Image source: The Motley Fool.
Simmons First National Corp (SFNC -2.98%)
Q1Â 2019 Earnings Call
April 23, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation First Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Mr. Steve Massanelli. Sir, you may begin.
Stephen C. Massanelli -- Executive Vice President, Chief Administrative Officer and Investor Relations Officer
Good morning, and thank you for joining our first quarter earnings call. My name is Steve Massanelli, and I serve as Chief Administrative Officer and Investor Relations Officer at Simmons First National Corporation.
Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; David Garner, Controller and Chief Accounting Officer; Marty Casteel, Chairman and CEO of Simmons Bank, our wholly owned bank subsidiary; Barry Ledbetter, President of our Southeast Division; and Matt Reddin, President of Banking Enterprise.
The purpose of this call is to discuss the information and data provided by the Company in our quarterly earnings release issued yesterday and to discuss the Company's outlook for the future. We will begin with prepared questions followed by a Q&A session. We have invited institutional investors and analysts from the equity firms that provide research on our Company to participate in the Q&A session. All other guests in this conference call are in a listen-only mode. A transcript of today's call, including our prepared remarks and the Q&A session will be posted to our website simmonsbank.com under the Investor Relations page.
During today's call, we will make forward-looking statements about our future plans, goals, expectations, 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 is contained in our SEC filings including without limitation the forward-looking information section of our earnings press release issued yesterday and a description of certain risk factors contained in our most recent Annual Report on Form 10-K. 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 the reconciliations of non-GAAP metrics to GAAP are contained in our current report filed yesterday with the SEC on Form 8-K and available on the Investor Relations page of our website simmonsbank.com.
I'll now turn the call over to George Makris.
George A. Makris -- Chairman and Chief Executive Officer
Thanks Steve, and welcome to our first quarter earnings conference call. In our press release issued yesterday, we reported net income of $47.7 million for the first quarter 2019 and diluted earnings per share of $0.51. Included in the first quarter earnings were $1.4 million in net after-tax merger-related, early retirement program and branch rightsizing costs. Excluding the impact of these items, the Company's core earnings were $49.1 million and the diluted core earnings per share with $0.53.
We have solid operating results in the first quarter. Revenue was affected by three significant items compared to the first quarter of 2018. Accretion income was down $4.6 million; debit card interchange income primarily as a result of the Durbin rate cap, was down $2.8 million; and the gain on sale of securities was up $2.7 million, a net decrease of $4.7 million of revenue from the previous year.
Total assets were $16.1 billion at March 31st, and our return on average assets was 1.2%, while our efficiency ratio was 56.8%. Our loan balance was flat versus 2018 year-end, our higher-yielding seasonal balances in credit card and agricultural lending were down $40 million from year-end. We originated $542 million in new loans during the quarter, when we have $373 million of loans (inaudible). The permanent market continues to be very appealing to certain credit, particularly CRE and we see some of our customers taking advantage of this dynamic.
We continue to see growth opportunities ahead, but based on the attractiveness of longer term non-bank options, we believe our growth will be closer to 5% for 2019. Our loan pipeline, which we define as loans approved and ready to close, was $473 million at the end of the quarter compared to $277 million at the end of 2018.
On a consolidated basis, our concentration of construction and development loans was 98.5% and our concentration of CRE loans was 293% at the end of the quarter. Total deposits in March 31st, 2019 were $12 billion. During the quarter, brokered and public fund deposits decreased $557 million while core deposits increased $148 million. We continued the management our balance sheet and the net interest margin. Our cash balance was reduced as we eliminated some higher cost deposits. We're very pleased with our growth in core deposits as we continue to emphasize relationship banking.
Our net interest margin for the quarter was 3.85% compared to 3.76% at December 31st. The Company's core net interest margin, which excludes accretion was 3.67% both quarter compared to 3.66% for the previous quarter. Our core net interest margin expanded by 1 basis point, which is consistent with our planned balance increase in deposit cost with similar increase in interest income.
Our non-interest income, for the quarter was $34 million. As of July 1st, 2018, we became subject to the interchange rate cap as established by the Durbin Amendment, resulting in a $2.8 million reduction in debit card fees for the first quarter of 2019 when compared to the same period in 2018.
Mortgage and SBA lending premium income decreased $1.1 million and compared to the first quarter of 2018. Mortgage lending income during the first quarter of 2019 was lower by $649,000 compared to 2018. SBA lending premium income decreased by $476,000 due to fewer loan sales in the current quarter compared to the first quarter of 2018.
Non-interest expense for the first quarter was $101.4 million. Core non-interest expense for the quarter was $99.5 million, which represented an increase of $3.2 million when compared to the first quarter of 2018. Software and technology policy increased approximately $1.8 million over the same period in the prior year. Our next generation banking technology initiative is progressing on schedule and our incremental IT expenditures during the first quarter were primarily related to this initiative. We expect more incremental expenses related to NGB throughout this year and into the first half of 2020.
During the first quarter, we offered qualifying associates an early retirement option. 91 associates took advantage of this offer. Most of the positions will not be replaced. We expect expenses of $2.5 million in the second quarter based on loans who were retired during the second quarter. We expect ongoing net AUI savings, the $4.4 million for this program beginning in the third quarter of this year.
At March 31st, the allowance for loan losses for legacy loans was $59 billion, with an additional $1 for allowance for acquired loans. The loan discount credit mark $42 million for a total of $103 million coverage.
At the end of the first quarter, non-performing assets were $80.7 million an increase of $20.1 million from the year-end. This balance is primarily made up of $61 million of non-performing loans and $19.5 million in other real estate loans, which includes $8 million closed bank branches held for sale. Non-accrual loans increased $27 during the quarter while OREO decreased $7 million.
During the quarter, our credit risk management practices identified loans specific to the acquired portfolio of Bank SNB's Dallas market which were poorly structured or were poorly managed post-funding, and were primarily linked to an individual lender. As a result, we made provision for acquired loans of $2 million related to acquired pool of loans. We've carefully reviewed these loans potential losses and believe we've adequately identified any risk associated with the loans. Unfortunately, based on purchase accounting rules, the credit mark associated with the declining Bank SNB acquired pool is a stand-alone amount not related to Simmons' overall allowance for loan losses and must be managed specific to that pool of loans. Our annualized net charge-off for total loans were 20 basis points, so provision for the loan loss was $9.3 million.
Our capital position remains very strong. As in March, common stockholders equity was $2.3 billion. Our book value per share was $24.87 an increase of 8.8% from last year, while our tangible book value per share was $14.78 an increase of 17.1%. The ratio of tangible common equity was 9% at March 31st compared to 8.4% at the end of 2018.
Our total risk-based capital ratio at the end of the quarter was 13.6% compared to 13.4% at the end of last year, while our Tier 1 leverage ratio was 9.07% at the end of the quarter compared to 8.78% at year end.
We would like to welcome our new Reliance Bank associates to the Simmons family. We've closed the transaction Friday, April 12, and performed the systems conversion over that weekend. All of our associates were very hard to make this happen and ensure a seamless transition for our new Reliance customers. We're excited about our merger with Reliance Bank in St. Louis, and opportunities we now have in that market, due to our increased presence. As we've mentioned for some time our commercial team in St. Louis has provided significant growth for our Company and we expect to build that momentum.
We're looking forward to another prosperous year in 2019. I've previously mentioned our NGB or Next Generation Banking initiative, which will involve the upgrade of most of our IT systems and applications, including our banking offerings. We expect to have not only a better product for our customer, but also the opportunity to achieve efficiencies associated with more integrated systems.
We will continue to focus on increasing our market presence in all communities we serve. Deposit growth will certainly be a priority as deposits are critical to fuel our loan growth potential. We will continue to work to diversify our loan portfolio and deepen the relationships we have with our customers. We'll monitor our concentration of C&D and CRE loans to ensure we abide by regulatory guidance. And we will continue to pursue partnerships with banks that will enhance our collective value in the marketplace.
This concludes our prepared comments. We'll now take questions from our research analysts and institutional investors. I'll ask the operator to come back on the one hand and give instructions and open the call for the questions.
Questions and Answers:
Operator
(Operator Instructions) And our first question comes from Stephen Scouten from Sandler O'Neill. Your line is open.
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
Hey, good morning, everyone.
George A. Makris -- Chairman and Chief Executive Officer
Hi, Stephen.
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
I wanted to -- see if you could give some further color on what led the decline in loans quarter-over-quarter on the end to period based there. I know you've talked about the guidance going lower from some non-bank lenders, but wondering what other dynamics were at play here if there are any other intentional reductions in certain segments or -- versus elevated pay downs?
George A. Makris -- Chairman and Chief Executive Officer
Well, Matt Reddin is with us, let him take the first crack at that.
Matt Reddin -- President, Banking Enterprise
Sure, George, thank you. Great question. Really, I think it's just showing really good management from a standpoint of the interest rate environment today that we're seeing. Your short-term funding cost higher and where we can get a rate that gives us the margin we're looking for versus what the market will take it at very high level. But also you've got remember too, this is probably the first year for us with the ag portfolio, it's down, we've also had a wet season as relate to ag, so we're now building that back up, that also kind of impact that slow growth in the first year.
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
Okay, that's helpful. And maybe thinking a little bit more about the kind of intentional reductions to meet higher cost deposits, seems like most of that came from the brokerage and public funds that you mentioned I think $557 million. Can you give us an idea of what those deposits rolled off from a cost basis at, and what you would tend to replace those with over time and with the theoretical costs would be there just to give us an idea of the moving parts?
George A. Makris -- Chairman and Chief Executive Officer
Yes, Stephen, so we ended the year, we had about $400 million or $500 million in excess liquidity at the end of the year. And we intentionally in the first quarter reduced some of our higher cost broker deposits and other deposits. Those were rolling off in the $240 million range, $250 million range. We had most of that invested overnight at 250, 260 (ph), so we had a very small spread on that, didn't need the liquidity, so we really just manage the balance sheet in the first quarter.
We saw good core deposit growth. I think Matt, it was in the $130 million, $140 million in this first quarter. So we're pleased with that, so we believe our core deposits are on the right track for the growth. They're coming in much lower obviously on the costing side, and we'll only use the deposits from the broker when we have the loans that we need to offset. And as we did last year, we talked about several times last year in the calls that, we've built up the cost to deposit side to fund that $1 billion of loan growth that we did have last year.
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
Sure. That makes a lot of sense. Thanks. And then just last one for me maybe now that reliance is closed, I know you guys weren't quite sure how that would impact your NIM guidance last quarter. But do you have any further clarity on what that looks like on a combined basis whether it be GAAP or core, however, you guys are thinking about it? Any direction that would be helpful.
George A. Makris -- Chairman and Chief Executive Officer
Well, I'll give you the core -- I would say, there is going to be about a 3 to 5 basis point negative impact the NIM for just the Reliance piece, that assumes no management of those numbers. We think there's opportunity in there rebalance in the security portfolio and so forth. So, and again keep in mind, first quarter is our lowest NIM for the company in the year. So we would expect the little pickup in the second quarter, offset a little bit by this 3 to 4, 5 basis points from the Reliance impact.
On a GAAP basis, that's pretty much anyone's guess of what accretion hits and where it is, but it will be accretive in the GAAP accretion -- GAAP NIM going forward, we'll have much more accretion coming out related to the Reliance. Those numbers came in at or above what our estimates were from the due diligence side, and it was all related on the interest rate portion of the mark.
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
Okay. Very helpful, Bob. Thanks guys for the color. I'll let somebody else jump on.
Operator
Our next question comes from David Feaster from Raymond James. Your line is open.
David Feaster -- Raymond James -- Analyst
Hey, good morning guys. Just I want to start on the loan growth. It was notably driven by CRE and construction and we've been hearing some mixed reviews about what the theory and construction market. Just wanted to hear your thoughts on that where concentration ratios might be inclusive of Reliance, and maybe what drove the strength in theory and construction this quarter?
George A. Makris -- Chairman and Chief Executive Officer
Let me clarify, you said the growth of our construction in the first quarter, or...
David Feaster -- Raymond James -- Analyst
Yes, CRE and your construction portfolios, yes.
George A. Makris -- Chairman and Chief Executive Officer
Well, our construction portfolio actually for the first time and the first quarter our overall commitments in construction went down in recent quarters. So for the first time, we saw an overall commitment that went down, but we have current construction portfolio that's funding at about $209 million quarter, so that's why we are seeing the increase in construction, but our overall commitments went down for the first quarter.
David Feaster -- Raymond James -- Analyst
Okay. And where are your concentration ratios in theory and construction?
Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer and Treasurer
Right now, I think -- it's Bob, 98% at corporation level in C&D.
Matt Reddin -- President, Banking Enterprise
CRE right at the 290 (ph)
David Feaster -- Raymond James -- Analyst
Okay. And then just on these credit issues that arose that Bank SNB could you give us a little bit more color on that. And has this changed the way that you're going to approach to maintain, your due diligence process is there, anything in hindsight that you think you could have done to maybe catch this or do you see any other risk in potentially any of your other acquired portfolios?
George A. Makris -- Chairman and Chief Executive Officer
Yes, David, I'll address that. I think that we have learned a lesson here, we are very careful between the time we announced transaction which reflects our diligence on the loan portfolio and the time we actually close it. And then the time it actually merges into the bank. So those are two periods of time that we have most risk. We are very conscious of some regulatory requirements that somewhat limit our ability to influence credit decisions during those periods of time. However, we also understand the risk and we believe that this go straight to what that risk is. We will be more diligent in our efforts to manage credit between the time we announce the transaction and the time we actually merge it into the bank and all of our credit metrics actually kick in.
Most of the problems occur during those periods of time. Fortunately, for us, we have really good credit review process, we think we found these problems very early in the process. I'll also tell you that at the end of last week, we have $5 million loan out of that to pool pay off, that resulted in $1 million recovery. So we think we're well on top of the issues. We think we'll manage through those very well. But you're right, it did point out an opportunity for us to be a little more aggressive in our oversight credit decisions between the time we announced the transaction and the time that actually flows in to Simmons Bank.
This is not -- this similar to what we experienced in our Wichita market a couple of years ago, with the single lender in their portfolio that was really just might not manage very well, so these things happen from time to time. Unfortunately, for us it happened in an acquired pool of loans and I don't want to get too specific about the details of purchase accounting, but that pool of loans at Bank SNB has to stand-alone and if we didn't have enough credit market left in their pool to cover the downgrades of those critics, we are required to specifically reserve additional funds to cover that portfolio. So whether or not we had sufficient allowance in our overall portfolio is irrelevant. Those all stand-alone, and I'll remind you we've got about 15 separate acquired loan portfolios on our books, each one with a separate credit mark.
Unfortunately, this is the first one that's really taken us to the point where we had to make a significant provision to cover a shortfall.
David Feaster -- Raymond James -- Analyst
Okay. Last one for me. I wanted to follow up on expenses. Could you just remind us of the seasonal impacts in the first quarter from that are going to come out and 2Q from FICA and payroll taxes. How much is the $10 million of annual expenses were actually in the first quarter? And is this $9.5 million core expenses a good baseline before layering in Reliance?
George A. Makris -- Chairman and Chief Executive Officer
Well, I would say that, I personally would not be satisfied with $99 million run rate. We had about $2 million of the $10 million that we expect in NGB expense in the first quarter. We offered early retirement program. I think I've mentioned before that as we put our NGB program in place, our skill sets really going to change internally. We'll expect some efficiencies and we just felt like the right thing to do is to give folks most, if not all of their careers to Simmons Bank an opportunity for an early exit if they chose. So we had eligible associates took advantage of that, 91 as a matter of fact. Really the only positions that are going to be replaced out of that 91 of those in the retail markets where we just absolutely have to have certain coverage in certain branches.
We expect that initiative by itself will save us a little over $4 million a year beginning in the third quarter, so we'll have some severance costs associated with that initiative in the second quarter, which we believe will be about $2.5 million. We will continue to push from an expense standpoint to make sure that our investment in technology provides capital efficiency in the marketplace that we're expecting. However, we do have some investment opportunities to grow some markets organically. So we will continue to examine our efficiency ratio and believe that we can still operate between 50% and 55% over a 12-month period, that will give us some flexibility with regard to investments in certain markets. So we still think we're on track. 99 is probably too high in my mind. I can't tell you exactly what we expect that going forward, but something less than that.
Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer and Treasurer
David, this is Bob. One thing just to give you a little guidance on the Reliance expenses going forward, we're still working through those numbers, but the ballpark is going to be in that $5 million to $6 million per quarter, is what I would estimate right now.
David Feaster -- Raymond James -- Analyst
Okay. Terrific. Thank you.
Operator
Our next question comes from Gary Tenner from D.A. Davidson. Your line is open.
Gary Tenner -- D.A. Davidson -- Analyst
Thanks. Good morning. I joined a few moments late, -- good morning, but just was hoping to get some more color on thee reduction in the loan growth guide for the year. I think you reduced the last quarter to the high-single digits looks to be more mid-single digit now, so I'm just wondering what the changes are driven by?
George A. Makris -- Chairman and Chief Executive Officer
Well, I'll talk about that specifically, but, I would say, that there are other opportunities for some of our large CRE customers in the marketplace today. And our job is not necessarily just to make loan and put it on our books, it really is to advise our clients on the best opportunity for them. We put in place some pretty significant correspondent banking group, that has great contacts in the secondary market, as well as our ability to sell loans to participating banks and that's going to be necessary for us as we control our concentration in CRE and construction lending.
So there are tremendous opportunities out there with our existing customer base in both of those categories. It just depends on what's in the best interest of the customer, whether or not we put it on our books, whether or not we help them access secondary market. or whether we sell participations to make sure that our concentration levels stay where they are. We're very hopeful that our C&I business and our ag business and the other lines of business pick up during the year. But if they mistake (ph) not to acknowledge opportunities that we still have at CRE construction. Line items on our balance sheet, Matt you might will speak more specifically to that?
Matt Reddin -- President, Banking Enterprise
Now I think that's really good, George, I would point you to our pipeline increase over the end of the year, almost a $200 million increase there. Also we have seen (inaudible) close a, 17 basis point increase in our great average rate. So another point of our pipeline, you'll be aware of 50% that (inaudible), so you're seeing our bankers kind of repositioning our balance sheet overall. So the growing curves on where that's heading (ph) for the remaining part of the year.
George A. Makris -- Chairman and Chief Executive Officer
So Gary, if we look at year-over-year, so December 31st, we had a flat first quarter. 5% growth for the year. There's going to be more than 5% for the remainder of the year.
Gary Tenner -- D.A. Davidson -- Analyst
All right. Thank you very much.
Operator
(Operator Instructions) Our next question comes from Garrett Holland from Robert. W. Baird. Your line is open.
Garrett Holland -- Robert. W. Baird -- Analyst
Thanks for taking the questions. I just wanted to follow-up on the credit outlook. Sorry if I missed this, but is between $8 million provision guidance for 19 still accurate in light of some of moving parts of the asset quality and then loan growth.
George A. Makris -- Chairman and Chief Executive Officer
Yes. We think it certainly is. It would have been that run rate this quarter, but hadn't been from the $2 million special provision for the acquired bucket. So yes, we're still very comfortable with that. We don't see any overall credit deterioration in our portfolio. In fact, I think we're making substantial progress in managing that portfolio down. And if you take a look at where we were at the end of the first quarter in 2018, our asset quality numbers are better than they (inaudible). So we consider this one portfolio on the Dallas market to be a blip on the screen, and nothing that signifies any deterioration in our core credit quality overall.
Garrett Holland -- Robert. W. Baird -- Analyst
Thanks. It's good to hear the focus on risk adjusted growth, and the credit track record historically have been great. So just curious if you could provide some more detail for CRE lending? And what LTV or debt service coverage strategy and force and have those standards changed at all over the past couple of years?
Matt Reddin -- President, Banking Enterprise
Yes. That's a great question. Yes. So we definitely with a prolonged growth cycle especially in commercial real estate, we've implemented a program now where we are maybe heavily concentrated in certain product types. We're still doing business for our good customers, but at a lower loan to value, higher DSC to create an overall better portfolio from our credit metrics standpoint. And also, as you know, as George mentioned earlier, the churn was at portfolios is pretty aggressive right now. And our customers are seeing access to the capital markets with long-term rates well below anything we need to be doing. So overall, I think our CRE portfolio is in a much better position from a credit metric standpoint, as we are getting those lower LTVs and their DSCs.
Garrett Holland -- Robert. W. Baird -- Analyst
That's helpful. Thanks for the detail.
Operator
Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to George Makris, for any closing remarks.
George A. Makris -- Chairman and Chief Executive Officer
Okay. Well, thanks to all of you for joining us today and a big welcome to our Reliance Associates in St. Louis. We really look forward to the opportunities we have in what is now our largest single deposit market. So congratulations and we'll do this again three months from now. Have a great day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.
Duration: 31 minutes
Call participants:
Stephen C. Massanelli -- Executive Vice President, Chief Administrative Officer and Investor Relations Officer
George A. Makris -- Chairman and Chief Executive Officer
Stephen Scouten -- Sandler O'Neill & Partners LP -- Analyst
Matt Reddin -- President, Banking Enterprise
David Feaster -- Raymond James -- Analyst
Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer and Treasurer
Gary Tenner -- D.A. Davidson -- Analyst
Garrett Holland -- Robert. W. Baird -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
