Simmons First National Corporation

Ladies and gentlemen, thank you for standing by and welcome to Simmons First National Corporation Third Quarter Earnings Call and Webcast. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press stars and one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press stars and zero. I would now like to hand the conference over to your speaker today, Steve Messinelli. Please go ahead.

Good morning, and thank you for joining our third quarter earnings call. My name is Steve Massinelli, and I serve as Chief Administrative Officer and Investor Relations Officer at Simmons First National Corporation. Joining me today are George Macris, Chairman and Chief Executive Officer, Bob Fellman, Chief Financial Officer and Chief Operating Officer, and David Garner, Executive Director of Finance and Accounting and Chief Accounting Officer. The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued this morning and to discuss the company's outlook for the future. We will begin with prepared comments followed by a Q&A session. We 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 listen-only mode. A 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 actual results could differ materially from those projected in or implied by the forward-looking factors statement due to a variety of factors. Additional information concerning some of these factors is contained in our SEC filings, including, without limitation, the description of certain risk factors contained in our Form 10-K for the year ended December 31, 2019, our Form 10-Q for the quarter ended June 30, 2020, and the forward-looking information section of our earnings release issued this morning. The company assumes no obligation to update or revise any forward-looking statements or other information. Lastly, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Please note that additional disclosures regarding non-GAAP metrics, including the reconciliations of these non-GAAP metrics to GAAP, are contained in our earnings press release and third quarter investor presentation, which are included as exhibits to our current report filed this morning with the SEC on form 8K and available on the investor relations page of our website at SimmonsBank.com. I'll now turn the call over to George Macris.

Thanks, Steve, and welcome to our third quarter earnings conference call. We're very proud of our results for the third quarter, especially under these trying conditions. I'd like to begin today's call by thanking the Simmons Associates for their commitment, dedication, and continued demonstration of our community banking values. In our press release, we reported net income of $65.9 million for the third quarter of 2020, an increase of $7 million compared to the second quarter. Deleted earnings per share were 60 cents. Included in the third quarter earnings were $2.5 million in net after-tax, merger-related, early retirement program, and branch right-sizing costs. Excluding the impact of these items, the company's core earnings were $68.3 million for the third quarter of 2020, and core diluted earnings per share were 63 cents for the quarter. Our return on average assets was 1.2 percent. Our return on average common equity was 8.9 percent. Our return on tangible common equity was 15.4 percent, and our efficiency ratio was 54.1% for the third quarter. As of September 30th, total assets were $21.4 billion. Our loan balance was $14 billion, and our deposit balance was $16.2 billion. Our loan pipeline of approved and ready-to-close loans was only $70 million at the end of the quarter, signaling that loan demand remains very weak in almost every aspect of our commercial economy. Our net interest margin for the quarter was 3.21 percent, and our core net interest margin, which excludes accretion, was 3.02 percent. The lower yielding PPP loans and additional liquidity decreased the net interest margin by 30 basis points. Our non-interest income for the third quarter was $72 million, a decrease of approximately $13 million, compared to the same period last year. The decrease was primarily due to the large gain on the sale of Visa Class B common stock that was recognized in the third quarter of 2019. This decrease was partially offset by a $9.5 million increase in mortgage lending income and a $15 million increase in the gain on sale of securities. Non-interest expense for the third quarter was $119 million. Core non-interest expense for the quarter was $115 million. Our capital remains very strong at quarter end. Our total risk-based capital ratio was 16 percent. Our common equity tier one ratio was 13 percent. Our tier one leverage ratio was 9 percent. The ratio of tangible common equity was 8.7% at September 30th. We have once again shared an extensive presentation on our website at www.simmonsbank.com, along with a press release and financial data, which gives much more detail regarding our quarterly results and other important information about our company. I'd like to take a minute to discuss some asset quality information found in our presentations. In our recap of loans excluding PPP loans, we show our allowance for credit losses, or ACL, for loan types in selected industry categories. Notably, our ACL for our energy portfolio is 19.5%, for our hotel portfolio, 4.1%, for our restaurant portfolio, 3.8%, and for our retail portfolio, 3.6%. In our COVID-19 loan modification update, we show those commercial loans still in a modification period. We expect only 3.9% of our loans to be considered for loan modifications longer than six months. Most of those we expect to return to regular payments with no credit downgrade or long-term restructure. Once again, our efforts were very proactive early in the pandemic. As Fed Vice Chairman Quarles mentioned recently, March was a record month of increases in C&I loans as companies drew on their lines of credit. That was not the case at Simmons, and it's reflected in the contrast between our loan growth during that time and other banks and in the ability of our customers to return to regular payment status. And of the 1,894 consumer loans that received forbearance, only 167 are being considered for a second round. Our energy portfolio declined by $42 million during the third quarter, and we expect continued reductions in the fourth quarter and into 2021. We expect to begin submitting information to the SBA during the fourth quarter for forgiveness of our customers' PPP loans. 63% of our PPP loans are below the $50,000 threshold. We have the details supporting our ACL, which is 1.77% total loans as of September 30th, and 1.9% of loans excluding PPP loans from the total. We've highlighted management's qualitative adjustment on that slide. And last, but certainly importantly, we want to recap our asset quality performance in our acquired portfolios for bank acquisitions since 2013. While some of our largest charge-offs and the energy losses have been from acquired portfolios, the comparison of losses to acquired loans versus credit marks to acquired loans has been exceptional. We believe our diligence identified appropriate risk in each of the acquired portfolios and in no case have our charge-offs in any acquired portfolio exceeded our credit mark. Once again, we're very pleased with our ability to identify portfolio risk in acquired banks and manage it within our established marks. Management of credit risk has long been a fundamental strength at Simmons, and we're very proud of our record, including the management of acquired portfolio credit risk. We continue our investment in digital capability our customers are adjusting their habits to the use of more self-service channels, and we expect that trend to continue. We have planned several upgrades to our digital offerings from now through 2021. While we still have much uncertainty in the marketplace today, we're encouraged to see our customers taking their time to understand future opportunities. We will be well prepared to help our economy recover at the appropriate times. I will now turn the line over to our operator and invite questions from analysts and institutional investors.