Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Simmons first National Corporation's first quarter 2020 earnings Conference call.
At this time, all participants on the listen only mode.
After the speaker presentation, there will be a question answer session.
Ask a question during this session you would need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any thought or assistance. Please press star zero.
I'll now like behind the conference over to your Speaker today Mr., Steve Mcannally. Thank you. Please go ahead Sir.
Good morning, and thank you for joining our first quarter earnings call. My name is Steve Mass Nelina service, Chief administrative officer, and Investor Relations Officer Simmons first National Corporation.
Joining me today, or George Makris, Chairman and Chief Executive Officer, Bob Fehlman, Chief Financial Officer in Chief Operating Officer, David Garner Executive director of Finance, and accounting and Chief Accounting Officer, and met Red and Chief Banking Officer.
The purpose of this call is disgusting information and data provided by the company our quarterly earnings release issued this morning and to discuss the company's outlook for the future.
We will begin with prepared comments followed by QNX session.
We have been bodied institutional investors and analysts from the equity from their provide research on our company to participate in the Q and a recession.
All other gas during this conference call or in listen only mode, a transcript of todays call, including our prepared remarks, and the QNX session will be posted on our website Simmons bank Dot com under the Investor Relations page during today's call will make forward looking statements about our future plans goals.
<unk> estimates projections and outlook I remind you that actual results could differ materially from those projected in the forward looking statements due to a variety of factors.
Additional information concerning some of these factors just get it contained in our FCC filings, including without limitation. The description of certain risk factors contained in our most recent annual report on form 10-K, and the forward looking information section of our earnings press release issued this morning.
The company assumes no obligation to update or revise any forward looking statements or other information.
Lastly in this presentation, we will discuss certain non-GAAP financial metrics, we believe provide useful information to investors.
Please note that additional disclosures regarding non-GAAP metrics, including the reconciliations of these non-GAAP metrics. The gap are contained in our earnings press release, which is included as an exhibit to our current report filed this morning with the FCC on form 8-K and available on the Investor Relations page on our website Simmons.
Bank Dot com.
I'll now turn the call over to George Makris.
Thanks, Steve and welcome to our first quarter earnings Conference call.
I'd like to be on todays call by thanking the 3000, Plosch Simmons associates for their commitment and dedication. During these very trying times many of our ourselves huge could not work from home.
Oh, sorry, we're serving our customers needed our hill.
Especial death of gratitude goes to our branch call Center and digital banking support staff, who were here every minute to fulfill the needs of our customer.
Later, I will mention the efforts of our bikers, there's I address the credit needs of our customers. During this crisis I'm very proud of our team and their demonstration of our community banking values.
In our press release, we reported net income of $77.2 million for the first quarter 2020.
Diluted earnings per share were 68 cents per quarter.
Included in the first quarter earnings was net income of $3.4 million related to gain on the sale of our branches in south, Texas and merger related and branch right sizing expenses.
Our return on average assets was 1.5% and our efficiency ratio was 56.4% so the first quarter.
As of March 31st 2020, total assets were $20.8 billion, our loan balance was $14.4 billion and our deposit balance was $15.6 billion.
During the quarter, we moved $115 million blows and $58 million of deposits held for sale based on our agreement to sell our Colorado branches, which we expect close in the second quarter.
Our loan pipeline remained steady at $313 million 50 ended the quarter, excluding payroll protection program launch.
In response to economic hardships associated with the crumble bars pandemic through April 16th we have completed or in the process of modifying over 3000 loans totaling over $1.8 billion.
In addition, as over that time, we've obtained approval from the SB <unk> for over 3100, PPP loans totaling over $725 billion.
During the first quarter, we sold approximately $1 billion obscurities and recorded gains totaling more than $30 million.
At March 31st our cash position was $1.7 billion, which were used to fund PPP loan to millions.
As those loans pay back or forgiven.
We expect reinvest those funds in our securities portfolio.
Our net interest margin for the quarter was 3.68% in our core net interest margin, which excludes accretion was 3.42%.
We continued reprice our deposits in line with the substantial rate cuts during March and our index loans totaling approximately 50% of our loan portfolio have repriced.
During the first quarter, we repurchased approximately 4.9 million shares of Simmons stock at an average price of $18.94 no shares have been repurchase since March 31st.
Remaining authorized repurchase balance is $76.5 million and the current termination date of the program is October 31st 2021.
Market conditions, and our capital needs will drive decisions regarding additional future stock repurchases.
We adopted seasonal on January 1st 2020.
As of December 31st 2019, our allowance was $68 million <unk>, 0.47% total loans.
For the seasonal related adjustments on January 1st 2020, our allowance was $220 million or 1.52% total loans.
During the quarter, we added $23 million note of charge offs to the allowance, which totaled $243 million or 1.69% of total loans on March 31st.
In addition, our reserve for unfunded commitments was $29 billion at quarter end.
Our capital remains very strong our total risk based capital ratio was 14%.
Our common equity tier one ratio was 11%.
Well, our tier one leverage ratio was 9% at the end of the quarter.
This quarter because of the extenuating circumstances associated with pandemic, we've published our quarterly Investor presentation contemporaneously with our press release, including a supplement section specifically addressing certain income statement and balance sheet statistics in commentary.
I would encourage you to go to Simmons Bank Dot com and access information under our Investor Relations tab.
This information can also be found it FCC dot Gov.
On behalf of Simmons Bank, our customers and communities we serve.
Good luck like our health care professionals, along with our federal state and local officials, who have all responded quickly and with great care to the challenges presented by the pandemic.
Well the full impact of the grown virus pandemic remains uncertain.
I believe the timing of returned to normal is a critical factor.
But even more interesting will be the new normal.
Based on programs available the marketplace today I suspect when you're not fully understand the longer term effects of this crisis for several months.
We're prepared to monitor the progress during that time and believe we as a company are well positioned to help our customers and communities as we come out of these unprecedented times.
Once again I encourage you to access more information on our website I'll now turn the line over to our operator and invite questions from our analysts and institutional investors.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please standby we've compiled acuity roster.
I sure first question comes from would leave from KBW. Please go ahead.
Hey, good morning, guys.
Reported more than.
So.
Question on now.
Great. Thank you.
[laughter].
The bank just an update on technologies that are all the best.
Right.
Well I would I would say that a it's performed very well in.
In fact, our our mobile App has a 4.7 writing.
In the App stores, we're pretty proud about that.
We're going to continue to enhance our mobile offerings. We're gonna continued rolling on.
New optionality into our mobile App and I think.
The chart that you might be looking at shows the.
Trend away from branch transactions into.
Digital transactions, which is pretty pronounced.
Especially during this period of time.
No we expect that there will be permanent.
Consumer habit changes.
As a result of the economy's lock Dale.
We think of one of them is gonna be the way they access banking services. So we're taking a good hard look at how we continue to.
To enhance our digital offerings to our customers not only consumer business.
In anticipation that they will use our branch locations less for typical deposit transactions. So I would say, we're real pleased with why things, you're going and better things to come.
That's right then so well looking.
And then do you.
<unk>.
Your branch.
[laughter] [laughter] 2020 area, but it's one.
Well.
As you probably know we've already announced that we're going to close 12 branches in the second quarter.
We're continuing to look at other possible branch consolidation throughout our footprint I would say that it's possible that some other consolidation could happen in 2020.
Could roll in first and second quarter 2021, but we do believe that other branch consolidation is probably going to be.
Born out by our customers utilization.
All right.
Yeah.
Just with active.
Yeah.
In fact.
I'll say that the with the Mark at the 10.
You know that was breaking up are you then one your your calls break it up so we're having a hard time you. It was a question on landmark and the co good cost saving cost savings related to the koeppen 19.
I mean timing will be impacted.
No not at all that conversion happened on February 14th and Everything's moving along there very well.
Okay. Thanks.
Thank you.
Thank you our next question comes from.
From the line of Matt Olney from Stephens, Inc. Please go ahead.
Thanks, Good morning, guys.
Yeah.
You noted in the slide deck that the A.C.L. ratio is now a pretty big jumped to 169 as a percent of.
Overall loans can you just talk about where you expect this to go.
Based on where we sit today thanks.
So Matt we.
Obviously spend lot time talking about that I would tell you the one area that.
Over the long term gives us a little calls.
I would be our energy portfolio.
I mean, I think we've got quite a bit of coverage now.
And quite honestly most of our energy production is well hedged through 2020 and quite honestly a lot of it through 2021.
So the current volatility in oil and gas prices is not that concerning to us today, but if it continues.
We're in a have probably more exposure in our energy portfolio.
We have taken a look at.
The rest of our portfolio as you probably noticed.
We have already.
Modified 20% of our outstanding loan balances and we've worked with those customers will want to make sure we understand their game plan going forward.
And just give you a little more color or modified loans. We had two options. One was six months interest only the other was deferred payments for three months then interest only for another three months so both of them.
Had a six month deferral plant.
When we're doing well with our customers we have to make sure. There were there currently in compliance with our loan agreement, we take in consideration or payment history. There are available liquidity other financial performance prior to the crisis and their emergency business plan, along with projections will not come out of the crisis.
Yes.
We have no cash out dividends or distributions allowable.
In any of the loan modifications and no rate adjustment so we.
We feel like.
Our customers should be only on.
Before we modify.
Their loan agreement and I think that's generally accepted good business practice in our good customers certainly understand that.
So.
I would tell you that were fairly comfortable where we are today.
And with the loan modifications and with the PPP liquidity that were injecting into our customers balance sheets, it's going to be a few months before we can really tell what the long term effect is gonna be not to mention when we start coming out of the lock down.
I mean, that's all over the board today, so in Arkansas as you know, we've we've had really good success.
Would flatten in that curve I could be that we start coming out in Arkansas early to mid but.
What that means we're not exactly sure yet.
But I mentioned, the us and I want to emphasize it once again.
Through the PPP program, we are going to inject more than a billion dollars.
Oh liquidity that has the potential to be given.
And our customers balance sheet.
So that's as far as we're concerned.
Better scenario than we were looking at early in <unk>.
Okay, that's great commentary, Georgia, I appreciate that and and one of the big variables that she did you mention what was the energy portfolio and I think your slide deck cats and great details in there about the anticipated pay off.
For the remainder of 2020 I'm curious what consideration are you, giving too to stress in the industry with in that pay off amount and you mentioned the borrowers have a healthy level of hedged production that's.
That's great. It can you put some numbers behind that as far as.
What percent is hedged in 2020 and then.
How much of that fall two in 2021. Thanks.
Have you will you have I start with that Hey, Matt.
This is Matt.
A couple of comments there on the hedging as far as 2020, it's about 60% are hedged through a crude I understand when you look at those numbers in the deck easy. The overall 380 million of that there's really 220 million. That's true production, that's where you would have hedging in place.
And now that that's 60% is it on average hedge for 2020 and whats important also remember once you get underneath that that production, 60%. The remaining 40% is made up a smaller production loans that have guaranteed personal guarantees behind them that you know it's just.
As essentially like a hedge because they had the wherewithal.
To make those whole now 2021, I have to get to that number but 60% for 2020, and then a lot of those 6% moves into 2021.
Matt just a little more information the weighted average swap price rules 55 Bucks for natural gas its $2 and 66 suits.
Okay. That's that's great color I appreciate that and then I want to switch gears on the deposit cost. It sounds like you guys had some nice momentum, bringing those costs down. The next few quarters is there any color you can give as far as spot rates that you see more more recently just trying to appreciate.
Where where this could land over the next few quarters. Thanks.
You know Matt I'd, just tell you we worked on deposits pretty hard starting in early March.
You know.
I would expect you know we had a nice.
Pick up in our rates are lowering of our rates for the first quarter and I'd expect to see that continued into Q2 and into the balance of the year you know, saying, we're seeing good deposit growth from the ended the quarter, obviously was stimulus checks coming in PBP loans coming in we're seeing good low, but I mean deposit volume coming down also.
From Portland.
But our expectations would be that we'd have a nice pick up in the second quarter.
You know, Matt I'll, just I'll just tell you. This I'll I'll be disappointed if we don't manage.
Our deposit cost.
In line with our.
Loan.
Pricing.
So we were pretty successful in the first quarter doing that I would expect we will be successful in the second quarter keeping that spread.
Pretty neutral.
Yeah. It wasn't a other number I'd give you two that we didnt have in the release is about 80% of the variable rate loans repriced in the first quarter now granted all the deposit and loan repricing happened in the basically in March or somewhere in that book, but 80% of our well.
Variable rate low pricing happened in the first quarter. So we'll have another 20% lagging over the next couple of months to the balance of the year, but the deposit pricing will pick up obviously the transactions very quickly the time will be lagging over a period of time.
Matt I'm, a I might just mentioned one other factor in our deposit pricing.
As we acquired banks and passed we have been very cognizant of some deposit products that they had in place.
And we had deposit pricing all across the board we have.
To the best of our ability at this point in time standardize that deposit pricing.
So we're going to see a downward momentum.
In a lot of those different markets.
[noise] a understood. Okay. That's it thanks for that and then just lastly, it sounds like the liquidity build towards the end of the quarter.
It sounds like the excess or the high liquidity levels that will continue.
At least the next few quarters and am I interpreting that correctly.
Well so.
You know our our liquidity was about 1.7 billion in cash will fund billion to and PPP loans. We are actively reinvesting now and our securities portfolio and as those PPP loans pay all we will also invest that back end of this.
Purities portfolio, so were funded in our own.
PPP loans right now I know there are other programs available out there.
But that's what we've chosen to do just take care of our own business and we think thats going to work out well I would say that our current liquidity level is higher than we would ever have under normal circumstances.
But these are normal circumstances, and we believe.
Lots of liquidity is very very important right. Now you know we started building that because we didn't know if there was going to be or run all deposits before the stimulus was announced a we knew that this is we're going to have some issues. So we tried to be prepared for that.
Yes.
You know if we stay will lock down for a period of time, even this stimulus money is not going to stem. The tide. So we've got to always be aware of the risk associated with our customers needing to access.
Their deposits and liquidity is where we're going to do.
Okay. That's very helpful. Thanks to the commentary and things should this slide deck. That's a that was very helpful.
Thank you.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
I sure on next question comes from Gary Tenner from D.A. Davidson. Please go ahead.
Thanks, Good morning, guys.
Gary.
Oh, Hey asked about the funding just.
With regard to BPP, you've just kind of ran through which the but just a clear just if you were kind of building your your liquidity.
<unk> program.
In case, you sort of.
Draining Bobby.
You saw that utilize that.
That is supposed to using there.
Sources.
The funding.
Yep.
Yeah, It Gary as as George mentioned, when we got early into March you know, we Didnt really know what stimulus plans, we're gonna come out by the government and we decided early on that were and take care of our own liquidity issues. If they did come up we didnt have any idea what was going to be out there a lot about nodes. So when the 10 year hit below 40 basis.
Points and 35, we decided it's time to take advantage of the price the gains that we had in our security portfolio and de risk the balance sheet basically by taking a billion dollars UBS securities and putting it into cash and big chunk of that was in mortgage backs and Cmos a small portion of it a couple hundred million was in muni. So we.
Selectively pulled some out there picked up $37 million Engain built up a billion dollars and liquidity. So that we were able to take care of ourselves well since that time. The government came in is put in a lot of stimulus plan.
So towards the end of the quarter, we came back said well well use this cash and liquidity to as these PPP loans funded up and as you know those yields on those will first the rates, 1%, but when you put that loan fee and it gets accreted over the life of those loans.
No we calculate those yields are gonna be anywhere from four to six 7% depending when they are forgiven are paid off those and I would tell you also those those rates.
The effective yield is what I would call is going to be very lumpy, you're gonna have some periods. It's three four or 5% if they're forgiven are paid off in the second third quarter, you're going to have substantially higher rates as those fee income is recognized during that period. So for us. It was very good timing. We can then choose to go back into the.
The securities portfolio back in the back side of this hopefully when the markets more stabilized down the road, but it gave us a lot of optionality that we controlled our own destiny instead of relying on somebody else.
Great I appreciate the color.
Nice quarter.
Regarding your portfolio.
No.
Demand for your plan of reducing your actual credit exposure through this year, so you've got about $70 million. So.
Yes, and speed exposure.
That are looking to you.
The entire remaining and given the environment has been working to <unk>.
Hello.
<unk>.
Well, our intention is to exit all $71 million less.
No it was redeterminations.
Come around that's going to be the logical time for us to determine whether or not.
We can exit and quite honestly.
You've seen on our slide deck, what we expect to exit in Q2 in Q3, I will tell Ya last quarter most of that $163 million was in Q2. So we think we're very realistic about our opportunity to exit some of those loans.
But our intention is to get out of every national credit worry on in the energy portfolio.
Okay, Great and I'm, just wondering what your for manner.
I missed any you may provide to here.
Quarter increase indeed.
Uh huh.
Thank you.
Thank you Kathy Rodney.
Yeah, you bet so.
33 million dollar increase in energy loans, including the Sauflon royalty bankruptcy, which is something you were probably aware of way too early for us tell exactly what that exposure is.
There are we had $5 million in consumer non accruals and then during the first quarter.
We converted landmark bank into Simmons bank, so all of their loan portfolio fell into the appropriate categories.
In our loan portfolio. So all of their non accruals. They were in our acquired bucket previously are now in our.
A regular loan portfolio. So the bull vast majority of the increase were in those three categories, Yeah, and and as you know undersea. So yes. There are no longer is an acquired loan bucket, so any and how it was reported before only of the acquired loans were not part of our.
Acquire our nonperforming loan bucket. So now it's all on the same playing field, they're all in there and as reported because now the the Hcl covers all of loans instead of just legacy loans.
Thank you.
Thanks.
Thank you.
I sure next question comes from David Feaster from Raymond James. Please go ahead.
Hey, Dave Thank God.
Oh I get your thoughts on.
A.
A lot of capital.
Yeah.
Capital.
Act on hold.
[laughter] I guess, how to think about Apple what do you think you're comfortable <unk> what would you want.
Before.
So the repurchase broke it just.
Thought topic.
Yeah I appreciate those ends and so on capital you know, there's I always look at a two different ways. What is your T.C. and your equity capital and then what is your regulatory on the regulatory side you know our leverage ratio was 9% our tier one was 11 and total risk base 14, So we're very comfortable with those.
These ratios, especially given this quarter that we.
Implementing adopted Cecil that was 120 million dollar drag on GAAP capital. Fortunately the regulators gave as the five year phase in which we obviously took advantage of that so it'll give us a period of time to grow into that for regulatory purposes, and as we also noted we pursue repurchased $700 million worth of stocked.
During the quarter, so to have a period like that and to maintain those capital levels. You know we were very happy and we're very pleased with our capital levels today, the stock buyback plan as we mentioned, we've we haven't repurchased since March 31st we did back quite a bit in first quarter due to the pricing.
There and if you look at that when we looked at it and said you know basically at this repricing, we have less than it right at a year earn back period on that reap buying back those shares that's about as good as you can do on a really stock repurchase plan. You know we have not ceased or stopped the stock buyback, but we have not bought any we'll just keep look.
And that didn't decide basically look at economic times see where we are there we'll look at our capital structure, our balance sheet structure and we'll just continue to monitor it but right now we have not purchased any don't have any plans in the near term, but we'll just keep monitoring it.
Okay. That's helpful.
Okay.
But what does.
Look today.
I'll.
<unk> some people that no activity kind of comfortable halt, but both the <unk> okay.
How long growth.
Yeah, Yeah, yeah customers you.
Yeah.
Aaron.
Actually job growth.
Beep.
So David I'm going to sit matter.
Talking a little bit about.
Some restrictions that we put in place recently, all new loan consideration and that is.
We think it's time to strictly adhere to our credit policy it's in.
Its policy for a reason.
And the reason is in times like the us its shares risk appropriately with our customer.
The second thing is we are very interested in shortening maturities.
With the uncertainty in the marketplace, we're not willing to.
Go out too far.
And I would say more than a year, except on certain types of loans like equipment loans and things like that which Mike perfectly good sense, and then were restricted cash out loans. So we have customers who want to.
Take money out of their business or put it under bank account, we don't think Thats, an appropriate action for us participate in during these uncertain times, so knowing that that sort of our philosophy really philosophy currently I'm going to turn it over to add and let him talk about how that's trended.
Slide into what's actually happening on the street yeah. Thanks, George David I'd tell you. If you look at our a pipeline of proved very close it says 312 million really since that point in time, even before we really started having conversations with our bankers in our customers. Yeah. We had a fall out taking that down you know just over 200 million.
The 200 million approve ready to close bucket.
We feel like that that most of that bucket will close out the however on new opportunities.
We are pushing the pause button in hearing a higher underwriting guidelines around specifically commercial real estate on values were not going to be putting our neck out there too far on any new projects and that's it makes complete sense in its a customer we know very well. So I wouldnt, we don't have be expectations on loan growth in any way.
Until we see some clarity and what the economy. It looks like moving forward in your question regarding PPP loans I would say a vast majority some 95% is on our existing customer, but I would say you know we we have been a known SBLF preferred lender in the marketplace and so there was.
A flight to quality when we stood up our PBP program and I, absolutely believe they will be some new customer acquisition through that but quantifying that to a big number I would not because 95% or more were existing customers.
Okay.
Okay.
Well you expected speed.
Good.
Yes.
Well that the Ian.
Yeah, though they'll flow, David through and I and they'll be over accreted over the life with loans and and so how that'll get set up under the accounting rules is they'll be accretive like this is a two year alone and then when they get paid or forgiven in let's say, it's July or June July August whatever timeframe they come in the <unk>.
The balance that's paid there'll be a pro rata amount of that be taken to income that's why I say in the.
The month set where they're paid that yield on those loans is going to be very lumpy. So we could be this period of time that were 345, 6% on the yield and you get that one month, we may see.
A much higher yield in that bucket.
Okay, I mean, just any thoughts on that.
Yes.
Yes, that's what do you do your customers just.
Sure.
Thanks, guys.
Yes. Good question on the AG book I would say.
So far you know our AG customers are very focused on what the stimulus package, which is still being defined for all add customers. Yeah. So that's going to if you look at our book right now you'll see were.
Over last year's same time same quarter about $37 million and that's from our add customers holding onto their crops due to the price Oh.
Yeah, so there, but significant decrease on a prices so they're very conscious of what that stimulus package will do for them. We've also had them they were able to participate in the PPP loans, we had over 50 AG farmers participate in the PBP loans. So.
From that perspective, we feel good where they're at but they're very anxious to see what the stimulus package would be for new customer acquisition I would say, there's some of that there, but also everyone's you know a flight to quality.
Quality and where they were they know they have.
Ability to gain capital. So I don't think we haven't yet expectations on significant AD growth from new customers in this current climate.
Thanks.
Thank you.
I show no further questions in the queue at this time I like to turn the call back over to Mr., George markers, Chairman and CEO for closing remarks. Please go ahead.
Well, thanks to all of you for joining US today. These are certainly unusual times and.
We feel very good about our preparation for weathering the storm.
Beyond the traditional Simmons bank that as a conservative community bank.
We are normally positioned well during times like this so we think we are again, we think we're putting policies in place.
To make sure that that happens we appreciate your support and your time today have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].