Simmons First National Corporation (SFNC) Q2 2021 Earnings Call Transcript

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Simmons First National Corporation (SFNC -3.08%)
Q2 2021 Earnings Call
Jul 27, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, thank you for standing by and welcome to the Simmons First National Corporation Second Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today Ed Bilek. Please go ahead.

Ed Bilek -- Executive Vice President, Director of Investor Relations

Good morning and thank you for joining our second quarter earnings call. My name is Ed Bilek, and I serve as Director of Investor Relations at Simmons First National Corporation. Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, President and Chief Operating Officer; Jay Brogdon, Chief Financial Officer and Treasurer; Steve Massanelli, Chief Administrative Officer; Matt Reddin, Chief Banking Officer; and David Garner, Chief Accounting Officer.

The purpose of our call is to discuss the information and data provided by the company in 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 followed by a Q&A session. We have 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. Recording of today's call, including our prepared remarks and the Q&A session will be posted on our website simmonsbank.com under the Investor Relations page for at least 60 days.

During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook. I remind you that you should not place undue reliance on any forward-looking statements as actual results could differ materially from those projected in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors 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 31-2020 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. 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 exhibits 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 company's website, simmonsbank.com.

I will now turn the call over to George Makris.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Thanks Ed and welcome once again on our second quarter 2021 Earnings Call. Overall, we're very pleased with our results for the quarter as we delivered solid performance in multiple areas while continuing to navigate the challenging environment. Net income for the quarter was $74.9 million up $16.1 million or 27% compared to the second quarter a year ago. Diluted earnings per share were $0.69, up 28% from the year ago quarter. Core earnings for the quarter, which excludes certain non-core items were $75.4 million or $0.69 on a per share basis.

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

As a result of these actions, core net interest income, which excludes accretion increased 1% on a linked quarter basis. Non-interest income totaled $47.9 million for the second quarter. Core non-interest income was $47.5 million up 6% on a linked quarter basis. Expenses were well contained as total non-interest expense, both on a reported basis and on a core basis were up 1% from first quarter 2021 levels. Our efficiency ratio was 56.9%, an improvement of 50 basis points on a linked quarter basis.

Credit quality trends over the past three quarters continued to show marked improvement as certain concerns during the pandemic failed to materialize. Non-performing loans totaled $80.9 million, down $34.6 million from first quarter 2021. In addition, during the quarter, we reported net recoveries of 7 basis points. These positive trends combined with improved economic modeling scenarios resulted in a recapture of provision expense in the quarter totaling $13 million at the same time, our allowance to loan ratio ended the quarter 2% to up 7 basis points on a linked quarter basis and our non-performing loan coverage ratio stood at 281%.

With respect to the balance sheet, total assets ended the quarter at $23.4 billion, total loans were $11.4 billion and total deposits were $18.3 billion. While the extensive stimulus programs provided support to those in need of assistance, high levels of liquidity also creates challenge to the financial services industry in terms of loan growth and we have not been immune. Total loan production during the first half of 2021 totaled $1.8 billion putting us on 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 than normal level of pay-downs.

On a positive note, our commercial loan pipeline rose for the third consecutive quarter to $1.3 billion and deposit generation continues to be strong as total deposits increased $1.3 billion during the first half of 2021. Our capital remains very strong. Total risk-based capital was 17.5% CET1 was 14% and the leverage ratio was 9%. Given this strong position, our Board of Directors increased the authorization of and extended the timeline for our stock repurchase program, thus increasing our remaining capacity under the program to approximately $150 million. On our website at simmonsbank.com, we share an extensive presentation along with press release and financial data which gives much more detail regarding our quarterly results and other important information about our company.

Finally, the second quarter also marked a return of M&A activity as we announced agreements to acquire two Tennessee-based financial institutions Landmark Community Bank and Triumph Bancshares, Inc, both of these organizations are successful local community banking groups who share 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 our existing footprint in Tennessee and enhance our scale in two of our key growth markets, Memphis and Nashville, while creating the 9th largest bank in Tennessee.

We're on target to complete these acquisitions during the 4th 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're encouraged by our performance during the first half of 2021 we also recognize the backdrop of economic uncertainty as we navigate the second half of the year. As such, our focus remains on executing basic blocking and tackling fundamentals, taking care of our clients and 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 have made to transform our company, coupled with the discipline and strong culture we have in place we're confident in our ability to implement these initiatives, while adapting to the ever-changing landscape. This concludes our prepared comments, I will now turn the line over to our operator and invite questions from our analysts and institutional investors.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Stephen Scouten with Piper Sandler. You may proceed with your question.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, good morning everyone.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Good morning.

Stephen Scouten -- Piper Sandler -- Analyst

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 kind of frame that up a little bit in terms of pay-downs quarter-over-quarter? I know you show in the one waterfall chart the year-to-date, pay-downs, but I'm wondering what that was quarter-over-quarter and what sort of visibility you have into pay-down levels, moving forward?

Matt Reddin -- EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER

Hey Stephen this is Matt -- really good question. We saw a slightly higher amount of payoffs in the second quarter versus the first quarter and so, as we think about what that looks like moving forward, we do feel that is slowing and we're already starting to see that in the first month of the year, but our challenge is, some of the still planned exits -- I mean we're still planning to exit energy that's another $150 million that we think will exit, especially in the current environment so we have those headwinds that we see coming but the planned payoffs in CRE that we have talked about many times seems to be slowing but there are still some headwinds and honestly, with this uncertain environment and stimulus there is -- it continues to happen. I mean, we thought would slow in the second quarter, but we're still seeing it -- think it's going to slow in the third and fourth but it's still out there.

Stephen Scouten -- Piper Sandler -- Analyst

Okay. And Matt, do you happen to have a number of -- like a ballpark of the amount of loans that are renewing over the next year?

Matt Reddin -- EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER

Well, I don't have that exact number Stephen, but our duration now is at 3.8 years overall and so that can give you an idea of the velocity of the overall churn of the portfolio.

Stephen Scouten -- Piper Sandler -- Analyst

Definitely. Okay, great. And 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? And how aggressive would you anticipate being with that between kind of now and October?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Stephen, this last quarter we were locked out of share repurchase, due to the pending acquisitions coming in, so we're three 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 over the next balance of the year. We believe we'll be pretty active in it going forward is our plan right now.

Stephen Scouten -- Piper Sandler -- Analyst

Okay, great. And maybe last thing for me, I wanted to get some incremental detail on your Coin Checking product and just kind of how long that's I guess been in play for your customer base, what you're seeing so far. Kind of what the feedback has been? Because, I feel like that's a little bit ahead of the curve for a bank of your size. So, I think that's a pretty interesting pursuit.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Stephen this George. So I'll tackle that. As you know, our Chief Digital Officer, Alex Carriles is top notch and well known in the community and I think you've seen him on 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 lawyers of fraud protection that we felt like we needed -- there are actually three 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 rolled it out in all the states where we do business in the last 60 days, and I will tell you the acceptance has been extraordinary.

The ultimate result of all of that will be, that all of our customers, whether they're online or whether they come into a branch 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 and I can still remember when I used to open my accounts it was a half a day process. So, we believe that we really have 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, relationships with today and some that we're working on. So, we have PGA sponsorship, we're associated with Fort Worth Stock Show and Rodeo.

We've got tremendous access to several colleges in our footprint so we really are focused on the new consumer group coming to Simmons Bank and we believe that our Coin Checking product is a basis for that success.

Stephen Scouten -- Piper Sandler -- Analyst

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

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

You bet. Thanks Stephen.

Operator

Your next question comes from Brady Gailey with KBW. You may proceed with your question.

Brady Gailey -- KBW -- Analyst

Hi thanks, good morning guys.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Good morning Brady.

Brady Gailey -- KBW -- Analyst

So, I just wanted to start on the bond book. I know you guys have been talking about growing that and that's exactly what we saw this quarter. Maybe talk about any thoughts on continuing to grow the bond book from here. I think if you look at it on a average point of view, you will still see some bond growth in the third quarter just as kind of a catch up but you're at about $7.5 billion at the end of the quarter. So, maybe just talk about your appetite to continue to grow that bond book especially as we've seen the long end of the curve pullback?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Yeah Brady. First thing I'd point out is if you look at the bond book we have about $1.3 billion that is in floaters, variable rates that really is our money, we've moved from cash that we are making 10 basis points and picked up to about a 35 basis point yield so that is really variable can move back if we need it for liquidity, it could move into the bond portfolio permanent when we need to. So, we'll continue to look at that piece. So, the way we are looking it, if you look at slide 23 in our deck that $1.3 billion is very fluid on the bond side but it's also fluid on the cash side, that's where we're managing both of those pieces.

I would say going forward, we'll continue to look for opportunities. I don't think you'll have as dramatic effect obviously going into Q3 and Q4 but we could have some pick up that would be more on opportunistic buys. We continue to manage our book bond portfolio, just like we have the last couple of years and look for opportunities to sell. As you saw we had opportunity to sell another $40 million worth securities, pick up $5 million in gains and it's just hard to pass up 3 years to 4 years of earnings on that and it does hurt your bond yield a little bit, but it's just tough to pass that up.

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

Brady Gailey -- KBW -- Analyst

Okay, all right, that's helpful. And then the $17.2 million of remaining PPPs, any idea as far as the timing of when those will be realized? You think the most of those will be realized in the back half of this year or does some slip into 2022?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Well, I would say it's hard to tell when you're dealing with anything with the government on repayments and the rules always change. But, we would expect Q3 to be a pretty heavy quarter I believe and some will go into Q4. There'll be some stragglers into next year, just really timing should be small volume dollars -- we might have a lot of volume that we're dealing with, but on the dollar side it should be pretty small. I would just -- you look at that Phase II $319 million and we're down to about $300 million so that is -- you're starting to see those payoffs and that really just happened in June, so we believe that will hit more into Q3.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

We have just started seeing 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, you're going to see large volume decreases in our PPP portfolio.

Brady Gailey -- KBW -- Analyst

Okay, and then just to revisit the loan growth or loan shrinkage topic, I mean it has been pretty surprising. I mean -- I think you're non-PPP loans are down about $3.5 billion today versus the end of 2019. When do you believe that you'll be at an inflection point of starting to see loan growth again?

Matt Reddin -- EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER

Hey Brady, this is Matt. I'd say what we're encouraged by is our production trends, if you just look at what 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% to 70% came in the second quarter so if you look at that plus the trend in the 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 and I feel good about where the known headwinds are. I mean, we're now talking -- when I'm now speaking to energy at additional $150 million it wasn't -- 18 months ago, that was $400 million. So, the planned CRE exits there at the tail end of that so, I feel that we're there. The unknown 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'll continue to grow throughout the back half of the year.

Brady Gailey -- KBW -- Analyst

Okay, all right, great. Thanks for the color guys.

Matt Reddin -- EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER

Thanks Brady.

Operator

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

Matt Olney -- Stephens -- Analyst

Thanks. Good morning guys.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Hey Matt.

Matt Olney -- Stephens -- Analyst

I wanted to ask about the bank's interest rate sensitivity and how you're managing this? It seems like there is lots of moving parts, we're seeing with the securities build this quarter, but also two pending acquisitions. And as we get into 2022 and 2023 hopefully an eventual fed funds increase, what's the bank's sensitivity to higher rates?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Well, I think first off, if you look at the loan book, it's about roughly 50-50, maybe 55-45 on variable versus fixed. A lot of the fixed to shorter term, I think, Matt, on the duration were probably 3 year, 3.5 years or so overall. I would say on the book bond portfolio, there is obviously some extension there on some of the munis, but a lot of those munis is at decent prices. We do have the $1.3 billion in floaters, 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 basis points to 5 basis points in the next quarter or two that will pick up there before we bottom out. So, I would say right now, we're pretty evenly matched when you look at all the different components to get down underneath so we're preparing as much as we can at this point but again I would tell you on interest rates it's still unknown out there. This week also in Today they're talking maybe they'll go back up but the tenure is down -- about 2 weeks ago rates were going back down where tenure might be going to 1%. It just seems like every week, we have a different narrative on where rates are going and 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 interest income in this artificial environment we're in.

Matt Olney -- Stephens -- Analyst

Okay, that's helpful Bob. Thank you. And then I guess kind of on a similar topic as far as core loan yields. If I back out some of the PPP and accretion, I'm showing not much of a move, versus the first quarter. Any color you can provide as far as directionally where you expect these core loan yields to move from here?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Yeah, I would say, yes, we were pretty pleased this quarter to have our core yield actually pick up a basis point or two. No question, that's a challenge in this environment as the book -- as loans we're putting on are averaging right at that 4 to 4.25, so a little bit below what we're on. Now keep in mind, some of the loans that are paying off that Matt talked about earlier on the early payoffs were some of our acquired loans that were pretty low rates, so you're actually -- that's where you're picking up some of the accretion on the volume there, but again it's a constant process on trying to manage that and it's going to be a challenge to maintain at those levels continuing to go forward. But, our goal is to keep it in that line or drop just slightly.

Matt Olney -- Stephens -- Analyst

Okay, got it. And then lastly from me -- provision expense for loan losses was negative this quarter; you're still carrying an ACL ratio around 2% would love to hear kind of your view of the incremental need provision expense from here?

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Well Matt, this is George. So the credit quality today is better than it has been in a long time and I think we have charts in our presentation that show that. When you scratch your head and go then and why do you need 2% allowance against your loan portfolio and we gave a little additional color on hotels, office and retail and while we feel very good about our hotel portfolio and where it stands with regard to coming back, we see us in our office portfolio and our retail portfolio some potential delayed deterioration, if you will and the reason is that 73% of the leases in our office portfolio don't renew until 2023 or after.

A higher percentage 78% of the retail lease expirations occur in 2023 or after. So right now, they're are performing really, really well and quite honestly, I feel good about that because we're going to have time to analyze, what's happening in those two sectors over the next couple of years before it really affects our portfolio. So there's still some unknown risk out there and I don't need to really remind everyone about the uptick in COVID today and whether or not we're going to get back to in-person school. However, we're going to be able to fill those supply chains that have caused artificial inflation because of the supply and demand factor. If we can get those things back to normal, we'll be in pretty good shape.

Matt Olney -- Stephens -- Analyst

Okay, thank you.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Thanks Matt.

Operator

Thank you. [Operator Instructions] Our next question comes from Gary Tenner with DA Davidson. You may proceed with your question.

Gary Tenner -- DA Davidson -- Analyst

Thanks everybody good morning.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Good morning.

Gary Tenner -- DA Davidson -- Analyst

I think you'd sort of addressed this question in answering one of Matt's. But, in terms of the time deposits could you kind of talk about the scheduled maturities for the back half of the year and what the prevailing rates are and your renewal rate on those time deposits?

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Yeah, I would say, we've got roughly about $800 million. I think the balance of the year the rate is over -- right over 1%. Those are going on, anywhere from 20 basis points to 40 basis points depending on the relationship, somewhere in that ballpark. So, I would tell you Gary -- if you look at that plus the transaction deposits that we've continued to look at individual markets and price down I think overall, there is a good 4 basis point to 5 basis point pickup from third, maybe a little bit into the fourth quarter, but really over the next quarter or so.

Gary Tenner -- DA Davidson -- Analyst

Thank you. My other questions were answered.

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

All right, thank you.

Operator

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to George Makris for any further remarks.

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Well notwithstanding the pressure on our loan portfolio, unexpected pay downs, I will remind everyone that much of what's happened with regard to that loan portfolio shrinkage was intentional with regard to the sale of our Colorado, South Texas locations, intentional elimination of concentrations of credit in St. Louis and DFW and reduction in our energy portfolio.

But on a positive note, our asset quality has improved tremendously during that period of time. We've been able to manage the significant securities portfolio. We've been able to expand our mortgage and wealth business and that continues to expand. We're going to add Triumph and Landmark to our portfolio in Memphis and Nashville before the end of the year. We've just hired new leader of business in Consumer Banking that held that position at Regions Bank out of Birmingham.

And once again, if we can manage through the COVID surge to get schools back in person -- good healthcare system back to taking care of the deferred medical care. If we can get supply chains filled and stem the inflationary pressure and if we can encourage folks to get vaccinated to protect themselves, your families and others I think we're on the back side of what we experienced in 2020. I think the diversity of the way we operate our bank has shown to be a real plus for Simmons -- we made $75 million this quarter. That's nothing to sneeze at. So we're very encouraged by the outlook. We see our loan pipeline increasing -- meaning that we have some very good customers who see some potential out in the marketplace today, and we're going to be there to help them. So, thank you very much for joining us today and if we don't talk before then we'll do this again three months from now. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Ed Bilek -- Executive Vice President, Director of Investor Relations

George A. Makris -- CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Matt Reddin -- EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER

Bob Fehlman -- PRESIDENT AND CHIEF OPERATING OFFICER

Stephen Scouten -- Piper Sandler -- Analyst

Brady Gailey -- KBW -- Analyst

Matt Olney -- Stephens -- Analyst

Gary Tenner -- DA Davidson -- Analyst

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