Simmons First National Corporation
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Hello. Thank you for standing by and welcome to the Simmons First National Corporation Second Quarter Earnings Call and Webcast. At this time, all participant are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Ed Bilek. Please go ahead.

[Ed Bilek:]

Good morning. And thank you, for joining our second quarter earnings call. My name is Ed Bilek and I serve as Director of Investor Relations at Simmons First National Corporation. Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, President and Chief Operating Officer; Jay Brogdon, Chief Financial Officer and Treasurer; Steve Massanelli, Chief Administrative Officer; Matt Reddin, Chief Banking Officer; and David Garner, Chief Accounting Officer.

[George Makris:]

Thanks, Ed. And welcome once again our second quarter 2021 earnings call. Overall, we're very pleased with our results for the quarter as we delivered solid performance in multiple areas while continuing and navigate the challenging environment. Net income for the quarter were $74.9 million up $16.1 million or 27% compared with second quarter a year-ago. Diluted earnings per share was $0.69 up 28% from the year-ago quarter. Core earnings for the quarter which excludes certain non-Core items were $75.4 million or $0.69 on a per-share basis.

[Operator:]

Thank you. Our first question comes from Stephen Scouten with Piper Sandler. You may proceed with your question.

[Stephen Scouten:]

Hey, good morning everyone.

[George Makris:]

Good morning.

[Stephen Scouten:]

So, if I could start maybe with loan growth, obviously that continue to be under pressure and I'm wondering if you could give us kind of frame that up a little bit in terms of pay downs quarter-over-quarter. I know you show in the one waterfall chart the year-to-date pay down but I'm wondering what that was quarter-over-quarter and what sort of visibility you have in the pay down levels moving forward?

[Matt Reddin:]

Hey Stan, this is Matt. You've a really good question. We saw a slightly higher amount of payoffs in the second quarter versus the first quarter. And so, as we think about what that looks like moving forward, we do feel that it's slowing and we're already starting to see that in the first month of the year. But our challenge is some of the still planned exits, I mean we're still planning to exit energy as another $150 million that we think will exit especially in the current environment. So, we have those headwinds that we see coming but the planed payoffs in CRE that we've talked about many times seems to slowing but there are still some headwinds that and honestly with this uncertain environment and esteemed investors it continues to happen. I mean, we followed slow in the second quarter but we're still seeing it. Think it's going to slow in the third and fourth but it's still out there.

[Stephen Scouten:]

Okay. And Matt, do you happen to have a number of like a ballpark of the amount of loans that are renewing over the next year?

[Matt Reddin:]

Well, I don’t have that exact number, Stephen, but our duration now is a 3.8 years overall and so that can give an idea of the velocity of where ever our churn in the portfolio.

[Stephen Scouten:]

Yes, definitely. Okay, great. And then, if I can think about the share repurchase for a minute. When are you guys able to repurchase loans with the pending deals, could you remind me of that and then how aggressive would you anticipate being with that between kind of now in October?

[Bob Fehlman:]

Hey Stephen, yes. This last quarter we were locked out of share repurchase due to the pending acquisitions coming in. So, we're three days out from one week and start buying back and we think its good opportunity and there we really want to look for good opportunities over the next balance of the year. We believe we'll be pretty active and then it's going forward as our plan right now.

[Stephen Scouten:]

Okay, great. And maybe last thing from me. I wanted to get some incremental detail on your Coin Checking product. And just kind of how long that I guess been in play for your customer base what you're seeing so far kind of what the feedback has been because I feel like that's a little bit ahead of the curve for a bank of your size. So, I think that's a pretty interesting pursuit.

[George Makris:]

Stephen, this is George. So, I'll tackle that. As you know, our Chief Digital Officer Alex Carriles is top notch and well-known in the community and I think you've seen him own American Banker and other opportunities to talk about our Coin Checking product. It has taken us almost a year to develop that product with the layers of fraud protection and we feel like we need it, there are actually three different fraud protection systems that go into that product to make is so easy for a consumer to use that. We priorly did the program in Arkansas and we have rolled it out in all the states where we do business in the last 60 days.

[Stephen Scouten:]

Okay, great. George, thanks for the color there and thanks so much for the time this morning.

[George Makris:]

We will, thanks Stephen.

[Operator:]

Thank you. Your next question comes from Brady Gailey with KBW. You may proceed with your question.

[Brady Gailey:]

Hey, thanks. Good morning, guys.

[George Makris:]

Good morning, Brady.

[Brady Gailey:]

So, I just want to start on the bond book. I know you guys had been talking about growth that and that's exactly what we saw this quarter. Maybe talk about your any thoughts on continuing to grow the bond book from here. I think if you look at it on an average point-of-view, you'll still see some bond growth in the third quarter just as kind of the captured output. You had about $7.5 billion at the end of the quarter. So, and maybe you could talk about your appetite to continue to grow that bond book especially as where you've seen the long end of the curve pull back.

[Bob Fehlman:]

Yes. And Brady, first thing I point out is if you look at the bond book, we have about $1.3 billion that is in floaters variable rates. That really is our money we moved from cash that we're making 10 basis points and picked up to about a 35 basis point yield. So, that is really variable, can move back if we need it for liquidity, it could move into the bond portfolio permanent one we need to. So, we'll continue to look at that piece. So, the way we are looking at, if you look at Slide 23 in our deck, that 1.3 is very fluid on the bond side but it's also fluid on the cash side. That's where we're managing both of those pieces.

[Brady Gailey:]

Okay, alright that's helpful. And then, the $17.2 million of remaining PPP's, any ideas for as the timing of when those will be realized. You think most of those will be realized in the back half of this year or they some slip into 2022?

[Bob Fehlman:]

Well, I would tell you it's hard to tell when you're dealing with anything with the government on repayments and the rules always change. But we would expect Q3 to be a pretty heavy quarter I believe and some will go into Q4. There'll be some staggers into next year in a just really timing should be small, volume dollars we might have a lot of volume that we're dealing with but on the dollar side it should be pretty small. I would just either get that Phase II $319 million and we're down to about $300 million. So, that is you're starting to see those payoffs and that really just happened in June. So, we believe that'll hit more into Q3.

[George Makris:]

We've just started seeing government forgiveness on loans in excess of $2 million. So, they've been sitting on the books waiting for the government to do something about that since we made them last year. So, as those start rolling off, you're going to see large volume decreases in our PPP portfolio.

[Brady Gailey:]

Okay. And then just to revisit the loan growth or loan shrinkage topic. I mean, it's has been pretty surprising. I mean, I think your non-PPP loans are down about $3.5 billion today versus the end of '19. When do you believe that you'll be at the inflection point of starting to see loan growth again?

[Matt Reddin:]

Hi Brady, this is Matt. I would say what we're encouraged by is our production trend. If you just look at -- we what we studied we did $1.8 billion in production the first half of the year but if you dig a little deeper, over 60 to same percent came in the second quarter. So, if you look at that plus the trend in the pipeline, I really like where we are heading trending on a production standpoint, I hope we hope for the inflection point will happen this year if we can just understand the velocity of the continued this liquidity in the market and I feel good about where the known headwinds are. I mean, we're now talking when I'm now speaking to energy at additional $150 million. It wasn’t, 18 months ago that was $400 million. So, the plan CRE exits there at the tail end of that. So, I feel that we're there, the unknown was this additional liquidity and same was in the market on repayment. But if back to production and like the trend like where we're taking that pipeline is I think that'll continue to grow throughout the back half of the year.

[Brady Gailey:]

Okay. Right, great. Thanks for the color, guys.

[Matt Reddin:]

Thanks, Brady.

[Operator:]

Thank you. Our next question comes from Matt Olney with Stephens. You may proceed with your question.

[Matt Olney:]

Thanks. Good morning, guys.

[George Makris:]

Good morning, Matt.

[Matt Reddin:]

Hey, Matt.

[Matt Olney:]

I want to ask about the banks interest rate sensitivity and how you're managing this. It seems like there is lots of moving parts we're seeing with the securities bill this quarter but also two pending acquisitions. And as we get into the 2022 and 2023 with hoping eventual fed funds increase, what's the banks sensitivity to higher rates?

[Bob Fehlman:]

Well, I think first-off if you look at the loan book, it's about roughly 50/50 maybe 55/45 on variable versus fixed. A lot of the fixed to shorter term, I think Matt on the duration we're probably 3.0 -- 3.5 years or so overall.

[Matt Olney:]

Yes.

[Bob Fehlman:]

I would say on the book bond portfolio, there's obviously some extension in there on some of the munis but and a lot of those munis have decent prices. We do have the $1.3 billion in floaters that we can either reinvest or will move up when the markets moves up. And on the even with the potential on rates moving at some point we do believe on the deposit side, we have another 04 basis points to 05 basis points in the next quarter or two that will pick up there before we bottom out. So, I would say right now we're pretty evenly matched when you look at all the different components to get down underneath. So, we're preparing as much as we can at this point but again I would tell you on interest rates it's still unknown out there. This week also and today they're talking maybe they'll go back up but that 10 years down. About two weeks ago rates were going back down when 10 year might be going to 1%. It just seems like every week we have a different narrative on where rates are going in a different narrative and where inflation is going. So, it's kind of hard to judge right now. All we can trend here is manage the best portfolio we can and manage net interest income in this artificial environment we're in.

[Matt Olney:]

Okay. That's helpful, Bob. Thank you. And then, I guess kind of saying a similar topic as far as core loan yields, if I back out some of the PPP and accretion, I'm showing not much of a move versus the first quarter. Any color you can provide as far as directionally or where you expect these core values to move from here?

[Bob Fehlman:]

I would say yes we're pretty pleased this quarter to have our core yield actually pick up a basis point or two. No question that's a challenge in this environment as the book as loans were putting on are averaging right at that four to four and a quarter, so a little bit below what we're on. Now, keep in mind some of the loans that are paying off that we Matt talked about earlier on the early payoffs were some of our acquired loans that were pretty low rates. So, you're actually that's where you're picking up some of that accretion on the volume there. But we're again it's a constant process on trying to manage that and this is going to be a challenge to maintain at those levels, continuing to go forward. But our roles keeping in that line or drop just slightly.

[Matt Olney:]

Okay, got it. And then, lastly from me. Provision expense for loan losses is neg at this quarter. You still carrying an ACL ratio around 2%. Would love to hear kind of your view of the incremental need provision expense from here?

[George Makris:]

Well Matt, this is George. So, our -- the credit quality today is better than it has been in a long time and I think we have charts in our presentation that show that. When you scratch your head and go then and why do you need 2% allowance against your loan portfolio and we gave a little additional color on hotels, office and retail. And while we feel very good about our hotel portfolio and where it stands with regard to coming back, we see us in our office portfolio and our retail portfolio some potential delayed deterioration if you will. And the reason is that 73% of the leases in our office portfolio don't renew until 2023 or after. A higher percentage 78% of the retail lease expirations occur in 2023 or after. So right now, they're are performing really, really well and quite honestly, I feel good about that because we're going to have time to analyze what's happening in those two sectors over the next couple of years before it really affects our portfolio. So, there's still some unknown risk out there and I don't need to really remind everyone about the uptick in COVID today and whether or not we're going to get back to in-person school. However, we're going to be able to fill those supply chains that have caused artificial inflation because of the supply and demand factor. If we can get those things back to normal, we'll be in pretty good shape.

[Matt Olney:]

Okay, thank you.

[George Makris:]

Thanks, Matt.

[Operator:]

Thank you. Our next question comes from Gary Tenner with D.A. Davidson. You may proceed with your question.

[Gary Tenner:]

Thanks everybody and good morning.

[George Makris:]

Good morning.

[Gary Tenner:]

I think you had sort of addressed this question in answering one of Matt's but in terms of the time deposits, could you kind of talk about the scheduled maturities for the back half of the year and what the prevailing rates are and your renewal rate on those time deposits.

[Bob Fehlman:]

Yes, I would say we've got roughly about $800 million. I think the balance of the year the rate is over right over 1%. Those are going on anywhere from 20 basis points to 40 basis points depending on the relationship, somewhere in that ballpark. So, I would tell you Gary if you look at that plus the transaction deposits that we've continued to look at individual markets and price down, I think overall there is a good 04 basis point to 05 basis point pickup from third, maybe a little bit into the fourth quarter but really over the next quarter or so.

[Gary Tenner:]

Thank you. My other questions were answered.

[Bob Fehlman:]

Alright, thank you.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to George Makris for any further remarks.

[George Makris:]

Great, thank you. Well notwithstanding the pressure on our loan portfolio, unexpected pay downs, I will remind everyone that much of what's happened with regard to that loan portfolio shrinkage was intentional with regard to the sale of our Colorado, South Texas locations, intentional elimination of concentrations of credit in St. Louis and DFW and reduction in our energy portfolio. But on a positive note, our asset quality has improved tremendously during that period of time. We've been able to manage a significant securities portfolio. We've been able to expand our mortgage and wealth business and that continues to expand. We're going to add Triumph and Landmark to our portfolio in Memphis and Nashville before the end of the year. We've just hired new leader of business in Consumer Banking that held that position at Regions Bank out of Birmingham. And once again, if we can manage through the COVID surge to get schools back in person, get healthcare system back to taking care of the deferred medical care. If we can get supply chains filled and stand the inflationary pressure and if we can encourage folks to get vaccinated to protect themselves, your families and others I think we're on the back side of what we experienced in 2020. I think the diversity of the way we operate our bank has shown to be a real plus for Simmons, we made $75 million this quarter. That's nothing to sneeze at. So, we're very encouraged by the outlook. We see our loan pipeline increasing, meaning that we have some very good customers who see some potential out in the marketplace today and we're going to be there to help them. So, thank you very much for joining us today and if we don't talk before then, we'll do this again three months from now. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.