Q1 2021 Simmons First National Corp Earnings Call
Good day and thank you for standing by welcome to the Simmons first National Corporation first quarter earnings call and webcast.
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I'd now like to hand, the conference over to your speaker today <unk>.
Nationality. Please go ahead.
Good morning, and thank you for joining our first quarter earnings call. My name is Steve Mouse Melia and I serve as Chief administrative officer of Simmons first National Corporation.
Joining me today are George Makris, Chairman and Chief Executive Officer, Bob Fehlman, Chief Financial Officer, and Chief Operating Officer, David Garner Executive director of Finance, and accounting and Chief Accounting Officer, and Matt Reddin, Chief Banking Officer.
The purpose of this call is to discuss the information and data provided by the company in its quarterly earnings release issued this morning and to discuss the company's outlook for the future. We will begin with prepared comments followed by a Q&A session. We've.
We've invited institutional investors and analysts from the equity firms 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.
A recording of today's call, including our prepared remarks, and the Q&A session will be posted on our website Simmons bank Dot com under the Investor Relations page for at least 60 days.
During today's call, we'll make forward looking statements about our future plans goals expectations estimates projections and outlook I'll.
I'll remind you that 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 those factors is 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 31st 2020, and the forward looking information section of the company's 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 to GAAP are contained in the company's earnings press release, and first quarter Investor presentation, which are included as exhibit to the company's current report filed this morning with the S. E C on form 8-K and available on the Investor Relations page of the.
The company's website Simmons Bank dotcom.
I'll now turn the call over to George Makris.
Thanks, Steve and welcome once again to our first quarter 2021 earnings call and our press release, we reported net income of $67 million for the first quarter of 2021.
Diluted earnings per share was <unk> 62 cents for the quarter include.
Included in the first quarter earnings was net income of $3.4 million related to a gain on the sale of our branches in Illinois and merger related to net branch right sizing expenses fixed.
Excluding the impact of these items the company's core earnings were $64 million for the first quarter and diluted earnings per share were 59 cents per share.
Our return on average assets was one 2% our return on average common equity was nine 2%.
Our return on tangible common equity was 15, 9% and our efficiency ratio was 57.8% for the first quarter.
As of March 31st total assets were $23 billion on.
Loan balance was $12 billion and our deposit balance was $18 billion.
<unk> in total loans at March 31st for $798 million in PPP loans during the quarter approximately $335 million in PPP loans were forgiven, while we originated $228 million and round two of the program.
At the end of the first quarter nonperforming assets were $128 million, a decrease of $16 million for Miriam.
Our annualized net charge offs total loans were 10 basis points.
Our net interest margin for the quarter was 2.99%.
The company's core net interest margin, which excludes the accretion was 2.86% for the first quarter of 2021.
Yeah.
Our noninterest income for the quarter was $52 million and included $5 $3 million in gains on sale of our branches in Illinois and file for <unk> 5 million dollar gain on the sale of securities.
Noninterest expense for the first quarter was 2021 was $115 billion, which represented a decrease of $13 million when compared to the first quarter of 2020.
Core non interest expense for the quarter was $114 million.
Our capital remains very strong quarter in our.
Our total risk based capital ratio was 17.5%.
Our common equity tier one ratio increased 14%, while our tier one leverage ratio was 9%.
At March 31st the ratio stockholders' equity was 13% and the ratio of tangible common equity was 8%.
On our website at Www Dot Simmons Bank Dot Com, we've shared an extensive presentation along with press solution financial data, which gives much more detail regarding our quarterly results and other important information about our company.
We're encouraged by the current activity in the economy we.
We saw consumer spending go up but credit card balances fail, our mortgage activity continues to be strong, but we've seen a decrease in refinance activity in this quarter.
The excess liquidity generated by the stimulus programs and development activities take Nepal have contributed to a continuing decline in loan Dominion.
However, we're starting to see light at the end of the tunnel.
Our loan pipeline at the end of the quarter was $1.2 billion up from approximately $700 million at the end of December including $300 million in approved ready to close loans.
That pipeline growth is reflected across our footprint in both rural and metro markets, indicating a back to business trends.
We expect the short term benefits of the stimulus payments will continue into the second quarter before we return to more normalized growth trajectory later this year.
This concludes our prepared comments and I'll now turn the line over to our operator and invite questions from our analysts and institutional investors.
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Our first question comes from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.
Yeah, Hi, good morning, Thanks, guys.
For you.
I'm just kind of curious.
If you could talk a little bit more about the ideology around the the securities investments and kind of how you're thinking about bad in an environment where rates have begun to.
The increase in move higher here lately.
Yeah, Stephen this Bob I'll start off and you know as we said at the end of the Q4 in our release and we plan to invest about $1 billion or so and get close to the $5 billion and we did this quarter.
You know and as we did you can still see our liquidity is still we've got cash of $3.9 billion right.
Right now our we're probably what we would call fully invested in the security portfolio.
We'll continue to look for opportunities when the events come up for sales like this quarter. Just an example, we we had $38 million in sales and it resulted in a $4.8 million gain it's hard not to pass on a four years' worth of interest at one time. So we took advantage of that but we'll continue to manage at this level.
You know the 10 year's been hovering at that 155 to 165 will continue to look at it is as we go forward.
We will probably you may see securities go up in the next quarter, but that really is more a defensive mechanism that we'd put some short term very liquid securities in that probably is about a 15 basis point pick up on the cash overnight money.
And really it would be to park it into the security portfolio. So if you do see it going up it should improve the duration on the portfolio and it would really be holding the money there in the interim periods.
Got it okay helpful. And then maybe if I could ask a question around loan growth I know you guys noted the $1 $2 billion pipeline build which looks very similar to what it was come out on one.
<unk> 'twenty, obviously, then we hit a very different environment. So I'm, just kind of warm and the near term how you think that could translate.
And to kind of bottom line net growth X P. P. P and then.
The seasonality around the credit card portfolio that seemed maybe larger than it was in the past and I was wondering if there was anything unusual there.
Steve This is Matt I'll I'll tackle that one first a couple a couple of things that let me talk first about the headwinds and then I'll talk about the pipeline you may get you may be willing to comment on the credit card.
Seasonal in nature normally but with the stimulus money that has come in that is more than we ever could have expected is it down even further at $175 million, but as we talked about in Q4. We also have seasonality in our Agra portfolio. That's another 40 million and then you have on mortgage warehouse, which had a tremendous year last year still.
Doing well, but that's an another significant pay down and then we also knew we talked about.
Our planned exit of energy. We're also seeing the rate, we often talk about the headwinds at all.
Portfolio mortgages out of the loans that we originate on book great customers, but they have the you know we have exited name in the secondary market with a mortgage.
So we knew that kind of coming into Q1 would be a challenge, but then heathrow in the amount of stimulus that all rate or bar for paying down debt. So that's.
Scott not compound, but it's another headwind we face, but now kind of moved to the pipeline, which is which is encouraging when you look at our Investor Day I got a really point you to page seven and that really shows you, how we rebounded quarter over quarter since the trough and you're right. We're at 1.1 point 2 billion in the Atkins diet asking team to increase and we're seeing.
Continued opportunity for us it's all about the opportunity funnel seemed when we got to get that one bigger and bigger because you know right now that's it for 87, but pre Covid in Q4 19 that was it was $1 billion and we're getting that there were getting that opportunity following getting more and more opportunities coming into us, but hopefully that gives you some color on we knew the per.
Headwinds that were in front of us, but we also have this growing pipeline and they are starting to hit the books, but we need that does him to both outpaced those ah seasonality and those planned payoffs.
Yeah, No that's super helpful and I guess you guys did note kind of mid single digit growth on the back half for 'twenty. One. So is it is it fair to say, we could see another little bit of decline based on your expectations in the second quarter here or where do you think that might have been in the last quarter of outright declines on the loan book.
Really good question I would tell you until stimulus tune came yes, Q1 would have been the low watermark, but now.
With this new mouth seamless that's in that's in the market and I'll give you. An example at a conversation with one of our great clients last week that has about a $5 million just owner occupied real estate brake business and he he explained to me on a launch debt do all the cash that he has to stimulus. It's paid off now he went ahead and just paid net.
So that those are the unknowns that we did not anticipate.
Coming into Q or into 2021 zone.
I believe we could have hit the low watermark for it.
Good for a little bit further, but like I said like we said feel really good about the back half of the year for falling to a more normal growth rate.
Okay, Great. That's super helpful. Thanks, guys for the time I appreciate it.
Dave.
Thank you and our next question comes from the line of Covid faster with Raymond James Your line is open. Please go ahead.
Hey, good morning, everybody.
Davidson.
I just wanted to kind of follow up on the on the growth line of glad to see the improvement in the pipeline could you just maybe give us a sense of where you're seeing an increased demand maybe by both segment and region.
Sure.
Glad to do that.
First start with just kind of geographically right now, we're seeing nice opportunities in Texas on.
Little rock.
Memphis, Nashville, Northwest, Arkansas, Kansas Day, they're all bringing nice opportunities to us I think it's also important to know if you look at all of our community markets, just where the low low profit was to now there are 300 million in their pipeline. So each one of those community markets for US are also building back for new business opportunities.
Around the segment continues to be owner occupied real estate equipment's been a nice space for us back half of 'twenty, and then going into 2021.
Industrial warehouse continues to do well simple single family construction.
We're seeing some nice opportunities in very conservative leverage finance opportunities, meaning business is buying business. Some private equity that that's out there with this amount of liquidity. So we're able to do some transactions there and we're also right now David retooling some of our consumer products on our portfolio mortgage.
Pricing those are areas that now that we have so much more solid footing on the economy, we're getting a little more competitive and as for the products as well.
Okay. That's helpful and then just I guess.
It's great to see that the growth there I guess, how much of the growth would you estimates from you know an improvement on the economy and improving demand for credit versus maybe a higher.
On the pipe for credit on on.
Your front just given the.
Improved economic outlook, and maybe an acceleration of your sales efforts and higher losses.
Oh, Okay. Yeah. Good question I think it's a little bit of a combination of both but really it's.
Our bankers being back into the market and our borrowers seeing now visibility on opportunities that they can see how that how they play out more than anything else.
Okay.
And then on asset quality I mean.
Asset quality continued to improve.
No.
Lower provision this quarter, but the reserve ratio actually increased.
Just in light of an improved economic outlook from the improved credit quality.
The opportunity to release reserves at some point would you prefer to maybe grow into your reserve base or.
Okay.
Outright outright release reserves, just how are you thinking about that and maybe where do you see a more normalized reserve ratio on the other side.
Hi, David This is George I'll start debt.
Conversation.
During this quarter, we're going to do a deep dive into two areas of our portfolio would be office and retail you'll like we've done with hotel previously.
We are very comfortable today.
With our credit coverage.
And we would certainly prefer to grow into that.
Allowance base I'm not sure that's actually going on happened in the second quarter.
But until we do a deep dive into those areas that we believe we will see some.
Lag and.
Deterioration in that is office and retail.
Were not comfortable releasing any of the provision today.
Now at the end of the second quarter, we may see things differently. After we do this deep dive.
We need to go in and check renewals renewal rates.
Man for office space in some of our key markets, we need to make sure that our strip centers or.
Renewing at normal rates on.
All of that kind of deep dive will be done this quarter. So we'll have a better idea of those portfolio segments them on.
I will say this that we think we did a great job in our hotel portfolio with identifying risk.
You can see that there is a substantial allowance against that market segment.
For those hotels are starting to perform much better.
So it could be that we see an improved outlook in that segment as well. So stay tuned second quarter is going to be a really key quarter for us as we evaluate what we believe is in each one of those segments.
Okay. That's helpful. Thanks, everybody.
Thank you and our next question comes from the line of Brady Gailey with <unk>. Your line is open. Please go ahead.
Hey, Thank you good morning, guys.
On a break Brody.
I wanted to start with the net interest margin or it might it might be easier to look at it and NII dollars instead of the margin but.
Do you think that.
This quarter or do you think that the first quarter of 'twenty. One is kind of the bottom from an NII or NIM perspective, and we should see growth.
And both of those going forward.
Brian I'm going to start that and then Bob talk about the overall outlook, but there is a measurement that we use internally that's really a core measurement.
Impairs our loan yields for our deposit costs, we called on a roll net interest Jacob.
Really what we take a look at to see how we're performing in the market from a pricing and profitability standpoint.
That number.
It turns out to be around 4% and it has been consistent for well over a year. So even with a decline on our loan portfolio, we've been able to manage the yield on our loan portfolio and our deposit costs.
Proportionately during that period of time, so we're very pleased with that.
Our net interest margins get killed because of the liquidity I mean, just as everybody else is and you saw our continued deposit growth in the first quarter were probably outpacing most.
Most other banks.
We're not turned on why any deposits, we're pricing them appropriately so to the extent that that liquidity keeps coming in the bank or are margins going on body or on net interest income is going to be.
Challenged.
But from a loan and deposit standpoint, we feel very good about how we're managing net and the marketplace, Bob you might as well talk more share.
George hit it but Brady if you look at the quarter I think we thought at the end of the year. We were at the low end of our at at the margin, but when you look at it but for.
For the quarter when loans are down what they were down P. P. P paid down seasonality in AG, which we would expect and credit card as Matt said on the other side. Our deposits grew 1.2 billion and we put about 1.3 billion in the security portfolio. So we expected to see slight flat to slight improvement. However.
And you can't you can't grow your earning assets and put it in cash and improve the margin and that's what happened. So as George said it all comes back to liquidity and we're still estimating its about 35 basis points on the.
Related to the liquidity.
Some on the PPP. So it's still we're still on that low 230 range.
When you look at our NIM.
I'm, sorry, 330, George Corrects me again 330 on the on the NIM. So on a more normalized basis and again, our cash while we thought cash would go down in the quarter because deposits went up a worsening of $3.9 billion in cash at the end of the quarter.
Okay.
And then also just wanted to ask you know the stock has done well here recently, so now now you're trading at about one nine times tangible book value, which I guess makes buybacks a little less compelling than that but on the flip side. You know you have a currency debt.
Is stronger than it's been for a while so that helps out on your M&A efforts. How do you think about you know relative to the stock price how buybacks and M&A.
Fits into Sevens this year.
Well, we still have an active buyback program.
Quite honestly dips in the market like we're experiencing day when the whole industry.
Goes down a little bit creates good buying opportunities for we will consider that again from an M&A perspective, well I would say our dance card is filling up.
We're very active in discussions today.
Many of those were ongoing before Covid hit we just picking back up. So we think that that is a great opportunity for us, especially with value for currency.
So I would tell you both of those are certainly.
Bob will uses of our capital.
Yeah, and George remind us we've seen several transactions in the space with you know notable.
Kind of transformational deals kind of like Bancorp, south and cadence that we saw.
I think last week.
How would you guys consider doing a merger that's almost like a M. O. We were you're partnering with a very large institution on putting the two companies together.
Well wait.
You know that.
Those are always tough and they don't happen overnight.
The social issues Bridie assumption that it was something like that are tremendous and you know I'll be honest with you.
We've been a real beneficiary of some of those moh and our ability to hire some really good folks.
Who come over and and our Mic Hawaii.
Huge contribution at Simmons.
That's a natural thing to expect and in Emily.
You don't need to have everything or for of everything.
And how that plays out is a real key to whether or not that's a successful transaction or not.
We're not in a position where we have any reason.
To believe.
I believe that we need to downsize the Simmons organization.
Through an M of Hawaii.
In fact, we're building for the future.
Creating that next generation of leadership, and we expect Simmons to be real survival going forward. So I would tell you that it would have to be a very special circumstance for us to consider on.
On the M O.
We see great opportunity, particularly in the footprint that we're in currently to continue to build share.
In key markets, and we've mentioned nose for Nashville, Memphis, St. Louis Kansas City, the DFW footprint.
Oklahoma City Tulsa, all of those are great opportunities for us either through organic growth for Humana.
So you know we'll just.
Stay the course and continue to do what we've proven we do pretty well.
Great that makes sense thanks, guys.
Right.
Thank you on our next question comes from the line of Gary Tenner with D. A Davidson. Your line is open. Please go ahead.
Thank you good morning.
I wanted to just to kind of.
Get a sense of how youre thinking about expectations for liquidity I think he made a comment that you've kind of reviewed assurance portfolio as being pretty fully invested.
And even more.
Typical pace of loan growth in back half of the year, obviously will be plenty of.
Funding availability there so I'm just wondering as you're thinking about the back half of the year and and.
Deposit flows.
How much of your.
Expectations that we're being conservative in case of deposit outflow or.
Do you have on.
Better bead on on where you think things might head back out for the year.
Well this Bob I'd say first off you know liquidity has been a challenge to gauge. This last year to go back to the beginning of the crisis, we built up liquidity.
To be able to protect our company.
Since then we've had more liquidity just like everybody else then we really know what to do with it this time.
So you know we don't I don't think any bank can tell you. What is this temporary funding on liquidity today. Our estimate is that's in that billions of billions of five that's what we're preparing for in case. It runs off take all the stimulus money came into individuals' all the stimulus that came into businesses through P. P. P.
When those loans pay off it's going to continue so we're still at a another I would say the balance of this year still trying to manage through this liquidity to try and figure out how do we best invest it but yet protect our company and be ready for when there is some run off on it.
I'll give you an example.
We're getting into <unk>.
So we have looked at renewing all of our.
Aircraft production loans, when our farmers had a great year last year, even without the stimulus and when you add debt money on top of a profitable year for the farmers typically what we would say is they'll use their money first and our money lives. So I would expect that from a non.
For more year perspective, we will see a delay in funding and maybe.
A top level of funding.
Yeah.
It may or may not hit what we did last year.
So there is there is just so much money.
Available to borrowers who were going to use that first before they come in and borrow more money.
And that's the wildcard to me is I don't know what the velocity of debt.
Theres going on.
It could happen in the second quarter and I could use most of them we'd be back in to the ballgame in the third quarter.
I just don't know.
And that's why we're trying to stay as flexible as we can.
$3.9 billion of cash is much more cash than we would normally Keith.
But.
We also don't feel comfortable investing most of that.
And a multiyear securities portfolio much what Bob said, we're taking a look at some variable variable right short term instruments.
To protect that liquid aspect of that cash.
One other point to make is you know cost of deposits did improved four basis points, we think theres still some room that theres, probably another three to five basis points in the coming quarters.
Continuing to work on that a little bit by a little bit and still retain core customers, but still.
Realize the benefit we can on that so.
It was a positive for the quarter.
Okay. Great. Thanks, Thank you for that detail and then just a follow up.
<unk> been pretty active in the past year plus in terms of rationalizing the branch infrastructure.
On songs from branches closing others I'm. Just wondering is there anything of size left within the branch footprint to rationalize or would it be more one offs if anything from here.
Gary we have a little bit of room left I think we've gotten the low hanging fruit, but here's here's really what you should expect from us going forward, particularly.
Particularly in Metro markets, where we have multiple branches.
We will probably reduce the number of locations.
We will also establish corporate offices.
In many of those markets. So we will.
Support hiring new lenders, new Treasury management folks in wealth folks into more of a corporate headquarters facility instead of spreading them out throughout the marketplace and we will still have branches, but we won't need as many from a transactional perspective.
As all banks have realized.
The use of our digital medium has just continued to go up and up and up and use of our branches for.
Posits.
And cashing checks.
Has become less and less so.
Fewer need for transactional branches more need for corporate offices in these communities, that's going to translate into fewer locations I'm not sure, it's really going to translate into cost rate.
Great. Thanks, guys I appreciate it.
Thanks.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
And our next question comes from the line of Jordan <unk> with Stephens, Inc. Your line is open. Please go ahead.
Hi, good morning, I'm on for Matt Olney I have a question regarding your core loan yield so.
The outlook calls for stable core loan yield and I'm, assuming this mean.
For $5 three.
Guys have on slide 24 can you guys help me appreciate why there won't be.
Additional loan compression when on slide seven.
It has.
Loan yields around three 8%.
For sure promotion, yes.
It is a really good.
Good question for the pipeline you see there that is just our commercial loan pipeline that does not encompass.
All of our other opportunities there that would drive that yield higher.
Some of that would be equipment finance credit card AG lending a lot of those others that are not in those numbers you see in the pipeline are at much higher yields.
As you can see.
We had a blip down in Q3, but that was really not that was just for that one quarter, we've been maintaining in that for 50 for the last for five quarters.
Perfect. Thank you.
Thank you and I'm showing no further questions and I would like to turn the conference over to Mr. Makris for any further remarks.
Okay. Thank you very much so just to recap.
No.
I want to say this we are functioning in an artificial economy frightening.
And to be able to predict and project based on the last few quarters.
Yes, it is an effort in futility and.
We just have to be flexible and maintain our ability to take advantage of the opportunities that our customers see in the marketplace and I think we've done a good job on that.
You recall, we began 2020 before COVID-19.
Telling you that 2020 was an adjustment period for us in net included.
Exiting our energy portfolio exiting non relationship credit, particularly in commercial real estate.
Branch rationalization I think when you look back over 2020, we hit all three of those out of the park.
I want to give.
Perspective, because I think these for metrics really defined what we're going through today.
If you'll notice our deposits year over year or up 17%.
Our credit card fees are up 14%, so people that have money you're spending money.
However, our service charges are down 27%.
Year over year, which reflects that excess liquidity that's in the marketplace.
And while our card fees were up 14% our card balances are down 7%.
Till we work through that artificial liquidity, it's hard for us to really gauge what normal looks like going forward.
We're trying to keep an eye on it.
But.
You know I've been wrong more than not been right and I would hate to try to predict the timing of back to normal.
So once again on flexibility in our system is extremely important and I think we've set ourselves up.
To be extremely successful not.
Not only for the bank, but for the communities we serve.
As we come out of Covid in this artificial economy.
Now moving to end on a really high note here and I want to take the opportunity to recognize young man that.
We got to know a little over a year and a half go on net will zelle tours.
You all may know will because you've got a lot of air time, a couple of weeks ago.
As a professional golfer he's on teams Simmons and he finished second at the Masters last week, losing about one shot.
You probably may not remember that earlier last year will finish six in the U S. So a real success story in the epitome of dreams realized which is our tagline here.
Here at Simmons, we also have three other members of team Simmons Dawson Armstrong, Kevin Dougherty in Brighton Thornberry.
Great success on the Korn Ferry tour and will be highlighted at the Simmons Bank opened in two weeks in Nashville, So just a shout out to those fine Young man and we appreciate what they've done and representing Simmons bank and a very important demographic for us. Thanks for.
Just a day and hope you have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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Yes.