Simmons First National Corporation (NASDAQ:SFNC) Q2 2021 Earnings Conference Call July 27, 2021 10:00 AM ET

Company Participants

Ed Bilek - Director of IR
Steve Massanelli - CAO
George Makris - Chairman, CEO
Matt Reddin - CBO
Bob Fehlman - President, COO
Jay Brogdon - CFO, Treasurer
David Garner - CAO

Conference Call Participants

Stephen Scouten - Piper Sandler
Brady Gailey - KBW
Matt Olney - Stephens
Gary Tenner - D.A. Davidson

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. [Operator Instructions.]

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.

The purpose of our call is to discuss the information and data provided by the company in this quarterly earnings release issued this morning and to discuss the Company's outlook for the remainder of 2021. We will begin with prepared comments followed by a Q&A session. We have invited institutional investors and analysts from the equity firm that provide research on the Company to participate in the Q&A session. All other guests in this conference call are in listen-only mode. Recording 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 page for at least 60 days.

During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook. I remind you that you should not place undue reliance on any forward-looking statement as actual results could differ materially from those projected in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors has contained in the Company's SEC filings including without limitation the description of certain risk factors contained in the company's Form 10-K for the year-ended December 31^st, 2020, and the forward-looking information section of the Company's earnings release issued this morning.

The Company assumed no obligation to update or revise any forward-looking statements or other information. Finally, in this presentation we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Please note that the additional disclosures regarding non-GAAP metrics including the reconciliations of these non-GAAP metrics to GAAP are contains in the Company's earnings press release and second quarter investor presentation. Which are included as exhibits to the Company's current report filed this morning with the SEC on Form-8K and available on the Investor Relations page of the Company's website simmonsbank.com.

I will now turn the call over to George Makris.

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.

In terms of key performance metrics, return on average assets was 1.3%, return on average common equity was 10.1% and return on tangible common equity was 17.3%. net interest income for the quarter totaled a $146.5 million, flat versus first quarter 2021 levels as we were able to offset a 10 basis point decrease and our percent net interest margin by holding loan yield steady, continuing to actively manage deposit cost and reinvesting excess cash into variable rate short-term securities. As a result of these actions, core net interest income which excludes accretion increased 1% on a linked quarter basis.

Non-interest income totaled $47.9 million for the second quarter. Core non-interest income was $47.5 million up 6% on a linked quarter basis. Expenses were well-contained this total interest -- non-interest expense both on a reported basis and on a core basis were up 1% from first quarter 2021 levels. Our efficiency ratio was 56.9%, an improvement of 50 basis points on a linked quarter basis. Credit quality trends over the past three quarters continued to show marked improvement has certain concerns during the pandemic fail to materialize.

Non-performing loans totaled $80.9 million down $34.6 million from first quarter 2021. In addition, during the quarter we reported net recoveries of 07 basis points. These positive trends combine with improved economic modelling scenarios resulting in recapture of provision expense in the quarter totaling $13 million. At the same time, our allowanced loan ratio ended the quarter at 2% were up 07 basis points on a linked quarter basis and our non-performing loan coverage ratio stood at 281%. With respect to the balance sheet, total assets ended the quarter at $23.4 billion, total loans were a $11.4 billion and total deposits were $18.3 billion.

While the extensive stimulus programs provided support to those in need of assistance. High levels of liquidity also creates challenge to the financial services industry in terms of loan growth and we have not been immune. Total loan production during the first half of 2021 totaled $1.8 billion, putting us on place to significantly exceed loan origination volume reported for the full-year of 2020. While we would normally expect higher loan production volume to translate into an increase in total loans, that has not occurred is we continue to experience a higher than normal of pay downs.

On a positive note, our commercial loan pipeline rose for the third consecutive quarter to $1.3 billion and deposit generation continues to be strong as total deposits increased $1.3 billion during the first half of 2021. Our capital remains very strong. Total risk-based capital was 17.5%, CET1 was 14.2% and the leverage ratio was 9%. Given this strong position, our Board of Directors increased the authorization of and extended the timeline for our stock repurchase program thus increasing our remaining capacity under the program to approximately $150 million.

On our website at simmonsbank.com, we're sharing extensive presentation along with press release and financial data which gives much more detail regarding our quarterly results and other important information about our Company. Finally, the second also marked to return of M&A activity as we announced agreements to acquire two Tennessee-based financial institutions, Landmark Community Bank and Triumph Bancshares, Inc. Both of these organizations are successful are local community banking groups who share our philosophy with strong credit culture, significant community involvement and a passion for delivering excellent customer service.

In addition to the cultural synergies, these acquisitions highly complement our existing footprint in Tennessee and enhance our scale in two of our key growth markets, Memphis and Nashville while creating the ninth largest bank in Tennessee. We're on target to complete these acquisitions during the fourth quarter subject of course to satisfaction of closing conditions including received regulatory approval and we look forward to welcoming these associates and customers to Simmons. While we're encouraged by our performance during the first half of 2021, we also recognized a backdrop of economic uncertainty as we'll navigate the second-half of the year.

As such, our focus remains on executing basic locking and tackling fundamentals, taking care of our clients and meeting needs of the communities we serve. Our strategic plan has a number of initiatives designed to help us finish the year on a high note while placing us in position and to continue to grow our bank in the future. Given the investments we have made to transform our company coupled with discipline and strong culture we have in place, we're confident in our ability to implement these initiatives while adapting to the ever-changing landscape.

This concludes our prepared comments. I'll now turn the line over to our operator, invite questions from our analysts and institutional investors.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions.] 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.

And I will tell you, the acceptance has been extraordinary. The ultimate result of all of that will be that all of our customers whether their own land or whether they come into a branch, we're going to have a much better account opening experience than they have ever had before. As you know, it only takes a couple of pieces of information in five minutes to open an account. And I can still remember when I used to open my accounts it was a half a day process. So, we believe that we really have stated our product. We think it's going to attract new consumers to Simmons Bank.

And when you take a look at how we have built our brand and with the consumer groups that we got relationships with today and some that we're working on, so we have PGA's sponsorship, we're associated with Fort Worth Stock Show & Rodeo. We've got tremendous access to several colleges in our footprint. So, we really are focused on the new consumer group coming to Simmons Bank and we believe that our Coin Checking product is a basis for that success.

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.

I would say going forward we'll continue to look for opportunities. I don’t think you'll have as dramatic effect obviously going into Q3 and Q4. But we could have some pickup that would be more an opportunistic buy. We continue to manage our bond portfolio just like we have the last couple of years and look for opportunities to sell. As you saw we had an opportunity to sell another $40 million worth securities, pick up $5 million in gains and it's just hard to pass up three to four years of earnings on that. And it does hurt your bond yield a little bit but it's just tough to pass that up.

We will continue to do that each quarter as we go through just looking for good opportunities as we have dips in the 10 year or pickups and it’s you know way to reinvest. So again, I would say we're at 7.3, I would look for that number to increase even into Q3. Some of that will be in the floaters and a little bit will be into select other buckets.

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. [Operator Instructions] 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.