost compared to Q1 of 2016, you'll see that, that personnel cost was flat.

Now during 2016, we integrated Citizens Bank, so we took on over 100 of their associates and 10 new branches and over $500 million of assets, and the net result first quarter to first quarter is no increase in personnel expense.

So we're pretty pleased with our integration process and how our entire company adjusted to make up for that additional expense that we picked up with the Citizens acquisition.

The second onetime expense was a $1 million consulting fee for a data aggregation project during the first quarter.

If you recall, with all our acquisitions, we actually had, I think, 6 different mortgage systems where all this data resided.

And as we took a look at cleaning that up for HMDA reporting, for CRA reporting, it required getting all that information consolidated.

That was a huge project and one that we just didn't feel like we could handle with our internal staff and put that additional burden on them.

So a consultant came in, helped us aggregate that, and our data quality, data integrity is in excellent shape today.

So that was a onetime expense, but necessary because we needed to bring all that information together in one bucket.

So yes, if you take those 2 out, we're...

$64 million.

We're at $64 million or maybe just a little bit below that.

Yes, that's really helpful.

And then maybe one last kind of question for me as it pertains to the credit outlook.

I guess a couple of things.

One, on the acquired loans sale, the incremental loss there, can you speak to maybe your remaining credit marks on other acquired loans and if you think those are sufficient or if you think you'd have to have -- take incremental losses on any dispositions there?

And then also maybe on the OKSB front, we've seen some weakness from other companies this quarter on health care lending.

Any concerns about their health care portfolio or a need to maybe reassess the mark there?

So let me address the OKSB question first.

We're not aware of any deterioration in their health care portfolio.

They had -- they're pretty diversified, as you probably know, in their range of health care lending.

I'm going to let Mark speak to that appropriately at the right time.

I would just tell you that we're not aware of any deterioration in that portfolio.

The second question...

Yes, on the acquired loan portfolio, the mark is adequate and the only reason this time was we had a sale, and it was the liquidation.

Let me explain why that sale was appropriate in our mind.

The loans that we sold were those that we would call perpetual special assets.

So they would be ones that we would have to work with very closely over a long period of time.

Our experience is that many of those ultimately end up in foreclosure, and we really don't want to go through that process.

We don't want to take the real estate into our OREO.

There's always a question about the marketability of that real estate.

Our experience is that for every year we hold that real estate, we get to write it down 20% because next year's appraisal obviously didn't support the previous year's valuation because we couldn't sell it.

So we took a look at those 11 loans and decided it was better to take the loss on that bulk sale now than to go through the expense and the future potential risk associated with foreclosure on those assets.

Now I wish I could tell you that those were the only 11 that we had identified that really fall into that bucket that we would be willing to part with.

That's not the case.

We do have some others that we are taking a look at today.

We're hopeful that we're able to move them along the same lines as we did in the first quarter.

We think that, that really limits our long-term risk in what's remaining in that portfolio.

So we've gotten rid of the low-hanging fruit.

We still have some acquired loans that we're glad to keep for the long term.

I think what we're concentrating on now are those that we consider to be long-term risk to our company.

(Operator Instructions) And our next question comes from Matt Olney of Stephens.

Want to go back to credit quality and the 2 loans that were added to the nonaccrual bucket that George highlighted a few minutes ago.

Have there been completed impairment tests yet on these loans or is that still something that's in process that we could see the results of that in 2Q?

And I'm trying to get a better idea of when these problem loans were discovered?

And have you had time to scrub the remaining portfolio from that specific lender?

I'll speak to the scrubbing of the portfolio of that lender.

Yes, we went in immediately, took a look at his entire portfolio, no other issues that we found.

These 2 were just not managed appropriately on our end, and we've got some good folks looking at it today, and we're hopeful that we'll rehabilitate these into performing loans here in the near future.

But I'm going to let Marty or Barry address the impairment testing and any future write-downs that we may expect here.

George, I'll answer that.

This is Marty, and I do believe that we have these loans marked appropriately based upon the information that we have available today.

We have had time to dig pretty deeply into both credits and feel like we have a good handle on where we are.

So my answer would be, yes, we have identified any losses today and they are marked appropriately.

Okay.

And then reconciling that back to George's outlook on the loan loss provision expense of $15 million for the year, I think that implies that provision expense could decrease from 1Q levels.

Any more color you can give us about why it would decrease and what was unique in the first quarter that drove the higher provision?

The loan sale had an effect on our provision for acquired loans.

So we made a onetime provision of a little over $700,000 into the acquired provision.

So that was a difference between what our quarterly projection was and the first quarter projection.

It's really going to depend on our loan growth.

We're very comfortable with the level of our provision today.

We have a really good model that we use to determine what's appropriate.

So there's no question in my mind about the adequacy of our allowance today.

But if we continue to experience good loan growth, we'll continue to add the provision appropriately going forward.

We think that we have accounted for the future growth.

But once again, it'll be a give-and-take.

We'll show good results on the interest income and some of them, unfortunately, will go into the provision.

I'll also mention that as we continue to migrate loans from the acquired bucket into our legacy bucket, some of that accretion income is going to be eaten up by additional provision.

So remember that, that's sort of the give-and-take between the benefit and the additional allowance.

Okay, understood.

That's helpful.

And then going back to fee income discussion.

It sounds like there were some seasonality there in the first quarter that you mentioned previously.

How should we be looking at the fee income for the next few quarters?

Okay.

Here's -- I got 3 or 4 things to say about that.

First is that our service charge fees, all our deposit account fees are seasonally low in the first quarter compared to the fourth quarter.

So as we take a look at linked-quarter numbers, those service charges were down $600,000.

That's normal for us.

We've got a lot of retail accounts, income tax refunds in the first quarter, overcoming the Christmas spending, those kinds of things really reduce that fee income on our deposit accounts.

So that's sort of normal for us.

A big number for us has to do with the accounting for the materiality of our commercial loan origination fees.

We've talked a lot over the last 3 quarters about the rise in our loan portfolio, really good increases, most of that has come in our CRE area and many of those loans come with substantial origination fees.

In 2015, our commercial loan origination fees were negligible, almost nothing.

They started to increase in Q2 of 2016.

And by the end of the year, on an annualized basis, they were going to be material in 2017, which required that we adjusted our accounting for those to comply with FAS 91 and defer most of those fees over the life of the loans.

And most of those large fees are over extended construction periods or are over fixed periods -- maybe not fixed rates, but fixed periods of multiple years.

So in Q1, we deferred $2 million of loan origination fees, which previously would have been current period income.

So as you take a look at Q4 of 2016 versus Q1, and you look at the fee number, we've deferred $2 million that previously would have been in current period income if we had accounted for it as we did in 2016.

And it all deals with the materiality of those fees collectively over an annual period of time.

And also, keep in mind, those fees were over a thousand of loans.

And administratively, we really only expected about $1 million or less in fees last year and it actually just exceeded expectations towards the end of the year.

First quarter, it showed up -- as George said, "It was significantly higher in the first quarter."

So Matt, I will tell you for 2 or 3 quarters, we may experience that same decline in recognized commercial loan origination fees as we continue to defer significant income into the future.

Now I've got a couple more that I want to touch on.

One is mortgage revenue, and I'm going to combine that with SBA revenue because, really, that line item is the sale of mortgage and SBA loans.

It has nothing to do with our loan balances in either one of those categories.

These are strictly sales of loans.

Obviously, the mortgage business is a little bit soft now compared to what has been in the past.

And I think that accounts for the $800,000 decline from the fourth quarter in mortgage lending income.

SBA is hard for us to predict in the fourth quarter when we had substantial sales of SBA loans.

In fact, our SBA income was down $1.4 million in the first quarter compared to the fourth quarter.

We do have an annual target for income from the sale of SBA loans, but it is pretty choppy throughout the year.

So we make a conscious decision on whether we want to keep those loans on our books for the interest income or whether the timing is right to sell those and take advantage of premiums that we can get on the sale of those loans.

In the first quarter, the timing wasn't right to sell those loans, so those loans are still on our books.

So that's going to be something that we'll just have to continue to monitor and we'll continue to report on as we make the decision on how much of our SBA portfolio we're willing to sell and what the timing is behind that sale.

I also want to mention one other thing, and that is gain on sales of securities.

Our gain on sales was down $1.4 million in the first quarter compared to the fourth quarter of last year.

As you know, after we got the rate increases, gains on the sales of securities has basically gone away.

So all the gains we had in our portfolio have evaporated, so we really don't have that opportunity going forward.

And that's one of the reasons we took advantage of that as we did in 2016; we think that was a good move.

But we don't expect that gain on sale income to come close to what we did in 2016.

So between all of those, we believe that, that explains fairly clearly the difference between the Q4 noninterest income and what we experienced in Q1.

And I would say Q1 is more consistent with the run rate than Q4 was, certainly, as we look at 2017.

Yes, and Q1 would still be at the lower end of the run rate because of the seasonality.

That's correct.

Okay, that's great color.

So a few things within your response there, George.

As far as the timing of the SBA loan sales, you said the timing just wasn't right.

Does that reflect more the margins you didn't like there in the market or it reflects something outside of the margins in the market?

We have sort of an internal goal on SBA loans we'd like to keep on the books.

Currently, it's a little over $200 million.

If our pipeline fills up, as we said, that $64 million that's currently in our SBA pipeline, we would expect to sell to keep that SBA portfolio on our books in the $200 million to $240 million range.

So it's currently $210 million-or-so today, so we didn't want to sell off any of that portfolio.

It really has more to do with the balances on our books than it does the timing and the margin we can get from the premium of the sales.

Okay.

And then on the origination fees.

I understand what you're saying there as far as recognizing those fees over the life of the loan.

So, obviously, a longer duration.

Do those fees still come in with -- into fee income or those fees accrue through interest income?

Interest income.

And we'll also, on the other side, be deferring the expenses related to incentives and so forth, salaries.

Okay.

So is it fair to say, Bob, we saw a little bit of pickup in loan yields from that in the first quarter?

Or was it so immaterial (inaudible) over the life of the loan?

Yes, probably not enough to even tick up a basis point.

But over time, you build $2 million a quarter, it's going to start having a benefit over time.

And does that affect your outlook on the margin over time?

Because it sounds like the outlook was relatively the same now as it was a few months ago.

Yes, I would say not in the near term.

I think as we get towards the end of the year and have more clarity, and we look into the first part of '18, we'll see how that is.

But right now, in the near term, we don't see it having a material effect on it.

Yes, we're going to suffer comparatively through the rest of this year and we ought to expect positive results in Q1 of '18.

And our next question comes from Peyton Green of Piper Jaffray.

Question for you, George, maybe in terms of the long run.

If we look back over the last 5 years, you have grown the bank by roughly -- the asset base by about 255%, share count has gone up about 180% and net income has gone up about 355% over that time frame.

So I mean, certainly, a very good long-run perspective in the value that's been created.

A question maybe as we move forward over the next couple of years, these acquisitions are different than the acquisitions that you accomplished over the last 5 years that led to a lot of the asset growth.

But just in thinking of the overall ROA trajectory, I mean, what would you think the bank should be able to do in a post -- once you cross the $10 billion asset threshold?

And how comfortable are you that the competitive conditions in the current rate environment accommodates that?

Well, Peyton, internally, and I think I've mentioned before, that we believe a good long-term target for our ROA is 1.50%, and that's coupled with a long-term target efficiency ratio of 55%.

And we base that on the percent of noninterest income to our revenue.

Most of that noninterest income in trust and investments in other areas don't have the same margins that the rest of our business does.

So while we ought to be producing income that's not tied to assets and, therefore, driving up our return on assets, we're going to have expense that's going to drive that efficiency ratio maybe up over what it would be if we didn't have those noninterest income lines of business.

We believe that, that's still a good target for us.

And of course, that has nothing to do with the increased interest rates that may change our profitability a little bit, that's in the steady-state as we are today.

We're really optimistic about what these acquisitions in Oklahoma and Texas will do to us long term because as you've seen in our current footprint, our new size and capacity has really benefited our loan growth, our opportunity in the marketplace.

And I will tell you that it pales in comparison to that opportunity in Dallas/Fort Worth, Oklahoma City, Denver, Austin, San Antonio and some of the markets we're getting ready to enter with a new size and scale.

We spend a lot of time these days with both [ Burt and Brian ] and Mark Funke and their staffs planning for that integration, and I think we all understand the real long-term benefit of the new size and scale past $10 billion.

And quite honestly, if it wasn't for that upside potential, Peyton, the pain of getting through $10 billion would not be worth it, okay?

So we're all committed to make sure that the pluses outweigh the minuses with regard to that $10 billion threshold.

Okay.

And so what would be a reasonable -- in order to achieve that 1.50% ROA with an efficiency ratio of 55%, what's the target noninterest income to revenue mix?

35% is a good long-term outlook.

So anywhere from 33% to 40%, in that range, would give us the opportunity to hit both of those numbers.

Okay.

And then a separate question.

At the margin, how are you seeing your core loan yields relative to where they were a quarter ago or a year ago?

Well, I'm going to let Barry answer that.

My overall reaction is, they're starting to tick up.

However, some of the large loans that we're looking at are really, really competitive in the market.

So Barry, if you have any other color that you'd like to add to that.

The one thing I would add to that is we saw considerable loan growth in the third and fourth quarters as far as large loans that we were closing, and again, George had talked earlier about some of those large loans we have not funded yet.

But as we continue to see those loans fund back in loans that we closed probably the third and fourth quarter of last year were a little lower rate than we're seeing today.

So you won't see a significant increase as far as loan yield.

But the new loans that we're looking at today, we're constantly trying to increase those loan yields on the new loans we're approving today.

Peyton, I might also mention that having an effect on that is, in fact, that our loan-to-deposit ratio now is 85%, 86%.

If you recall several years ago, especially within the Simmons legacy organization, our loan-to-deposit ratio was in the low-60s.

So we've increased that substantially.

So from a risk appetite standpoint and a liquidity standpoint and a capital standpoint, all those factors sort of filter in to supply and demand.

So we've got not unlimited capacity at the current point to take all comers.

We believe that's a good thing for us.

We believe we can seek out the absolute best quality with the best yields that there are in the market, and that's what we're looking to do.

Okay.

And then George, as you referenced, the unfunded closed by construction loans that will get funded over time, and as you look at these commercial real estate loans that you've committed to, how is the -- I mean, will that help the margin at the margin?

I mean, are the C&D loan yields better than the overall portfolio?

Are they in line?

Well, as Barry mentioned, some of the large loans that we approved in the third and fourth quarter are those construction and development loans, so several of them have lower rates.

The thing about the C&D portfolio is, as we add to it, a lot of it is dropping off.

Some of it stays in our CRE portfolio, some of it eventually goes to the secondary market.

So we can't always depend on those C&D loans that end to stay permanently in our CRE portfolio.

So it's a balancing act, Peyton, going forward.

We wouldn't expect that C&D run off, fill up our capacity in CRE.

And when we take a look at our combined portfolios of Bank SNB and Southwest, I think we calculated at the end of the year -- and I'm not sure I've done it at the end of the first quarter because we, obviously, don't have the numbers from those 2 banks yet -- but we calculated we had an extra $1 billion of capacity based on our merged portfolio pro forma CRE capacity, which is wonderful.

We think we can fill that up relatively quickly.

Okay.

And I guess, thinking -- Bob kind of mentioned that there was $2 million in fees that were deferred.

Was there associated expense that was deferred or will that hit going forward?

Yes, there was some expense on -- it would be 20% of that number basically is deferred, and that would be for the incentive piece of it.

And I'm showing no further questions at this time.

I'd like to turn the conference back over to Mr. Makris for closing remarks.

Well, thanks very much for joining us today.

We had a lot of unusual items in the first quarter.

And as I look at Bob Fehlman and David Garner, it reminds me that what the accountants giveth, the accountants taketh away.

And the accounting for all these acquisitions and other things I know keeps you guys busy.

But we appreciate your support, and we look forward to visiting with you in the future.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.