Simmons First National Corp (SFNC) 2018 Q2 法說會逐字稿

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

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Steve Massanelli.

Sir, you may begin.

Good morning, and thank you for joining our Second Quarter Earnings Call.

My name is Steve Massanelli, and I serve as Chief Administrative Officer and Investor Relations Officer at Simmons First National Corporation.

Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; David Garner, Controller and Chief Accounting Officer; Marty Casteel, Chairman and CEO of Simmons Bank, our wholly owned bank subsidiary; Barry Ledbetter, President of our Southeast Division; and Matt Reddin, President of Banking Enterprise.

The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued yesterday and to discuss the company's outlook for the future.

We'll begin with prepared comments, followed by a Q&A session.

We have invited institutional investors and analysts from the equity firms that provide research on our company to participate in the Q&A session.

(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 than our current expectations, performance or estimates.

For a list of certain risk associated with our business, please refer to the forward-looking information section of our earnings press release and the description of certain risk factors contained in our most recent annual report on Form 10-K, all 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 reconciliation 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 result determined in accordance with GAAP nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

I'll now turn the call over to George Makris.

Thank you, Steve, and welcome to our Second Quarter Earnings Conference Call.

In our press release issued yesterday, we reported net income of $53.6 million for the second quarter of 2018, an increase of $30.5 million or 132.2% compared to the same quarter last year.

Diluted earnings per share were $0.58, an increase of $0.22 or 61.1% from the same period in 2017.

Included in the second quarter earnings were $1.1 million in net after-tax merger-related and branch rightsizing costs.

Excluding the impact of these items, the company's core earnings were $54.7 million for the second quarter of 2018, an increase of $27.9 million or 104.3% compared to the same period in 2017.

Diluted core earnings per share were $0.59, an increase of $0.17 or 40.5% from the same period in 2017.

Our loan balance at the end of the quarter was $11.4 billion, an increase of $379 million from last quarter.

During the quarter, our portfolio increases included a $201 million increase in real estate loans, a $131 million increase in commercial loans, a $58 million increase in seasonal agricultural loans, a $12 million increase in other loans and a $23 million decrease in our liquidating portfolios of indirect lending and consumer finance.

Our loan pipeline, which we define as loans approved and ready to close was $612 million at the end of the quarter.

On a consolidated basis, our concentration of construction and development loans was 86.6%, and our concentration of CRE loans was 280.8% at the end of the quarter.

Our Dallas/Fort Worth, Denver, Nashville, Northwest Arkansas, Oklahoma City and St.

Louis markets, all experienced good loan growth during the quarter.

The company's net interest income for the second quarter of 2018 was $136.8 million, a 78.2% increase from the same period last year.

Accretion income from acquired loans during the quarter was $10.1 million compared to $4.8 million in the same quarter last year.

The accretion income in the second quarter was approximately $3.7 million more than our original estimates due to accelerated cash flows of acquired loans.

Based on our cash flow projections, we expect total accretion for 2018 of approximately $30 million.

Our net interest margin for the quarter was 3.99% compared to 4.17% the previous quarter.

The company's core net interest margin, which excludes the accretion, was 3.70% for the second quarter compared to 3.82% the previous quarter.

The sub debt issuance at the end of the first quarter had a 5 basis point impact on our second quarter margin.

The timing of existing sub debt prepayment had an additional 5 basis point impact.

We have experienced non-time deposit growth of $3.8 billion over last year and $145 million from last quarter related to acquisitions and our focus on internal growth.

Total deposits at June 30 were $12 billion, an increase of $4.8 billion over last year and $296.5 million from last quarter.

Cost of interest-bearing deposits increased 10 basis points from the prior quarter.

This increase was driven by the pressure of increases in funding costs from recent Fed rate hikes.

We do expect deposit costs to continue to increase.

Since last quarter, the Federal Reserve Board increased Fed funds target rate by 25 basis points.

Company's deposit beta was 40% and the core loan beta was 36%.

Looking back to March 2017, the Fed has increased target rate by 100 basis points.

The company's deposit beta was 51% and core loan beta was 45% during that period of time.

Our noninterest income for the quarter was $38 million, an increase of $2.3 million from the same quarter of 2017.

We had increases in trust income, service charges and in other fees due to our fourth quarter 2017 acquisitions.

Noninterest expense for the quarter was $98.5 million, while core noninterest expense for the quarter was $97 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 quarterly target noninterest expense run rate is approximately $95 million.

Our efficiency ratio for the quarter was 52.7%.

Income tax expense was lower for the second quarter due largely to discrete tax benefit related to tax accounting for equity compensation.

At June 30, 2018, the allowance for loan losses for legacy loans was $51.7 million with an additional $2.1 million allowance for acquired loans.

The loan discount credit mark was $68.3 million for a total of $122.1 million of coverage.

This equates to a total coverage ratio of 1.1% of gross loans.

At the end of the second quarter, nonperforming assets were $75.9 million, a slight decrease from the first quarter.

This balance is primarily made up of $44.9 million in nonperforming loans and $30.5 million in other real estate owned, which includes $7.2 million in closed bank branches held for sale.

During the second quarter, our annualized net charge-offs to total loans were 17 basis points.

Excluding credit card charge-offs, our annualized net charge-offs to total loans were 13 basis points.

Provision for loss during the quarter was $9 million, which includes an increase due to strong legacy loan growth and the increased loan migration during the fourth quarter of 2017, which is consistent with previous guidance.

I'm pleased to announce that we successfully completed the conversion of Bank SNB in May, and we're excited about turning our focus to creating a stronger and more efficient organization as we expand all of our product lines into the new markets.

Our capital position remains very strong.

At quarter end, the common stockholders' equity was $2.1 billion.

Our book value per share was $23.26, an increase of 21.4% from the same period last year, while our tangible book value per share was $13.05, an increase of 5.6% in the same period last year.

In March, we announced our offering of $330 million of aggregate principal amount of subordinated notes due in 2028.

As of June 30, we had paid off $173 million of outstanding indebtedness, and we'll pay another $50 million in the third quarter.

Asset growth due to subordinated debt offering and the timing related to paying off approximately $104 million in parent company debt reduced tangible common equity 6 basis points at quarter end.

During September, we plan to close 10 of our branch locations.

We continuously evaluate our branch network to determine the locations that are meeting the greatest needs of our customers.

We look at many factors, including market and economic considerations before making the decisions to close branches.

Our brick-and-mortar locations serve an important customer need.

However, our customers continue to take advantage of the convenience of our digital channels that we provide.

We will continue to look forward to invest in new and innovative channels to meet the ever-changing needs of our customers.

As a reminder, now that total assets have surpassed $10 billion, we became subject to the interchange rate cap as established by the Durbin Amendment beginning July 1, 2018.

We estimate that we will receive approximately $7 million less in debit card fees in 2018 and $14 million less in 2019 on a pretax basis.

This concludes our prepared comments.

We'll now take questions from our research analysts and institutional investors.

I'll ask the operator to please review the instructions and open the call for questions.

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

I appreciate the updated expense guidance.

Could you maybe just talk about what kind of drove the increase to -- from the $92 million to $94 million guidance we talked about before?

And maybe remind us how much of the cost savings from the 2 deals are in the run rate?

And how much of that $25 million digital build-out that we had talked before is in that run rate?

David, I'll attempt to address, and I'll let Bob pipe in a little bit.

One of the things that I think is important to realize is that last September or October as we got deep into the budget process, we had -- we're just prepared to close on 2 large acquisitions of Southwest Bank and Bank SNB.

During that period of time and over the next 9 months until today, we have converted both of those banks.

Our assets have grown from $9.5 billion at the end of September of 2017 to $16.1 billion today.

What's important to note about that is that $1.6 billion of that came from organic growth during the time that we were integrating 2 large banks.

So a full 10% of our entire asset base today has come from organic growth since September 30, 2017.

And I think that's pretty impressive number.

And what it points out is that our original expense base needed to be expanded to support that growth.

We have no problem today attracting and hiring really good producers in every market we serve.

And we will continue to invest in that production throughout our entire footprint.

So early this year before we understood what the organic growth potential was going to be and what the actual results were, we thought a run rate between $92 million and $94 million was reasonable.

Today, we believe $95 million is a reasonable run rate.

Most of the cost saves from those acquisitions have already been achieved.

We have a few, like severance agreements and things like that, that will be in the third quarter, but it's not going to be a significant number.

We believe we'll manage [now] the $95 million of a run rate for the rest of this year.

Then we'll evaluate our organic growth and see what we need to invest to support that.

I would say that our IT spend is right on track.

This year, we have -- we're just getting ready to flip the switch on a complete new accounting system and a new HR system that will affect all 2,600 of our associates.

We're going to do a Workday product, and pretty proud of the effort that's being given all year on that.

We've got other transformational projects in IT realm that'll start and end sometime in 2019.

So we believe all that's right on track.

The difference in our original expectation on expense and where we are today is pure organic growth.

Okay.

That's very helpful.

I appreciate that.

And we talked last quarter about your desire to lead more syndicates -- syndicated credits and help -- use that to help drive deposit growth.

Could you talk about the success that you've had?

And maybe how much of your growth in the quarter was [SNCs] and how many SNCs you've led?

And maybe your thoughts going forward?

Yes.

So the answer is 0 of the growth is the result of that.

We just put that program back in place in the last 30 days.

Matt Reddin's here with us, and I'll let him talk a little bit about our expectations with regard to our correspondent banking group.

Sure.

Thanks, George.

And David, the correspondent banking group, the strategy there is we'll be selling down participation from our loan growth which we have as opportunities, and in return, we're simply getting with deposits from those correspondent partners.

We're not leading any syndications.

We're not purchasing loans or leading that effort to generate deposits.

Okay.

Last one for me.

We'd kind of talked about the construction portfolio weighing on the NIM.

Could you maybe quantify the drag in the quarter and how much longer that's going to be?

And then maybe just on the core NIM more broadly, I know, the sub -- the timing of the sub debt negatively impacted about 5 basis points, but is that 3.70% to 3.80% range exclusive of that 5 basis points?

Looks like you're kind of right in the midpoint of that.

Is that still a good range for -- going forward?

Yes, I think it is.

I'm going to let Matt talk in a minute about our construction portfolio.

But I don't think that's a major factor one way or the other today because we're booking new construction loans at higher rates today.

So they sort of counterbalance each other.

But let's talk about the NIM a little bit because last quarter, we were 3.82%.

Now as you know, we issued $330 million sub debt at the end of March, so at the very end of the quarter.

$220 million of that was a refinance of current debt.

So we've added $100-or-so million to our subordinated debt, but that's sort of fixed price at 5% for the next 5 years.

We think that's a good long-term strategic move.

So that $100 million of additional permanent financing, if you will, will be a drag on our net interest margin.

The timing -- and that's the 5 basis points we referred to earlier.

The other 5 basis points was because we were not able to pay off all of the trust preferreds immediately.

We had to wait until the next interest payment period, which occurred at the end of June for a portion of it, and actually some of it is going to be in July.

So we felt the whole burden of that extra debt during the second quarter that we would have paid off if we could have.

So that's the other 5 basis points.

So we believe that 3.75% would have been our normal margin considering the permanent debt effect.

So we still think 3.70% to 3.80% is a range that we feel comfortable with.

And our next question comes from the line of Brady Gailey from KBW.

So the 10 branch locations that will be closed in September, I'm guessing that would save expenses of around $5 million to $7 million on an annualized basis starting in the fourth quarter.

Maybe just talk about the cost saves that we could expect to see in 4Q from those branch closures?

Yes.

This is Bob.

I would tell you, these are smaller branches, so you're not running at a $500,000, $600,000 expense run rate like the bigger branches run at.

These are running more at the $250,000 to $300,000.

So they're low-level performing branches, and they have less overhead in there.

2 of the 10 are mobile branches, which have very negligible operating expense.

So it's just kind of a cleanup that we need.

So I would say more on an annualized basis in the $2 million to $2.5 million range on the expense side, we don't believe there will be much attrition related to these because they're relatively close to other locations.

Okay.

All right.

And then, about 3 weeks ago, you all became subject to Durbin.

I know we've talked about Durbin in the past being roughly a $7 million impact for the back half of this year and $14 million for next year.

Is that still the right way to think about the decline in fee income that's starting this quarter?

Yes, we actually got to experience that on day 1 on July 1, and we got a letter right towards the end of June that kind of made it all real.

But right now, our best estimate is in that $14 million on an annualized basis, $7 million for the balance of the year.

We'll have a better idea when we get to the end of September of what actual performance.

Those are all based on run rates from history from putting the 3 banks, 4 banks together, what our debit charge -- debit income is and trying to get our best estimate as we've worked with Visa and Mastercard on those.

So we'll see when it comes in.

We're hopeful that's a conservative number that would hit that or better.

But we'll just say, it's a little bit uncontrollable at this point.

All right.

And then a question for George.

Last year, you guys were very active on the M&A front.

Year-to-date, this year, you've done a good job of putting these deals together and get the cost savings out.

It kind of feels like now is the time that I'd expect you guys to be active on the M&A front again.

And we saw a big deal in Texas this morning.

We saw another big deal in Florida.

Maybe just talk about your appetite to do M&A in the back half of this year and into next year?

Well, thanks, Brady.

We're still very interested for those strategic acquisitions where cultures fit ours.

But I think it's evident because of our ability to grow organically that we don't have to have acquisitions in order to grow our company profitable.

But we're still very interested in the right acquisitions.

And we've talked about markets that we'd like to expand our presence.

I think we've done a very good job from a commercial lending standpoint.

But we don't have the ability to roll out all of our retail products, new consumer lending, get our credit cards in front of people, have an active treasury management organization.

So where we have excellent commercial lending, we are very interested in expanding in those markets one way or the other.

So yes, we're having some really good conversations with some potentially good partners.

We've watched some of the acquisitions earlier this year and even through today, and we're sort of scratching our head trying to figure out exactly what the financial benefits of those are.

I'll tell you I saw a survey the other day that said 30% of banks bigger than us pay no attention to dilution of tangible book value.

They think it really does not matter in acquisition accounting.

I'm not sure we agree with that.

But it certainly appears that, that is in the back of some people's minds.

So the M&A landscape is changing a little bit.

There are some things going on that I quite honestly don't understand today, but we're going to be very disciplined in our approach because ours is truly a long-term proposition.

And the folks that we're talking to understand that.

They'll have a vested interest in the combined company.

And I would expect us in 2019 to be back in the M&A business.

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

So I wanted to talk a little bit more about the NIM.

Just in some of the moving parts, I'd expected some of your liquidity to come down this quarter.

It was a little elevated last quarter, but it looks to have increased even further this quarter, the cash balances and such.

So can you tell me what's going on there, I mean, is that a new level that you look to hold on from a liquidity standpoint?

Or could we see that move back down as that sub debt repayment occurred, I guess, late in the quarter and then to early July?

Yes, you're going to see the liquidity.

That's not our intent to leave those levels of liquidity just at the quarter-end.

We did have both quarter-ends.

We had some large deposits come in towards the end of the quarter.

So they were invested short term.

They come in and out during the month -- actually, during the quarter at various times.

So we left that short term.

As we get a better handle on that, we'll reinvest that either, one, in the loan portfolio, obviously, with the growth we've seen; or two, with our security portfolio.

Our security portfolio is down at about 13% of assets.

Our target would be in that 14% to 15%.

So over time, I could see a little bit buildup in the security portfolio there also.

But we did have a little excess cash right at the end of the quarter.

But I would say, invested for the length of the quarter, the liquidity was not at that high level.

Okay.

And just thinking about the loan and deposit betas.

In this current quarter, obviously, the deposit beta was slightly ahead of that core loan beta, which would presumably put some negative pressure on your NIM moving forward.

So as I think about the NIM, if we believe what the Fed is saying that we're going to keep getting kind of consistent rate hikes, with those incremental rate hikes, would you expect to see incremental pressure on your NIM?

Or is the goal maybe to try to keep that flattish and just grow NII through the continued strong loan growth?

How can we think about that?

Well, obviously, our objective is for our loan yield betas to outpace our deposit betas.

I think for the first half of the year, we've been very satisfied, in fact, both of those are relatively close to each other.

Some of our floating rate loans like our credit card portfolio has somewhat of a delay built in before we can actually realize the benefit of interest rate increases.

So there is a little lag in net portfolio.

But I'm pretty pleased with where we are today.

And we believe that our deposit costs have risen quite a bit lately.

And maybe, we're at a point where we can sustain those deposit costs for a period of time while our loan yields catch up.

That's sort of the way we're looking at it today.

But once again, if we continue to grow like we have, we intend to fund that with core deposits.

And we will do what we need to do about bringing those deposits into the bank.

So long term, our objective is for loan betas to outpace deposit betas.

But as long as they are equal during our growth period, we feel like that's a good long-term strategy.

I think it's also important to note that we kept them pretty equal for the quarter.

The interest-bearing deposits moved up very fast.

Those repriced almost instantly because bulk of that is in transaction type accounts, not CDs.

The loans only 40% to 50% repriced during the quarter, and as George said, some of that is timed that you don't get the full quarter impact.

So we believe in the long term, the loan yield will have a better pickup comparatively, but in the short term, we're pretty pleased with it being matched, especially coming from a low rate environment that we've been in low deposit costs.

Okay.

That's helpful.

And then maybe one last thing.

Just on the Crapo bill kind of regulatory thoughts, any real tangible benefits that you guys are starting to see in terms of regulatory oversight, any changes in terms of how you're thinking about incremental expenditures or people additions, anything -- I guess, anything you can speak to?

Or is it just a general environment, is it slightly better?

How would you phrase that?

Well, I would say that really the only tangible benefit we have so far is that we won't be required to go through the formal DFAST process and publish that.

That will have some cost savings.

But I think our regulators still expect the bank our size have substantial stress testing on the economic conditions.

So a lot of the infrastructure we build to deal with DFAST will stay in place and that cost will be in our run rate going forward.

I don't know what changes we can expect from a regulatory perspective going forward.

I don't think we're counting on any significant reduction in regulatory oversight.

We're of a size today that we're expected to do more things to monitor our risk than we did before we were a $10 billion bank.

And I will say that since we've experienced it, there's a clear differential between banks below $10 billion and those above $10 billion and what's expected of them from a risk management standpoint.

I think we have all the costs built in today for the most part for our risk management programs.

I don't expect any incremental cost associated with it, but I also don't expect any refunds, if you will, on costs already incurred in regulatory environment going forward.

(Operator Instructions) And our next question comes from the line of Will Curtiss from Piper Jaffray.

Just one quick question here.

I wanted to go back to expenses and I appreciate the color that you provided on the run rate.

But just wanted to make sure I understood that, that $95 million run rate that you talked to, does that include the September branch closures or would that be incremental savings to the $95 million run rate?

As I said, it's about $2 million on an annual basis.

So I'd say, in that $95 million ballpark, I mean, that could be $94.5 million, $95.5 million.

So I don't think it'll be a material impact on that number.

But I would say, we're looking at a go-forward run rate today, as George said, at about $95 million is our best estimate.

And in addition, you take to get putting together in addition to the $1.6 billion in growth that we had in organic growth, and then you put the banks of $9 billion in the 2 acquisitions of 5 to figure out where all of our back-office cost is and our regulatory compliance.

I think we're right in that line.

We believe $95 million is a good number to start with.

We'll continue to look for noninterest expense savings on a go-forward basis.

We think that's our level though that we'll be starting at.

I believe we're pretty comfortable to be that way in third quarter going forward.

And our next question comes from the line of Matt Olney from Stephens.

This is actually Brandon Steverson on for Matt.

So I wanted to go back to the discussion about the sub debt pay down, the impact on the core margin.

You mentioned that the core margin would have been 3.75% without the debt that you weren't able to pay down until late in the quarter.

So I'm wondering -- I think you mentioned $50 million remaining to be paid down in the third quarter.

Are you able to quantify the impact of the drag that, that $50 million would have on the core NIM in 3Q '18?

It's going to be negligible because we paid it.

It's already been paid off.

So we paid it off during the first 2 weeks of the quarter.

Yes.

So I would say if we just put it in relative terms, if we say 10 basis points overall, 5 being permanent -- more permanent, the temporary, we should get most of that back in the third quarter.

We have $40 million, $50 million that was paying off, but that was in the first couple weeks of July.

And then we have a remaining $18 million, $20 million that's at a high rate of 6% that we've paid off on the last day of September.

So we won't receive some of that benefit till then.

But I would say, it'll be 2 -- say, 2 basis points of the 5 that we'll see in the third quarter negative impact.

Got it.

That's really helpful.

And then just one more for me.

I think in the -- I think last quarter, you talked about 10% to 12% loan growth being still a good number.

And I'm wondering is that still your expectation going forward?

Well, obviously, we've outpaced that in the first 6 months.

So -- and our pipeline says that we can outpace that going forward.

However, we want to be very disciplined in our growth.

In a rising rate environment, sort of ECON 101 has kicked in, that's supply and demand.

And it is beneficial to our organization to keep fixed rates at minimum and make sure the pricing is commensurate with the risk associated with the loans.

And I think Matt may want to talk to this that we're certainly encouraging a very disciplined approach to our loan growth going forward for the rest of the year.

Matt, you've got any comments?

No, George, I'd say that's exactly right.

We're very focused in this current rate environment that we're focused on getting more variable rate loans in which we've been successful doing that month over month.

And if in shorter term on fixed rates, we can't get that pricing we need, we'll stick to our guns on that.

So Matt (sic) [Brandon], we've got the opportunity.

It's just we have a structure that's required to get the loan meet our current requirements.

(Operator Instructions) And I'm currently showing no further questions.

I'll turn the call back to George Makris for any closing remarks.

Okay.

Thanks to each of you for joining us this morning.

I will say this, and I'm very proud of our associates here at Simmons and what they've been able to accomplish over the last 9 months to be able to grow 10% of our balance sheet organically during that period of time is quite a feat.

We're looking forward to continue the good performance.

And with that, have a great day.

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

This concludes today's program.

And you may all disconnect.

Everyone, have a great day.