Q2 2021 Simmons First National Corp Earnings Call

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Hello, Thank you for standing by and welcome to the Simmons first National Corporation second quarter earnings call and webcast at this time all participants.

On a listen only mode. After the speaker presentation there'll be a question and answer session task. A question. During this session you will need to press star 1 on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today at Bailey. Please go.

Good morning, and thank you for joining our second quarter earnings call. My name is Ed Bill can 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 Matt.

Hey, Buddy 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 its quarterly earnings release issued this morning and to discuss the company's outlook for the remainder of 2021.

We will begin with prepared comments.

And that followed by Q&A session.

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.

<unk> 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 statements as actual results.

Bank debt 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 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 30.

<unk> 2020, and the forward looking information section of the company's earnings release issued this morning.

The company assumes 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.

<unk>. Please note that the 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 second quarter Investor presentation, which are included as exhibit to the company's current report filed this morning with the SEC on form 8-K and.

Available on the Investor Relations page of the Companys website Simmons Bank Dot com.

I will now turn the call over to George Makris.

Thanks, Ed and welcome once again on our second quarter 2021 earnings call. Overall, we're very pleased with our results for the quarters were delivered solid performance in multiple areas for.

While continuing to navigate the challenging environment.

Net income for the quarter was $74.9 million up $16.1 million for 27% compared to the second quarter a year ago diluted earnings per share were <unk> 69.

Up 28% from the year ago quarter.

Core earnings for the quarter, which excludes certain non core items for $75.4 million for 69 cents on a per share basis.

In terms of key performance metrics return on average assets was 1.3%.

Turn on average common.

Equity was 10, 1% and return on tangible common equity was 17, 3%.

Net interest income for the quarter totaled $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 yields steady continuing to actively managed deposit costs and reinvesting excess cash and variable rate short term securities.

As a result of these actions core net interest income which excludes accretion.

Inquiries.

1% on a linked quarter basis.

Noninterest income totaled $47.9 million for the second quarter core non interest income was $47.5 million up 6% on a linked quarter basis.

<unk> were well contained as total interest non interest.

Increased both.

Our efficiency ratio was 56, 9% an improvement of 50 basis points on a linked quarter basis.

Credit quality trends over the past 3.

First quarter's continued to show marked improvement as certain concerns during the pandemic fail to materialize nonperforming loans totaled $89 million down.

Down $34.6 million from first quarter 2021, and.

In addition, during the quarter, we reported net.

Coverage of 7 basis points. These positive trends combined with improved economic modeling scenarios.

Resulting in a recapture of provision expense in the quarter totaling $13 million.

At the same time, our allowance to loan ratio ended the quarter at 2% to up sell.

Replaces points on a linked quarter basis, and our nonperforming loans coverage ratio stood at 281%.

With respect to the balance sheet total assets ended the quarter at $23.4 billion.

Total loans were $11.4 billion and total deposits were 18.

<unk> 3 billion.

While the extensive stimulus programs provided support for those in need of assistance high levels of liquidity also creates challenge to the financial services industry in terms of loan growth.

We have not been immune.

Total loan production during the first half of 2021 total.

1.8 billion, putting us on pace 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 as we continued to experience a higher.

Normal level of Paydowns on <unk>.

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.

Hi.

Our capital remains very strong total risk based capital was 17, 5%.

CET, 1 was 14, 2% and the leverage ratio was 9%.

Given this strong position our board of directors increased the authorization.

Yeah.

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 Simmons Bank Dot Com, we'll share an extensive presentation, along with the press release and financials.

<unk> data, which gives much more detail regarding our quarterly results and other important information about our company.

Finally, the second quarter also marked the return of M&A activity as we announced agreements to acquire 2 Tennessee based financial institutions Landmark community Bank and trust banks.

Bancshares, Inc.

Both of these organizations are successful local community banking groups.

For our philosophy of a strong credit culture significant community involvement and a passion for delivering excellent customer service.

In addition to the cultural synergies these acquisitions highly complement.

On our existing footprint in Tennessee, and enhance our scale in 2 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 first fourth quarter subject of course to satisfaction of closing conditions.

Including receipt of regulatory approval and we look forward to welcoming these associates and customers to Simmons.

While we are encouraged by our performance during the first half of 2021.

<unk> also recognized the backdrop of economic uncertainty as we navigate the second half of the year.

Sorry for our focus remains on executing basic blocking tackling fundamentals taking care of our clients in meeting the 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 to continue to grow our bank in the future.

Given the investments we've made to transform our company coupled with a disciplined 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 will now turn the line over to our operator and.

Questions from our analysts and institutional investors.

Thank you as a reminder to ask a question you will need to press star 1 on your telephone to withdraw.

For your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Stephen Scouten with Piper Sandler You May proceed with your question.

Hey, good morning, everyone.

Yeah.

So if I could start maybe with loan growth, obviously that continues to be under pressure and I'm wondering if you could give us.

And by frame that up a little bit in terms of paydowns quarter over quarter I know you show in the 1.1.

The waterfall chart the year to date, Paydowns, but I'm wondering what that was quarter over quarter end and what sort of visibility you have and debt pay down levels moving forward.

Hey stay on this Matt really good question, we saw we saw.

Kind of slightly higher amount of pay offs in.

In the second quarter versus the first quarter.

So as we think about what that looks like moving forward. We do feel that is slowing and we're already starting to see that in the first first.

First month of the year, but our challenge is some of the steel planned exits I mean, we're still planning.

The exit energy, that's another $150 million that we think we will exit, especially on the current environment. So we have those headwinds that we see coming but the plan pay offs in CRE debt, we've talked about many times seems to be slowing but there are still some headwinds that and honestly with this uncertain environment and stainless theirs.

Continues to happen.

And I mean, we thought it was slow in the second quarter, but we're still seeing it I think it's going to slow in the third and fourth but it's still out there.

Okay, and Matt do you happen to have a number of.

Like a ballpark of the amount of loans that are on.

<unk> over the next year.

Well I don't have that exact number Steven.

But our duration now is at 3.8.

Years overall, and so that can give you an idea of the velocity of overall churn on the portfolio, yes definitely okay great.

Then if I could 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 in Howard.

Would you anticipate being with that between now and October.

Hey, Stephen Yes. This last quarter, we were locked out of share repurchase due to the pending acquisitions coming in so.

We're 3 days out from when we can start buying back and we think it's a good opportunity and we really want to look for good opportunities.

Opportunities over the next <unk>.

<unk> of the year.

Believe it will be pretty active in it going forward is on our plan right now.

Okay, Great and maybe last thing for me I wanted to get some incremental detail on your on your coin checking product.

Just kind of how long that's been.

And play for your customer base, what Youre seeing so far kind of what the feedback has been because I feel like that.

On a little bit ahead of the curve for a bank of your size. So I think that's a pretty interesting.

Pursuit.

Stephen This George so I'll tackle that.

No.

Our Chief Digital Officer, Alice Gorilla.

Is top notch and well known in the community.

Thank you you've seen him.

1 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.

As fiction that we felt like we needed there are actually 3 different fraud protection.

Systems that go into that product to make it so easy for a consumer to use that.

We piloted the program in Arkansas, and we have.

<unk> printed 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 debt all of our customers, whether they're online or whether.

We'll come into a branch you are 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 and 5 minutes to open an account.

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 a state of the art 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've got.

Got relationships with today and some that we're working on so we have PGA sponsorship were.

Associated with Fort Worth Star show in Rodeo.

We've got tremendous.

Access to several colleges in our footprint so.

We really are focused on the new consumer group come into Simmons Bank, and we believe that our coin checking product as a basis for that success.

Okay, Great George Thanks for the color there and thanks, so much for the time this morning.

Thanks, David.

Thank you. Our next question comes from Brady Gailey with <unk>.

W. You May proceed with your question.

Hey, Thanks, Good morning, guys. Good morning Blake.

I just wanted to start on the bond book I know you guys had been talking about growing that and that's that's exactly what we saw this quarter.

Yeah.

Talk about 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 a catch up but youre at about 7.5 billion at the end of the quarters on that maybe just talk about your appetite.

Maybe talk to continue to grow that bond book, especially as we've seen the long into the current pullback.

Yeah, and Brady first thing I'd point out is if you look at the bond book, we have about $1.3 billion debt isn't floaters variable rates.

That really is our money we've moved from cash that we are making 10 basis points and picked up.

Out of 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 when we need to so we will continue to look at that piece of 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 will continue to look for opportunities I don't think youll have as dramatic effect, obviously going into Q3 and Q4, but we could have some pickup that would be more on opportunistic buys we continue to manage our book.

The portfolio just like we have the last couple of years and look for opportunities to sell as you saw we had the opportunity to sell another $40 million worth of securities pick up $5 million and gains on it's just hard to pass up 3 to 4 years, our 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 in it either way to reinvest.

So again I would say.

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 interest.

Select other buckets.

Okay, Alright, that's helpful. And then the $17.2 million of remaining PPP fees any idea as far as the timing of when those will be realized we think for most of those will be realized in the back half for this year, there's some slip into 2022.

I would tell you it's hard to tell when youre dealing.

Going on with anything with the government on repayments as 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 stragglers into next year and it 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 as it would be pretty small I would just add you look at that phase $2.390 million and were down to about $300 million. So that's that is you're starting to see those pay offs and that really just happened in June. So we believe that will hit more into Q3.

We have just started seeing.

<unk> government forgiveness on loans in excess of $2 million. So they have 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 youre going to see.

Large volume decreases in our <unk> portfolio.

Okay, and then just to revisit.

On the loan growth or loan shrinkage topic, I mean, it's it hasn't been pretty surprising I mean I think your.

Non PPP loans are down about 3 and a half billion today versus the end of 19.

When do you.

I believe that you'll be at the.

<unk> point of starting to see loan growth again.

Hey, Brian It's Matt I'd say, what we're encouraged by is our production trends. If you just look at we stated we did $1.8 billion in production in the first half of the year, but if you dig a little deeper.

Over 60, the same percentage came in the second quarter. So if you look at that plus the training pipeline.

I really like where we're heading trending on a production standpoint.

We hope for the inflection point will happen this year.

If we can just understand the velocity of the continued liquidity in the market.

<unk>.

I feel good about where the known headwinds Army. We're now talking with him I'm now speaking to energy at an 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.

None was this additional liquidity and stimulus in the market on repayment, but back to production like the trend like where we're taking that pipeline. So I think that will continue to grow throughout the back half of the year.

Okay, alright, great. Thanks for the color guys.

Thanks Barry.

Thank you. Our next question comes from Matt Olney with Stephens You May proceed with your question.

Thanks, Good morning, guys, Hey, Matt.

I wanted to ask about the banks interest rate sensitivity and how youre managing this it seems like theres lots of moving parts. We are seeing with the securities build this quarter, but also.

The pending acquisitions.

And as we get into 2022 and 2023 with.

Hopefully an eventual fed funds increase.

The bank's sensitivity to higher rates.

Well I think first off if you look at the loan book, It's about roughly 50.50, maybe 50.545 on variable versus fixed.

Also.

A lot of the fixed is shorter term I think Matt on the duration, where price III 3.5 years or so overall.

I would say on the book Bond portfolio, there's obviously some extension it there on some of the Muni.

But a lot of those munis.

Recent prices, we do have the $1 billion 3 in floaters.

<unk> that we can either reinvest or will move up when the market 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 4 to 5 basis points in the next quarter or 2 that will pick up there before we bought them out.

So I would say right now we're pretty evenly matched when you look at all the different components you 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 on today Theyre talking.

And maybe they will go back up but for 10 years down about 2 weeks ago rates were going back downward 10 year might be go into 1%. It just seems like every week, we have a different narrative on where rates are going in a different narrative on where inflation is going so it's kind of hard to judge right. Now all we can try and do is manage the best portfolio, we can and manage net.

Net interest income in this.

Artificial environment we're in.

Okay. That's helpful. Thank you and then I guess.

Count on our similar topic as far as core loan yields.

If I back out some of the PPP and the accretion I'm showing on not much of a move versus the first quarter.

Any color you can provide as far as directionally or.

Where do you expect these core loan yields moved from here.

Yeah, I would say, yes, we are.

Really pleased this quarter to have our core yield actually pick up a basis point or 2 no question Thats a challenge in this environment as the book as loans, we're putting on our App.

Average ing right at that 4% for the quarter, so a little bit below what we're on now keep in mind. Some of the loans that are paying off debt, Matt talked about earlier on the early pay offs, where 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.

For again, it's a constant process on trying to manage that and it's going to be a challenge to maintain at those levels continue to go forward, but our goal is keep it in that line or dropped just slightly.

Okay got it.

And then lastly for me.

Provision expense for loan.

But we're on the negative this quarter you spoke here on the ACL ratio around 2%.

Would love to hear kind of your view of the increment on the provision expense from here.

Well, Matt this is George so.

The credit quality today is better than it.

On locking in long time, and I think we have some charts in our.

Presentation that showed that <unk>.

Can you scratch your head and go and why do you need 2%.

Allowance for loan portfolio, and we gave a little additional color on hotels office and.

Retail and while we feel.

Feel very good about our hotel portfolio.

And.

Where it stands with regard to coming back.

C C.

In our office portfolio in our retail portfolio some potential delayed.

Sure.

It has been deteriorating.

<unk>, if you will and the reason is debt 73%.

Of the leases in our office portfolio.

Don't renew until 2023 or after.

For a higher percentage 78.

Of the retail lease explorations occur in 2023 or.

So right now, they're performing really really well and quite honestly I feel good about that because we're going to have.

Time to analyze whatsapp.

Pursuing those 2 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.

I'll remind everyone about the.

Uptick in.

Happening 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.

Will.

<unk> will be in pretty good shape.

Okay. Thank you.

Thanks, Matt.

Thank you and as a reminder to ask a question you will need for press Star 1 on your telephone. Our next question comes from Gary Tenner of D. A Davidson you May proceed with your question.

Thanks, Eric Good morning.

Good morning.

You sort of addressed this question and answer on what a Max but in terms of the.

Time deposits.

Kind of talk about the.

The scheduled maturities for the back half of the year on what the prevailing rates are in your renewal rate on those time deposits.

Yes, I would say we've got roughly.

<unk> $800 million I think the balance of the year the rate is over right over 1%.

Is there going on anywhere from 20 to 40 basis points, depending on the relationship somewhere in that ballpark. So I would tell you Gary if you look at that plus.

Thus the transaction deposits that we've continued to look at individual markets and price down.

Overall, there is a good for years to 5 basis point pickup from third maybe a little bit into the fourth quarter, but really over the next quarter or so.

Thank you my other questions were answered.

Alright. Thank.

Yes.

Okay.

Okay.

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.

Alright, Thank you will notwithstanding the pressure.

Pressure on our loan portfolio.

Unexpected pay downs.

I'll remind everyone that much.

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.

<unk> elimination of concentrations of credit in St. Louis.

From DFW and reduction in our energy portfolio.

But on a positive note our asset quality has improved tremendously during that period of time we.

We've been able to manage a significant securities portfolio, we've been able to expand on mortgage and wealth business.

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 a new leader of business and consumer banking.

Debt held that position regions bank.

Birmingham.

And once again, if we can manage through.

Which serge get schools back in <unk>.

Person Hell.

<unk> care system back.

Taking care of the deferred medical care, if we can get supply chains filled on.

On stemmed the inflationary pressure.

And if we can encourage folks to get vaccinated to protect themselves their families and others.

For the coach.

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.

<unk>.

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.

The day and if we don't talk before then we will do this again 3 months from now have a great day.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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