Simmons First National Corporation
Q4 2016 Earnings Call Transcript

Published: 19 Jan 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Simmons First National Corporation Fourth Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Burt Hicks, Investor Relations Officer. Please go ahead.

[Burt Hicks:]

Good afternoon. My name is Burt Hicks, and I serve as Investor Relations Officer of Simmons First National Corporation. We welcome you to our fourth quarter earnings teleconference and 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; Barry Ledbetter, Chief Banking Officer; and David Garner, Chief Accounting 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. All other guests in this conference are in a listen-only mode. A transcript of today’s call including our prepared remarks and the Q&A session will be posted on our new 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 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 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 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 report 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.

[George Makris:]

Thanks Burt, and welcome to our fourth quarter earnings conference call. In our press release issued yesterday we reported net income of $27 million for the fourth quarter of 2016, an increase of $3.2 million or 13.4% compared to the same quarter last year. Diluted earnings per share were $0.85, an increase of $0.07 or 9%. Included in the fourth quarter earnings were $1.8 million in net after-tax merger-related and branch right-sizing costs. Excluding the impact of these items, the company’s core earnings were $28.8 million for the fourth quarter of 2016, an increase of $2.8 million or 11% compared to the same period last year. Diluted core earnings per share were $0.91, an increase of [ph] the nickel (04

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Matt Olney of Stephens. Your line is now open.

[Matt Olney:]

Hey. Thanks. Good morning, guys.

[George Makris:]

Hey, Matt.

[Matt Olney:]

Hey. I want to start on loan growth, obviously a pretty impressive quarter in the fourth quarter. As you can tell us about the details behind that, whether it's by market, by loan type, and I know you've hired some new lenders over the last several quarters. Can you talk about how much of the growth was from these new lenders versus the legacy lenders? Thanks.

[George Makris:]

Matt, I am going to let Barry Ledbetter deal with that question. Thanks for your comments.

[Barry Ledbetter:]

Again, we have had a good loan growth, it was really from all the markets that, it was in Central Arkansas, Northwest Arkansas, quite a bit of growth still in St. Louis and in Nashville as well. And again, we have continued to approve and close a lot of loans in Kansas City. We just haven’t funded all of those loans yet, but our loan growth is really been in spread throughout our footprint.

[Matt Olney:]

And how do I think about loan growth in ‘17 as far as the momentum, will some of this kind of carry forward into next year, by the sound of the pipeline, my guess would be, yes, but any comments on that?

[Barry Ledbetter:]

Yeah. We expect our pipeline as you heard has increased from $374 million to $426 million. As we look at in the different regions, it’s really spread, we had all regions again, we are going to continue have good loan growth in Northwest Arkansas, Northeast Arkansas, Central Arkansas and even into Pine Bluff too as well as the agro loans that hope to start funding at the end of the first quarter. Continued to have a good pipeline in Nashville, in middle Tennessee and really throughout Kansas and Missouri, in Southwest Missouri, Springfield, St. Louis and Kansas City loan growth is looks very positive in those markets at this time.

[George Makris:]

Hey, Matt. This is George. I would tell you that our expectations are that by the end of the year we will have net loan growth of over $500 million. So we don’t know exactly which quarter that’s going to come in. We have already mentioned we have got several large constructions loans on the books and as those get funded they will be spread out throughout the year. But I think our lenders are starting to understand the benefits of larger balance sheet. We continue to make community banks loans, but we are also getting to take a look at some loans that we never really got to look at before we are the size that we are today. So, I think, we are starting to reap the benefits of being a larger company.

[Bob Fehlman:]

Hey, Matt. That obviously would be excluding any future acquisitions.

[Matt Olney:]

Sure. I understand. Thanks for that. And then as far as the core margin outlook, I believe, George, you said 3.70% to 3.80%, which I believe is a little bit lower than we talked about back in October. Can you just talk about the competitive pressures that have changed over the last few months, where are you seeing that?

[George Makris:]

Well, primarily in some larger CRE loans, we are going to take look at, those are really competitive in the marketplace, so it takes a lot of smaller loans at a higher rate make up for one larger loan at a lower rate. Another thing that complicates it a little bit, Matt, obviously is seasonality of two portfolios, our credit card portfolio, which has higher yield will pay down during the first quarter, toward the end of the first quarter our agro loan which have little bit higher rate will start to fund. So there is going to be a little noise as one pays off another starts to build up and we continue to get the pressure of those larger loans at lower rates.

[Bob Fehlman:]

Look, Matt, also remember our first quarter, as George said, those, the ag loans will continue to pay down through the quarter and that -- in the second quarter is when the next wave will fund and credit card will pay down. So we are going to have a much lower margin in the first quarter than we will be balance of the year.

[Matt Olney:]

Got it. Understood. Okay. I will hop back in the queue. Thanks, guys.

[Bob Fehlman:]

Thanks.

[George Makris:]

Thank you.

[Operator:]

Thank you. And our next question comes from David Feaster, Raymond James. Your line is now open.

[David Feaster:]

Hey. Good afternoon, guys.

[George Makris:]

Hi, David.

[David Feaster:]

Is there any concern that this individual whose commented on now three of your deals might do so on the Southwest Bank deal and potentially delay that?

[George Makris:]

Well, that’s certainly completely out of our control. The frustrating part, David, is that the process just comes to a screeching halt anytime there is a comment, whether it’s from that individual or someone else. He has history making comments on multiple deals. So we are not singled out. We will feel like we are being abused by him. He is abusing the whole system quite honestly in my opinion. We are hopeful that there will be some process change that will allow quicker resolution to these comments. Quite honestly there is nothing that he brings that’s not examined on the regular basis in due course through our regulatory exams. The problem right now with the process is that in the interim between exams it just stops the application process and the issue for us in this particular deal is we have delayed getting in front of our soon to be new associates in Tennessee with job options. We have also had to postpone date certain for systems integration. Both of those dates are on hold right now, until we get some indication of the application approval. We are continuing on, we are filing this or having shareholder meetings being prepared to close the deal, but until we get regulatory approval our hands are tight. So it’s not necessarily that we have that much of a concern with the comment, it’s the process of administrating the resolution of comment that slows down whole system right now.

[David Feaster:]

Got you. Could you give us a thoughts on non-interest expenses going forward and maybe walk us through some of the puts and takes of how much of this C&D expenses are already in your expense stage, are already in your run rate and seasonality from FICA and payroll tax that might impact the first quarter, whatever color you can provide?

[Bob Fehlman:]

Yeah. Well, we estimate the FICA impact in the first quarter is about the $1 million. We have a run rate next year in our budget aggressively about $64 million, we have some quarters a little higher, some little lower, but that’s our target level for next year. That’s fully inclusive of C&D, no other acquisitions in those numbers. I would say the majority of the cost run were in Q4 or will -- would be fully in Q1, but we realize most of those in Q4. But, again $64 million or so on the cost run going forward.

[David Feaster:]

Okay. And similar does your outlook for the quarter include the deals or is that just included C&D.

[Bob Fehlman:]

No. Just current.

[David Feaster:]

Okay. Last one for me, could just -- could we talk a little bit about fee income and maybe the puts and takes, but there mortgage is obviously very strong? What are your general thoughts on fee income in 2017?

[George Makris:]

So I will let Marty talk specifically about mortgage and then we will talk a little bit about maybe trust and investment all the forms of fee income.

[Marty Casteel:]

David our mortgage volume in 2016 like everyone is very strong but 35% that was refinanced. We fully expect that refinance volume for 2017 based upon where interest rates are today and where they are expected to move we will however refinance this. So we would expect the volume to be impacted. We would try to manage that impact through our managing margins but we do fully expect production volume to be up in 2017.

[George Makris:]

But, David, I will talk a little bit about opportunities for other fee income. I think we have mentioned several times that that we are really good in the trust business but we don’t have it fully integrated costs on our market, so that’s the real priority for us. We expect to make good headway in 2017 and rolling out some of those services in markets where it’s previously not been offered. So we would expect continual steady rise in our fee income exclusive of seasonality in rate driven environment like our mortgage income. So we will continue to see it increase through that 2017.

[Bob Fehlman:]

But as a reminder, we did closed down our institutional investment group this year and you will see about a $0.5 million of quarter in revenue that will be lower but the bottomline impact is basically breakeven.

[David Feaster:]

Okay. Got it. Thanks, guys.

[George Makris:]

Thank you.

[Operator:]

Thank you. And our next question comes from Brady Gailey of KBW. Your line is now open.

[Brady Gailey:]

Hey, guys.

[George Makris:]

Hi, Brady.

[Brady Gailey:]

So the guidance for yield accretion of $14 million this year for 2017, is that just the scheduled accretion or does that also include some of the more one-time accretable yield benefits like kind of pay off of an acquired loan?

[Bob Fehlman:]

Yeah. Brady, this is Bob. This is our scheduled on our current banks that we have, so no future banks, it doesn’t include any special one-time when loans pay off. That’s our scheduled amount for next year.

[Brady Gailey:]

So, I mean, realistically you’ll have some pay offs, so that number could come in higher.

[Bob Fehlman:]

It could, I don’t, less likely we will have as much income as we have in the last two years from the special pay offs, some of those non-accretable yield loans that paid off, when we have taken those to income, so we will have less of that. But, yes, in reality it will be higher than the $14 million scheduled.

[Brady Gailey:]

Okay.

[Bob Fehlman:]

It’s hard to tell. It is -- and as you have seen this year, I think, we gave guidance that would be at about $23 million this year. If you look at the first quarter it look like we are going to be significantly above that number. As we move through the year it look like we are going to be below it. We ended up the year right at $23 million. So it’s very lumpy as you go through the year. So but the $14 million is scheduled right now.

[Brady Gailey:]

Okay. And then, I think, last earnings call, we’ve talked about four provision run rate of around $3 million to $4 million a quarter and a core efficiency ratio of around 55% in 2017, does that, do those numbers still feel right?

[Bob Fehlman:]

Yes. Both of those -- our target level on efficiency ratio is 55% going forward, even with acquisitions we believe that number would be at that level. Our provision going next year in the budget is right at a $1.1 million or so a must that you write on $0.3 million per quarter. That’s our target level. Now loan growth can change those numbers. We are hopeful that loan growth is higher than and requires but more than this.

[George Makris:]

Yeah. So, Brady, that’s something we struggle with all the time, I know before we look at we compare our allowance to the market is a percentage of loans. We’ve -- unfortunately we can’t look at it like that anymore. We actually have to allocate for loan based on the credit quality and as -- once again as our loans migrate from acquired to legacy, those are only past loans that are moving, so they get the lowest allocation in our formula assigned to them. So what you see in the additional allowance are those allocations based on loan growth period and as you can see when we take our growth in the allowance and the growth in the loan portfolio, they are at a lower level than 84 basis points and I would expect that to continue on that front.

[Brady Gailey:]

Okay. Right. That’s helpful. And then the tax rate, I think, this quarter and last quarter it was 31.5%, is that seem a little low kind of compared to where you all had been running historically, but how do you are looking the tax rate going forward?

[Bob Fehlman:]

Well, we show that the taxes as we got to the end of the year, it was 32.5% for the year, is what our full rate was. We would expect going into next year it would be probably close to the 33% as we expect higher income levels -- to hit higher income levels would be a fully taxable amount. If you look at this last year, it’s pro rata amount of the benefit we get from the municipal income.

[Brady Gailey:]

Okay. And then on the tax topic, post Trump’s win, people are talking about the lower corporate tax rate, have you all looked at any sort of sensitivity that you might have to a reduction in the corporate tax rate?

[Bob Fehlman:]

Well, we hear at the market, a lot of people are giving guidance on 5%, if every 5%, this is the impact that, I think, that’s pretty easy calculation, you take the 5% of the pre-tax income and you come up with that number. But there is also a question of what’s the impact on deferred tax asset and for us there is roughly for about every 5% there is about a $4 million deferred tax asset that we would have to write down and basically it’s about less than a year been recovery earn back on that number.

[Brady Gailey:]

Okay.

[Bob Fehlman:]

We are hopeful for that, but we are not looking any dollars yet.

[Brady Gailey:]

Yeah. Okay. And then, finally for me, just on the caught up with the M&A, so he has filed on previous deals with you before, right?

[George Makris:]

That’s correct.

[Brady Gailey:]

Okay. And then how -- with those two deals that he filed on before, how much did those delay the process, is it just a month or two?

[George Makris:]

Yes. It -- bottomline it delayed about two months.

[Brady Gailey:]

Okay.

[George Makris:]

Even though the period for the Fed to actually rule on comment was six months, we would had shareholder meetings and got approval of shareholders and we were ready to close as soon as we got approval from the Fed. So the actual delay was only a couple of months than what our original timeline was. The First South Bank deal could have similar delay because we are going to move right on through the process with shareholder approval and when we are ready to close as soon as we get approval from the Federal Reserve.

[Brady Gailey:]

Yeah. All right. That’s all I have. Good luck with getting the approvals.

[George Makris:]

Yeah. Thanks.

[Bob Fehlman:]

Thanks, Brady.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open.

[George Makris:]

Hi, Stephen.

[Stephen Scouten:]

Hey, guys. Thanks.

[Bob Fehlman:]

Hi, Steve.

[Stephen Scouten:]

A question for maybe just following up on Brady’s last question with the delay, I mean, is this guy the one that’s been out there doing some of this CRE comment letters that delayed several deals we see in the marketplace? And then, secondarily, is it normal for you to not have filed the OKSB application yet or this already delayed even your filing of that application?

[George Makris:]

No. That’s very normal OKSB application. In fact if you recall we didn’t expect to close that deal until the third quarter this year. So, we really don’t know if it’s going to delay the OKSB transaction at all. But the fact we haven’t file the application yet is normal course. The guy who filed the comments Matthew Lee, okay. So he is well known by the institution…

[Stephen Scouten:]

Yeah. Perfect. Yeah.

[George Makris:]

You just need to know who we are dealing with.

[Stephen Scouten:]

Yeah. No. I have had -- I had several banks where he had delayed. Thanks. So that’s not surprising. I appreciate that.

[George Makris:]

Okay.

[Stephen Scouten:]

And then, going back to the tax rate, I know, you said, it’s pretty simple math on like 5% decline, but just unclear like, say, the -- corporate tax rates went down 15%, are you saying you would realize a 15% reduction in your effective rate or would it be safe to assume that you would lose some of that just given, I mean, that’s bold and state taxes is another -- other effects there?

[Bob Fehlman:]

Yeah. Yeah. You would lose some on your municipals, but it’s effectively if you went down the pro rate, effect rate of 33% next year and it goes down 15%, it’s going to be 15% of 35% that would go down.

[Stephen Scouten:]

Okay. Yeah. That makes sense. Other percentage of that. Okay.

[Bob Fehlman:]

That’s right.

[Stephen Scouten:]

Okay. Great. And then, George, you mentioned that you are still seeing some really strong competition especially on the larger CRE deals. Can you tell us kind of what new loan yields are coming on at and if you have seen any sort of help so far from the December hike?

[George Makris:]

We really haven’t seen much help from the December hike yet, many of our floating rate loans are consumer based, so they require, I start to notice before we are able to move those. We expect to see that toward the end of January pick in. I am going to very tough little bit about some of the yields we are seeing on more larger comparative loans.

[Barry Ledbetter:]

Well, unfortunately then compared that the market has suggested a well in the larger loan, we are still seeing comparative pressure on the large loans that we have seen in the past, I think, like all banks are looking for high quality low risk loans and I spoke about we haven’t seen outpace increase of risks lot on the larger loans.

[George Makris:]

Generally on average, Barry, you say prime or somewhere around…

[Barry Ledbetter:]

Somewhere around prime, a lot of these are construction loans and they will have 18-month construction loan and then they will term out for three years to four years. So a lot of those will have too problem or maybe when they term out they’ll be maybe 50 basis points above prime.

[Stephen Scouten:]

Okay. And then are you putting floors on many of those loans right now or is it usually just a prime floater?

[George Makris:]

Well, generally, you will come back comparative pressure there, we try to always put absorber in there, but I would say a lot of our loans are able to have a floor but then it requires us to have that ceiling as well, so it’s probably mix as far as the offering we have put forwards on those loans.

[Stephen Scouten:]

Okay. That makes sense. And then maybe just one last question for me, I mean, one of the attractive things about your balance sheet today is, I mean, your loan to deposit ratio is still only 82%. So kind of curious as to what you think the path for that metric will be and kind of how you might lever up your balance sheet towards the loan book especially if you are going to add on maybe $500 million of growth this year, but just want to hear your thoughts around that, what you think the opportunity is?

[George Makris:]

Well, we certainly strive for 90% loan to deposit ratio and based on our cash flows of our investment portfolios we plan to fund that growth primarily through those cash flow. So we have established an ALCO policy that will allow us to fund that $500 million of loans this year. I don’t know that we will get to 90% this year, may take us two years to get there. But based on trajectory of the last two months pipelines, we think that within two years would be 90% loan deposit. That’s always going to depend on our internal need for liquidity, so to the extent that we don’t, there are many thing to attract additional deposits. I think you could expect that 90% within the next two years.

[Bob Fehlman:]

Yeah. And keep in mind we have got, as George said, $1.6 billion in our security portfolio, we don’t have to level that we are trying to maintain at that point. We have that much in there right now to be fully invested on our liquidity side. But we will allow that number to go down to a manageable level to keep us at the 90% or so.

[Stephen Scouten:]

Okay. Fantastic. Well, thanks guys and congrats on the strong growth this quarter, congrats.

[George Makris:]

Thank you.

[Operator:]

Thank you. And our next question comes from Peyton Green of Piper Jaffray. Your line is now open.

[Peyton Green:]

Yes. Good morning. A couple of questions. One I was wondering when your last CRE exam was?

[Marty Casteel:]

2012, 2012.

[Peyton Green:]

Okay.

[Marty Casteel:]

Nice.

[Peyton Green:]

Okay. Okay. All right. And then, maybe for Bob, I mean, what would you expect the 25 basis point move to do or maybe a better way to ask, if we got another one in June, this kind of slow methodical bump in rates, do you think the asset sensitivity approve that or do you have to go more than say another 50 basis points to start to see it?

[Bob Fehlman:]

I mean, I think, we are going to start to see some benefit from the December one, a small, a portion of that. I think if forecast are right and we have another 25 basis point increase in June, in July, I think, we will start realizing even more of that benefit. I think every, there is several million dollars obviously for each quarter basis point goes up in there what we project that.

[Peyton Green:]

Okay. So that will be $7 million per year or 25 basis points…

[Bob Fehlman:]

Yes. On annualized basis, yes.

[Peyton Green:]

Okay. And then maybe you mentioned about the securities portfolio and potentially funding loans over the next couple of years. What is the cash flow that you expect to get off the securities book and then let’s kind of the roll off yield as a consistent with what the securities yields are lifted or is it lower or higher?

[Bob Fehlman:]

Yeah. I will say, well, first of the roll off is about $250 million to $300 million per year.

[George Makris:]

That’s right.

[Bob Fehlman:]

Is somewhat, is the cash flows projected right now. The roll off as you, obviously, you can reinvest a little bit higher today than what the roll off is coming off, but it’s a pretty consistent portfolio from what’s rolling off of what we will be able to invest.

[Peyton Green:]

Okay. And again, the preference would be to fund loan growth absolute deposit growth relative by additional replacement that you present?

[Bob Fehlman:]

Exactly. Yes. Yeah. We will use that security portfolio to help fund the loan growth.

[Peyton Green:]

Okay. Great. And then, I may have missed this and I apologies if I missed it earlier, but the mortgage number was quite strong, the loan sale gain that was quite strong this quarter? Was there anything in particular that drove that and what’s the outlook for 1Q?

[George Makris:]

It really was a good 2016, Peyton, we have good volume, we have a good strong fourth quarter. And I did mentioned earlier that our refinanced volume for 2016 was in the 35% of the portfolio range -- of the volume range. We do not expect that to continue into 2017 and so we do expect volume -- actual volume in the mortgage production would be down absent our how initial originate. So we are planning on a lower volume for 2017.

[Peyton Green:]

Okay. And then any, I mean, it was okay. All right. Good enough. Thank you.

[George Makris:]

Nothing, just having sometimes the sales occur and the trades take place at -- in the quarter sometimes and that we will carryover. I don’t think there was anything significant that happened in the quarter there.

[Peyton Green:]

Okay. Great. Thank you for taking my questions.

[George Makris:]

Thanks, Peyton.

[Bob Fehlman:]

Thank you.

[Operator:]

Thank you. And there are no further questions at this time. I would like to turn the conference back over to Mr. George Makris for closing remarks.

[George Makris:]

Well, thanks to each of you for joining us this morning. Obviously, we are pretty proud of our performance particularly in the fourth quarter of 2016 and based on our outlook we are looking for great 2017. Thanks again for joining us and have a great day.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day everyone.