Simmons First National Corp Q4 FY2021 Earnings Call

Good morning and thank you for joining our fourth quarter earnings call. My name is Ed Bilek, 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 2022. 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 on this conference call are in listen-only mode. The 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 sixty days. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook. I'd remind you that you should not place undue reliance on any forward-looking statement as actual results could materially differ from those projected or implied by the forward-looking statements due to various 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 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.

Thanks, Ed, and welcome once again to our fourth quarter 2021 earnings call. If I could give my comments about thanking the associates of Simmons Bank for producing the record earnings year in 2021, despite operational challenges associated with the pandemic and the artificial economy created over the past two years. Earlier today, we announced earnings of $271 million for the full year of 2021, a 6% increase over 2020. We also reported diluted earnings per share of $2.46, an increase of 6% from the previous year. Other important financial information for the fourth quarter and for the full year is available in our press release and our Investor Presentation published earlier today and available on the Investor Relations page of simmonsbank.com. We simultaneously acquired an integrated Landmark Community Bank and Triumph Bank, both Memphis-based, in October of last year, so their activity is included in our fourth quarter results. The acquisition of these banks has significantly enhanced our size and scale in Tennessee, where we now rank as the largest bank based on deposit market share. Shortly after we completed these acquisitions, we announced the definitive agreement to acquire Spirit of Texas Bank shares, strengthening our Texas franchise has been a strategic priority and partnering with Spirit not only enhances our current footprint but also establishes a platform for growth in Houston, Austin, San Antonio, and College Station. Net income for the fourth quarter was $48.2 million and diluted earnings per share were $0.42. Included in our results for the quarter were $11.3 million of after-tax non-core items, primarily related to the acquisitions of Landmark and Triumph. Excluding the items, core earnings were $59.5 million or $0.52 on a diluted per share basis. I think it is remarkable that we closed and integrated two acquisitions, repurchased approximately 2.6 million shares of our stock, contributed $2.5 million to our foundation, and grew our tangible book value per share by 2% during the fourth quarter alone. The positive momentum we began to see in terms of loan growth during the third quarter of 2021 accelerated in the fourth quarter. Newly funded loans in the quarter totaled $2.6 billion. Our commercial loan pipeline rose for the fifth consecutive quarter to $2.3 billion, up 56% on a linked-quarter basis, as growth was broad-based throughout our community and metro markets, as well as in our new corporate banking unit. We're also encouraged by our level of unfunded commitments, considered a leading indicator of loan growth, which rose to $2.9 billion in the fourth quarter, a 31% increase on a linked-quarter basis. We believe this positive momentum combined with the new loan producers we have added in 2021 and continue to actively recruit positions us well in terms of loan growth in the year ahead. During the fourth quarter of 2021, we repurchased 2.6 million shares of our stock in January 2022, substantially exhausting the remaining capacity under our existing share repurchase program. As a result, the Board of Directors authorized a new $175 million share purchase program and raised the quarterly cash dividend by 6% to $0.19 per share. In closing, the significant investments we have made in technology, particularly in terms of expanding our digital capabilities, are producing solid results and will allow us to continue to help meet the ever-changing needs of our customers while improving the speed and efficiency with which we deliver products and services to our customers. The investments we made in M&A represent meaningful geographic transformation, with an emphasis on building scale in high-growth markets that significantly enhance our growth profile. Given our successful track record, we're confident in our ability to seamlessly convert and integrate Spirit later this year and capitalize on the tremendous growth opportunity this acquisition presents. As a result, we enter the year with positive momentum and are confident in our ability to respond to the ever-changing landscape and challenging economic environment. We believe we're well-positioned throughout our footprint to capture growth opportunities that will lead to another successful year. This concludes our prepared comments. I will now turn the line over to our operator and invite questions from our analysts and institutional investors.

Our first question comes from the line of David Feaster from Raymond James. Your line is now open.

Hey, good morning, everybody. I just wanted to touch on the growth outlook. I appreciate the commentary in your prepared remarks. It’s clear originations are improving. We've made a bunch of new hires. It sounds like the pipeline's still good. And it sounds like, just looking at the guidance, we're expecting the growth rate to accelerate throughout the year. I'm just curious kind of some of the puts and takes as you look at what's happening in payoffs and paydowns and everything. How you think about the pace of growth and what gives you confidence that we're going to see accelerations going forward.

Hey, David. It’s Matt. I'll address that first and others can add their thoughts. As we've discussed every quarter, we were anticipating a turning point as production increased, which we definitely observed in the fourth quarter. Just to highlight, even in December, we closed $1 billion in new originations, marking that inflection point. January is always a unique month, and while it's uncertain what will happen then, our pipeline, as George mentioned, is currently at $2.4 billion and continues to grow. From our perspective on production, the outlook is very positive. Our headwinds are diminishing. Will there be some early payoffs? Yes. However, all indicators suggest strong net positive and accelerated loan growth this year. I'm happy to provide more details on specific areas or topics; just let me know where you’d like me to focus.

Could you provide some details on the growth opportunities in the pipeline? Where do you see the most potential? Additionally, how is the pipeline evolving, and what insights can you share on new loan yields and pricing trends? Are you noticing any improvements in pricing due to the steepening of the curve?

Yes, David, absolutely. Recently, we've been focused on movements in rates and what long-term rates suggest. We're incorporating this into our term sheet and seeing some improvement. As we approach year-end, it's important to note that we maintain a conservative approach to asset quality, ensuring the strong assets we add to our books. We're beginning to recognize trends in rate movements that we can apply to our new deals. Texas has shown a strong rebound for us in the fourth quarter, with a robust pipeline. We're also seeing significant gains from our production, highlighted by the acquisitions of Landmark and Triumph. Memphis, Nashville, Kansas City, and Northwest Arkansas have also contributed nicely, with Northwest Arkansas particularly standing out in 2021, and I expect that will continue in 2022. Additionally, our corporate banking group has seen an increase in pipeline from commercial financing; however, growth will be gradual as we focus on integration. We're also working to expand our asset-based lending in the institutional banking group, especially in municipal finance, and are seeing strong pipeline growth there, which we anticipate will accelerate in 2022.

Thank you for the information. Regarding the guidance, it seems loan growth is projected to be in the high single digits while deposits appear to be stable. We should expect an improvement in the earning asset mix. I was hoping you could provide more insight into the margin, specifically whether you believe we have reached the lowest point and can anticipate further expansion. Additionally, could you remind us about your asset sensitivity and how you foresee a rate increase influencing the margin on a pro forma basis?

Yeah. Hey, David. This is Jay. A couple of remarks there to maybe unpack the question. But the first thing I'd go to just on the guidance or on the outlook that you're referring to from page 29 in our slides. As I think about net interest income and net interest margin, the real inflection in the margin from our perspective is going to hinge on the timing of that growth throughout the year. So, the primary driver from a true margin perspective is driven by asset mix, as you indicated. So, as we are investing liquidity into loans this year with that growth, you're going to see some margin expansion. Now, the natural headwind to that margin expansion is the rolloff of PPP, in addition to the lower rate environment where some of the loans have been paying off versus where rates are coming on. But I think the asset mix is more than enough to offset that as we inflect on the loan growth side. So that's kind of part A of your question. Part B, as it relates to interest rate sensitivity, and I'd maybe point you to page 21 in our slides for some additional statistics there, but keep in mind, we've got about $3.15 billion in cash at the Fed and in floating rate securities. So that's all going to be sort of fully asset sensitive, if you will. On the loan side, we give you a lot of statistics on this page, breaking down our variable rate loan portfolio. So, you can see those statistics there. But the thing I point you to is that if we ramp this year, the way we're thinking from the Fed, just on the variable rate loan portfolio alone, we show you that ramp would be about $9 million of incremental interest income off the loan portfolio. And that's kind of with 25 basis point hikes in March, June, and October, if you will. So, hopefully that gives some color to unpack the questions a bit there.

No, that's very helpful. And then just touching on expenses, there's a lot of moving parts here. Just curious kind of how much of the Landmark and Triumph synergies have been realized and are already in the run rate? And then just kind of how do you think about inflationary pressures and expense growth just given the investments that you guys are making and maybe just what a pro forma run rate will look like once we get the Spirit of Texas deal in the run rate as well.

Yeah. So, again, I'll point you to a page and give you some additional color, but on page 11 of the slide deck, we give you the detail on the quarter up in the table at the top. But I'd point you to the kind of bottom middle of that page. If you take what we show as core non-interest expense, I call out specifically there, the contribution to the foundation, as well as the salary expense on non-retained Triumph and Landmark employees. So, as part of our integration, we don't realize all of that headcount reduction day one. We retain those folks for a month, 45 days, or two months, et cetera. So, we're fully there by the first quarter, but we had about $1 million of expense in the fourth quarter before those folks left. So, that's I think a more normalized run rate down there in the fourth quarter that $122.9 million, which is going to be really close to about 2% of average assets, which is what I've sort of continued to focus on as we think about our non-interest expense run rate. So, I think we're continuing to kind of hold the line in that 2% area. Yeah, there's wage inflation, et cetera out there. But I think, given some of our ability around M&A and the scale we've had, we've got some opportunities to continue to combat that inflation.

We believe that $123 million serves as a baseline. As we move into 2022, we expect to implement normal raises and merit increases, along with facing additional cost pressures from rising inflation. Additionally, our ongoing investments in production will contribute to an increase in these figures. However, we anticipate corresponding revenue growth from production as well.

Hey, thanks. Good morning, guys.

Good morning.

Good morning.

Maybe just to ask one other thing on loan growth. I know in some of your prior acquisitions, you've had some loans that you've kind of strategically run off. When you look at the two that closed in the fourth quarter and Spirit of Texas, that'll close here in a little bit. Are there any buckets out of those targets that are going to be kind of put in runoff like you've done in prior deals?

Yeah, Brady. It’s Matt. There’s nothing happening within Triumph, but for Landmark, we have some mortgage portfolios from purchases that will just amortize off and we are accounting for that. Looking ahead to 2022, it was $100 million or less, but that's the only part of that book we have decided not to pursue further, and it will amortize.

All right. And then anything on the Spirit of Texas side?

No. Nothing that we see right now at all. Spirit looks a lot like us. Anecdotally, their pipeline right now is over $1 billion today and we're really excited to get them integrated in April, because a lot of what they do. Their average loan size, Brady, is a lot like ours. It’s $350,000 and that's kind of right in our sweet spot. So, we feel good about them coming on with no plans for runoff of a certain sector.

I noticed they achieved impressive growth in their fourth quarter, which was encouraging. It's also great to see your active buyback strategy. Should we consider the $100 million and $75 million in new buybacks this year, or do you think that might be too ambitious? The stock is still priced under 12 times earnings and at 1.65 times tangible book value, which is quite attractive. Is it feasible for the full $175 million to be completed in 2022?

Brady, this is Bob. I would say it's going to be spread throughout the year. I'm not sure if we'll complete it all by the year's end. There are many factors to consider, including pricing as you mentioned, as well as the timing of our market presence and when we can file our 10b5. Additionally, we have a systematic plan in place that extends over a measured period. So, while I can't guarantee everything will be finalized by this year, our goal is to make the best use of our capital position.

Okay. And then, finally for me. I know yield accretion ticked up a little bit in the fourth quarter, potentially from the two deals that were closed, but I know Spirit of Texas is coming on. But how do you think about where accretable yield could be in 2022?

The accretable yields are distinct from those in previous deals because, under CECL, part of it is treated as a credit mark, while another portion is marked at a negative interest rate. Consequently, there is significantly less accretion on these deals compared to the asset size in earlier transactions. I'm not sure if we have any guidance on this, but it will likely be less than what we experienced previously.

Agreed. Yeah, I agree with that.

Hey, thanks. Good morning, guys.

Good morning, Matt.

I want to revisit the topic of interest rate sensitivity. I believe Jay mentioned the variable rate securities that will also reprice around $1.5 billion. I'm not very familiar with the structure of these and how they repriced. Can you provide more information about what these repriced on, including the kind of index and how quickly they repriced?

They will adjust in line with our cash position. Their yield was around 35 to 36 basis points in the quarter, but it will align with our current cash rate of 15 basis points. You can expect that to change in tandem with any Fed increases. So, I would consider both to act similarly.

Got it. Okay. Thanks for that. On slide 14, discussing the loan portfolio, you provide a helpful graphic regarding the new producers added in 2021. I want to explore that further, as the numbers seem significant. Are those growth or net numbers for the year? Additionally, do they include the banks that were acquired last year? Thank you.

That would not include within our acquired banks, but that is going to be replacement bankers as well as net new bankers, Matt.

Got it. Okay. And then, as far as the general outlook you guys give, I think it's on slide 29, you got the pending acquisition of Spirit of Texas. Does this outlook include or exclude the impact of Spirit?

Yeah. Great question. It excludes that. So, the outlook is really a standalone Simmons, if you will. So, kind of from 12/31 to 12/31, any pending or future M&A would be incremental to that outlook, Matt.

Okay. I see that the expected closing date for the Spirit of Texas is noted as 2022. Can you provide more details about the timeline? I have it projected in my model for the second quarter, but I can't remember if that was part of the guidance. Any additional information would be appreciated.

Matt, this is George. We're still optimistic for the second quarter. We've filed all the necessary applications at this point. We haven't received all the approvals. We just haven't been through the requisite timeline yet. Our diligence is well underway. We are in constant communication with the Spirit of Texas folks, and I think having really good conversations. The performance in the fourth quarter is indicative of our optimism about the combination when that happens. We're still optimistic that in the second quarter, we're going to get this deal finalized, closed, and converted. There are certain things that are out of our control. There is quite a bit of disruption at the Federal Reserve these days. So, we don't know exactly how that might affect approval, but we don't see anything between our two companies that would cause us any pause for concern. In fact, I think the deeper we get into it, the more we realize this is going to be a really good fit.

Okay. Thanks for that, George. And then I guess, as we think about layering in Spirit into our forecast in 2022, can you just talk generally about that goal you guys have of maintaining operating expenses at that 2% loan level of average assets? Is that a dynamic where we should assume maybe that ticks higher than that level initially and then over time works down, or any color you can give on that?

I believe we need to take a cautious approach with Triumph, similar to what we did in the fourth quarter with Triumph and Landmark. We won't achieve all the cost synergies immediately. It will take a quarter or two before we see the full realization of those savings. This doesn't alter my overall expectations for our expense run rate, but those savings won't materialize right away.

Okay. Thanks, guys.

Thanks, Matt.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to George Makris for closing remarks.

Thank you. There is one point that we'd like to make that we sort of anticipated the question about, and that is our net charge-offs for the fourth quarter. A little elevated, and I'm going to ask Bob Fehlman to talk about the new accounting principles that sort of caused that to happen.

Yeah. We had about $9.5 million in charge-offs in the quarter; about $6 million of that was related to the recent acquisitions. Under the CECL rules, those charge-offs happened after the acquisition under the old rules prior to CECL. That would have been adjusted to fair value on that date and it would have flowed through. So, no surprises for us at all. It was identified with the banks we acquired during our due diligence. So, it's just a little difference in how the accounting is on that. Other than that, it was negligible charge-offs for the quarter.

Yeah. And just I'd add a little to that, considering the Landmark and Triumph charge-offs and the charge-off on previously recognized energy credit between, those two things exceeded our $9.3 million net charge-off. So, it's a little misleading, but this is really the first time that we're dealing with the new CECL requirements in our reporting. The other thing that needs to be expressed is that, in our provision reversal of $1.3 million, that actually includes an addition of $22 million to the provision based on the Landmark and Triumph acquisition. So, the reversal without that $22 million charge would have been much more than that. Just a couple of accounting issues that were unusual this quarter that we wanted to make sure that we talked about today. So, with that, once again, I want to thank the Simmons associates who have put up with a lot over the last two years, particularly last year in the economy with COVID. I think our results are extraordinary, and it's all due to the team that we built here at Simmons. We're looking forward to 2022. We're looking forward to welcoming our new partners with Spirit of Texas Bank. We hope that we have really, really good news to report in April. So, thank you very much for joining us this morning. We'll do this again in 90 days.

This concludes today's conference call. Thank you for participating. You may now disconnect.