Simmons First National Corporation
Q1 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation Analyst Call and Webcast. [Operator Instructions] I would now like to introduce your host for today’s conference call, Mr. Steve Massanelli. You may begin, sir.

[Steve Massanelli:]

Good morning, and thank you for joining our call to review the announcement of Simmons acquisition of Reliance Bancshares Inc. 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; and Marty Casteel, Chairman and CEO Simmons Bank, our wholly-owned bank subsidiary. The purpose of this call is to discuss Simmons’ acquisition of Reliance Bancshares, which was announced yesterday. We have invited institutional investors and analyst from the equity firm that provide research on our company to participate in the call. All other guest are in a listen-only mode. A transcript of today’s call 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 remind you of the special cautionary notice regarding forward-looking statements, in 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 the press release associated with the Reliance acquisition 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. I will now turn the call over to George Makris.

[George Makris:]

Thanks, Steve, and welcome to everyone this morning. This is a really great day at Simmons Bank. We’re awfully excited about our new partnership with Reliance Bancshares. I will remind you that yesterday, we filed three different documents that you may want to refer to

[Bob Fehlman:]

Yes, as George mentioned in the past, our mark has been relatively small, it’s mostly been credit mark. And as you know, under the accounting rules on day two of the transaction after you close, those marks become one. In this case and I think you’re going to see this with a lot of transactions going forward, because of the rate increases we’ve seen over the last 1.5 years, there is going to be a substantial interest rate mark on the loan portfolios. And as with this transaction, we’re at about $21 million is our estimate at this time. Keep in mind, that’s an estimate, we’ll go out to valuation experts to sure that up before we close. We’re estimating that to be accreted to income over about four year period. The way we look at this is effectively that $21 million is similar to buying a bond at a discount. This will be accreted as we go forward. What we plan to do in future earnings releases is give a breakout of what is the credit portion of this and the interest rate portion. So it gives a better description of what that is. What -- how we see it is, these loans that we bought effectively at a discount today, when they mature, there’ll be at a current rate. So effectively on day one, we mark them to the market rate of that time. So it’s more of a ongoing benefit as we see going forward.

[George Makris:]

Okay. With that, I think we’re going to turn it back over to the operator and open the lines for question.

[Operator:]

[Operator Instructions] Our first question comes from Brady Gailey with KBW.

[Brady Gailey:]

Hey, good morning, guys.

[George Makris:]

Good morning.

[Brady Gailey:]

So maybe we can just start – I mean, if you look at the target, I mean, their net interest margin has run in around 2.70%, which is a little below average. Their ROA is 85 to 90 basis points. Fee income, I think it’s around 10% of revenue. I know you guys have target around 30% for Simmons. So I just want to – what opportunities do you have beyond just the 30% cost saves to transition this net interest margin higher and potentially add some more fee income to this acquired platform?

[George Makris:]

Well, Brady, I think it’s – at least in our minds, it’s fairly obvious that that’s a real opportunity for us. And when you consider the turnaround that Tom Brouster and his team did on this bank, their loan portfolio is about as clean as any we’ve seen. They went into marketplace, they – good loans to really good customers and got some certainty in the revenue stream that allowed them to turn the bank around. So that’s why you see a heavy CRA concentration, a low net interest margin. They really couldn’t afford any losses going forward as they built this bank back up. And I might say that I believe this is correct. I don’t believe they’ve had a past due loan in 77 consecutive months. So when I say their asset quality is pristine, I really mean that. We obviously see an opportunity to diversify the loan portfolio. We were named the number one SBA lender in the St. Louis market. So we’ve got a great small business lending program. Our consumer loans are certainly something we’re very proud of. We have really good mortgage operation, and they have an excellent branch network that allows us to deploy all those products and services in St. Louis. So we see this as a really great opportunity to expand all our products and services, particularly those that have non-interest income revenue tied to that over the next two to three years. So while we don’t build any of those additional revenue projections into our models, we’re buying the current income stream. We believe synergies available to us in the St. Louis market, with this new network locations, is about as good as we could hope for in that market.

[Brady Gailey:]

Okay. All right. And then, if you look at their loan portfolio, if you add up commercial real estate and multi-family, I think it’s around 75% of their loan base. You’re deploying some of y’all’s excess capital. So it feels like CRE to capital is going to go up from here. I know – I think you all are around 300% already, but do you have any idea what the pro forma of CRE to capital ratio would be with this one in there?

[George Makris:]

I’m going to let Marty Casteel take that.

[Marty Casteel:]

Brady, the pro forma CRE would be at 3.26% and the C&D at 98%.

[Brady Gailey:]

All right. And lastly for me, George, I know – I think around 12 to 18 months ago, you guys had three pending deals all at the same time. You took a break to integrate OKSB in Texas over the last year. I mean, now you’re back announcing this deal. Maybe just give us an update on kind of – as you look forward to the next six to 12 months, I mean, are you still on the hunt? And you’d be willing to announce another transaction? Or will you take it slower this time, maybe announcing one transaction, get it closed before you move onto the next?

[George Makris:]

Well, I really can’t speculate on timing of an announcement. I would say that the closing of this, in April, has our full concentration, because it is different than what we’ve done in the past. Because our systems conversion happens at the same time. So we’re very focused on that. We also have some IT projects that are slated in 2019, that are going to require our conversion assets. But I will say this, we’re still very much interested in continuing to expand through M&A. So we’re still having really good conversations, and I really just can’t speculate on when that next announcement might be.

[Brady Gailey:]

Got it. Thanks for the color, guys.

[Operator:]

Our next question comes from Daniel Mannix with Raymond James.

[Daniel Mannix:]

Hey, guys. Good morning. Thanks for taking my question. Just want to piggyback off that M&A question there. So you talked about the depositors of the St. Louis market. You know you have the commercial strength there. As you look across the rest of your footprint, what other markets do you have that same dynamic right now where – your commercial team is doing great, and you’re looking for that retail presence to help both during round out the product offering.

[George Makris:]

Well, I would say that Nashville is probably at the top of the list, our commercial team there. And quite honestly, we have a fairly good retail franchise, but it’s very limited in its geography around Nashville. So we would like to expand in the Nashville area. I would say that Memphis is starting to show a little promise. And of course, we picked up Denver, San Antonio, and Austin through the Bank SNB acquisitions. Their commercial teams are doing well, and we hope they continue to the point that they move up in our priority list too. So those are primarily the ones that I would tell you are doing exceptionally well today, and we continue to take a look at opportunities in those markets.

[Daniel Mannix:]

Got it. Great color. Want to just jump over to the deposits for a minute. So what does this transaction do to your growth expectations? I see that Reliance has a larger mix of CDs. Is that something that you’re looking to grow just proportionally from here?

[George Makris:]

Well, I would say this, we’ve talked about our products and services, our consumer lending opportunities that really Reliance couldn’t do as they were turning around the bank. They’ve done a phenomenal job of developing a really strong retail deposit base through their 22 branches in the St. Louis market. We think that the sky is the limit. They’ve got an excellent retail group. We have an excellent retail group in St. Louis. In fact, our J.D. Power storage in St. Louis is the third-highest in our entire organization. So from a customer service standpoint, I think we all understand what needs to be done. Our objective is to get our products and services in the hands of the retail staff at Reliance as quickly as possible. And we think that retail deposit base will grow extremely well.

[Daniel Mannix:]

That’s great. If I could just sneak one more in. Looking at the loan-to-deposit ratio, this deal brings it down a little bit. You talked in the past about being at the top end of your comfort level. Just curious, are you planning on employing the same kind of deposit campaign that you’ve done across the footprint here in St. Louis, to kind of bring that down further. Can you give us the target level, I guess? What have you seen recently on deposit pricing competition? Just looking more broadly along your footprint. Thanks.

[George Makris:]

Well, I would say that our comfort level from loan-to-deposit ratio is 92% to 95%. We’ve exceeded that because our loan growth has been so strong in 2018, far exceeded our deposit growth. Even though, our deposit growth for the year is 10%, we’re awfully proud of. So we had to go out and fund that growth with probably, what I would consider, to be some high-price deposit, so public funds, things like that. As we start managing that deposit base a little more, we expect to replace those high-price deposits with more reasonable core deposit pricing. But we’re not going to turn down loans when we can go out and fund them, and we’ve got plenty of funding sources available. Matt Redd now – had a banking enterprise here. Matt, you may want to speak to that a little bit.

[Matt Redd:]

No, George, I think you hit that around the head. While we have – we view some higher-cost funding sources to take care of immediate needs. We’re deploying multiple strategies right now for core funding across – looking at new retail products through our branch network, continuing to enhance our treasury management team to grow in IB. And honestly, this acquisition gives us a chance to really be a middle market player with 22 – we have combined 25 locations in a great MSA that we think we can really grow in IB accounts moving forward.

[George Makris:]

Daniel, one of the thing I failed to mention is that – I think I did mention that the borrowing group at Reliance bank, those customers of theirs are A customers. That also gives us the opportunity to expand our relationship with those customers with some of our products and services, including our treasury management offering. So we just think there is great potential in the St. Louis market, and we’re committed to manage that loan-to-deposit ratio appropriately going forward.

[Daniel Mannix:]

That’s great. Thanks for the time, gentlemen.

[Operator:]

Our next question comes from Matt Olney with Stephens.

[Brandon Stevenson:]

Hey, good morning. This is Brandon Stevenson on for Matt this morning. I wanted to go back to the TARP paydown that you mentioned. You mentioned that you plan to go ahead and pay it down at the close. Is that something that you would expect to raise capital to fund the paydown and then replace the capital that you’re paying down?

[George Makris:]

No. We’ve modeled that in, and we feel very comfortable. We’ll have the resources just to pay it off at close.

[Brandon Stevenson:]

Understood. And you mentioned that at this time, you’re planning to convert your systems the same weekend as you close the deal. Have you set a date that you’re expecting to close and convert yet?

[George Makris:]

Yes, we have. We penciled in April, 12. We’ve already confirmed that with our key IT providers, so that’s what our target is.

[Brandon Stevenson:]

Understood. Thanks a lot guys. That’s all for me.

[Operator:]

Our next question comes from Bryce Rowe with Baird.

[Bryce Rowe:]

Thanks, good morning. Maybe a couple of follow ups on the last couple of questions there. On the preferred redemption and some of the pro forma capital ratios you lay out in the presentation. Just curious, if those pro formas exclude the preferred debt that you would convert and then redeem?

[Bob Fehlman:]

Yes, this is Bob. Yes, all of the pro forma ratios assume that the preferred is paid off.

[Bryce Rowe:]

Excellent, okay. Right, understood, okay. And then wanted to, I guess, follow-up on the conversion in the close over the same weekend. George, you mentioned, you’ve kind of a specific plan for 2019 that warranted a conversion and close over the same weekend. Maybe if you could provide a little bit of context around that comment? And are you comfortable with the conversion close simultaneously, just given the experience you’ve built up over the years with the M&A activity?

[George Makris:]

Well, first of all, yes, we’re very comfortable with the convert and close on the same weekend. We actually did that with Metropolitan National Bank back in 2013 or early 2014. Worked out extremely well and it was much more complicated than what we’re going to do with – in St. Louis. If you recall, we closed 27 branches with the Metropolitan acquisition, so lot more moving parts there. What is similar, though, is that it is a very confined geographic area. So we’ve been able to provide plenty of support over that weekend to those 22 branch locations in St. Louis. So that doesn’t give us any concern at all. With regard to our 2019 plan, we’ve been talking about our investment in technology here for about 18 months, and we have several of those activities that will occur in 2019. Some upgrades of current applications and things like that, that require systems conversions internally. Some of it maybe customer facing, some of it may just be internal conversions. And not dissimilar to what we just experienced in August when we converted our accounting and HR systems from the legacy systems to Workday. All that was done internally, no customer facing, but it affected every associate at Simmons. So we’ve got some of those activities scheduled in 2019, but none of them will conflict with our ability to convert in April.

[Bryce Rowe:]

Excellent, thank you, George. I appreciate the color.

[Operator:]

[Operator Instructions]

[George Makris:]

Okay. It doesn’t appear that there are any other questions. So we appreciate you joining us this morning. I want to, once again, congratulate both the Simmons’ commercial banking team in St. Louis and Tom Brouster and the team of Reliance Bank for their excellent performance in the past. I can’t imagine a marriage that looks better on paper than what we have here. We will be in the St. Louis market in the very near future to welcome our newest associates and look forward to reporting on our success in St. Louis in the months to come. Thanks again for joining us today, and we’ll say goodbye.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.