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Edited Transcript of SFNC earnings conference call or presentation 22-Oct-19 2:00pm GMT

Q3 2019 Simmons First National Corp Earnings Call

PINE BLUFF Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Simmons First National Corp earnings conference call or presentation Tuesday, October 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Garner

Simmons First National Corporation - Executive VP & CAO

* George A. Makris

Simmons First National Corporation - Chairman & CEO

* Matthew Steven Reddin

Simmons First National Corporation - Chief Banking Officer for Simmons Bank

* Robert A. Fehlman

Simmons First National Corporation - COO, CFO & Treasurer

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David Pipkin Feaster

Raymond James & Associates, Inc., Research Division - Research Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Simmons First National Corporation Third Quarter 2019 Earnings Call Webcast. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, David Garner. Please go ahead, sir.

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David W. Garner, Simmons First National Corporation - Executive VP & CAO [2]

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Good morning and thank you for joining our third quarter earnings call. My name is David Garner and I serve as Controller and Chief Accounting Officer at Simmons First National Corporation.

Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer and Chief Operating Officer; Steve Massanelli, Chief Administrative Officer and Investor Relations Officer; Marty Casteel, Chairman and CEO of Simmons Bank, our wholly owned bank subsidiary; and Matt Reddin, Simmons Bank Chief Banking 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.

(Operator Instructions) A transcript of today's call, including our prepared remarks and the Q&A session will be posted on our website, at 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'll 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 description of certain risk factors contained in our most recent annual report on Form 10-K and the forward-looking information section of our earnings press 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 the reconciliations of non-GAAP metrics to GAAP are contained in our current report filed this morning 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.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [3]

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Thank you, David, and welcome to our third quarter earnings conference call. In our press release issued earlier today, we reported net income of $81.8 million for the third quarter of 2019, an increase of $26.6 million or 48.3% compared to same quarter last year. Diluted earnings per share were $0.84 for the quarter. Included in third quarter earnings were $2.1 million in net after-tax non-core items. We had merger-related costs of $1.9 million, early retirement program expenses of $131,000 and branch rightsizing costs of $118,000. Excluding the impact of these items, the company's core earnings were $84 million for the third quarter and core diluted earnings per share were $0.87. Increases of $27.5 million and $0.26, respectively, over the same quarter last year.

I would like to mention that we have been consistent with our inclusion of among other things, securities gains and losses along with charitable contributions and provision expense in our core results, while excluding items such as merger-related costs and branch rightsizing expenses from the core results. We have done so again this quarter. However, this quarter, we experienced several notable events that further impacted our results and that warrant additional discussion.

First, as is public record, Simmons Bank as a result of its merger with Bank SNB was a participant in the Shared National Credit to White Star Petroleum, LLC. White Star became the subject to bankruptcy proceedings earlier this year and on September 30, 2019, the bankruptcy court authorized the sale of White Star assets through the section 363 proceeding. Our portion of the Shared National Credit was $19.1 million. Based on the anticipated net proceeds from the pending bankruptcy sale, our loss recognized in the third quarter was $14.7 million. As a result of the loss, we made a special provision of $15 million that increased the allowance to the appropriate level consistent with our historical ratios.

Second, during the quarter, we recorded the sale of our Visa class B common stock. The gain on the sale of the shares was $42.9 million pretax. It's been our intention to fund our Simmons First Foundation with part of the proceeds from the sale of the Visa stock. We have previously contributed over $6 million to the foundation as an advance on that commitment. This quarter, we contributed another $4 million to the foundation to bring our total contribution to over $10 million since its inception in 2014.

Third, we have previously mentioned our efforts to reduce our CRE portfolio by selling some non-relationship loans. During the quarter, we saw $114 million of loans and recognized a $5.1 million loss, including sales fees Included in the loan balance was $82 million from the Reliance Bank portfolio and classified loans of $32 million, primarily from the acquired portfolios of Bank SNB, Heartland Bank and Southwest Bank.

In summary, the net after-tax effect of these notable items is an increase to net income of $13.8 million for the quarter. I'll speak more on White Star loan later.

Our total assets were $17.8 billion at September 30. Our return on average assets for the third quarter was 1.83%, while core return on average assets was 1.88%. Our efficiency ratio was 43.8%.

Our loan balance at the end of the quarter was $13 billion, a decrease of $124.1 million from last quarter.

We were successful in reducing our real estate portfolio by $165 million. Our loan pipeline, which we define as loans approved and ready to close was $639 million at the end of the quarter compared to $419 million at the end of the second quarter of 2019. The projected weighted average rate of the loans on the pipeline is 5.43%.

On a consolidated basis, our concentration of construction and development loans was 108% and our concentration of CRE loans was 321% at the end of the quarter.

Total deposits at September 30 were $13.5 billion, which was flat compared to last quarter and an increase of $1.1 billion from the year end 2018. Our non-time deposits were up $200 million, while our time deposits were down the same amount.

Our net interest income for the quarter was $150.2 million. Included in interest income was the yield accretion recognized on loans acquired of $9.3 million, which is down from $10.2 million last quarter. Of this amount, $4.4 million or 48% was accretable credit market related and $4.9 million or 52% was interest mark related.

Our net interest margin for the quarter was 3.81% compared to 3.92% at June 30. The company's core net interest margin, which excludes all accretion, was 3.58% from the third quarter of 2019 compared to 3.66% for the previous quarter.

The 23 basis point difference between GAAP and core net interest margin included 11 basis points of credit mark accretion and 12 basis points of interest mark accretion. The rate decreased in the variable rate loan portfolio preceded our ability to manage deposit repricing, which contributed to the decrease in our net interest margin.

Our noninterest income for the quarter was $83.8 million, an increase of approximately $50 million compared to the same period last year. This increase was mainly the result of the gain on the sale of Visa stock previously discussed.

In addition, we recorded the gain on the sale of securities of $7.3 million related to the sale of approximately $89 million of bonds, this part of a plan to reduce wholesale funding and rebalance the portfolio. We also had an increase in mortgage lending income of $3 million compared to the same period in the prior year.

Noninterest expense for the third quarter was $106.9 million, an increase of $6.6 million over the same quarter last year.

Core noninterest expense for the quarter was $104 million, which represented an increase of $5.5 million when compared to the third quarter of 2018. $4 million of this increase was related to the Simmons First Foundation donation, mentioned earlier. We also had incremental increases in several operating areas related to our recent acquisition of Reliance Bank.

Software and technology costs increased approximately $2.2 million over the same period in the prior year related to our Next Generation Banking technology initiative that we have previously discussed. Our incremental IT expenditures during the third quarter were primarily related to this initiative. I am pleased to report that we're beginning to see real change associated with our NGB investment.

A major milestone was accomplished during the third quarter when we successfully completed the migration of our core banking platform to our vendor-hosted environment. This was the single largest conversion we have ever done. The seamless transition was very successful and has increased the security and the reliability of our systems.

In addition, on October 16, we had an extremely successful launch of our new mobile banking app. Our new app makes us a formidable competitor in mobile banking and customer response has been phenomenal as evidenced by the 4.9 star rating from our users. We will continue to expand customer offerings through our digital channel.

At September 30, the allowance for loan losses for legacy loans were $66 million, with an additional $600,000 allowance for acquired loans. The loan discount mark was $60.4 million, for a total coverage of $127 million.

At the end of the third quarter, our nonperforming assets were $93 million, an increase of $5.4 million from the second quarter. This balance is primarily made up of $72.9 million in nonperforming loans and $20.1 million in other nonperforming assets, which includes $5.9 million in closed bank branches held for sale.

Our annualized year-to-date net charge-offs to total loans were 38 basis points. And the provision for loan loss for the third quarter was $22 million.

The White Star loss is embarrassing and contrary to the credit culture here at Simmons. Because we were only a participant in the credit, we were limited both in our ability to act unilaterally and in our access to timely information. We've learned some valuable lessons from this experience. We have changed the approval authority of any energy loans to a bank wide committee. All loan participations must also be approved by the bank wide committee. And we are evaluating our hold limits on any single loan and on total borrower debt. We will work to exit all purchase syndicated energy credits. Currently, we have $187 million in syndicated energy loans in which Simmons is not the lead bank. We expect to exit at least $120 million of these credits by the second quarter of 2020.

Our energy portfolio currently includes 2 credits totaling $17.3 million, which were on non-accrual. Both loans are acquired loans from the Bank SNB portfolio. We have recently done a deep dive into our energy book. And while things can obviously change, we're confident we have accounted for all classified credits as of September 30, 2019, and have reserved for them accordingly.

In summary, we have balances of $426 million of energy credits or 3.33% of our total loan portfolio. During 2019, we have booked $87 million in new commitments all of which were Simmons Bank controlled. We have booked no additional energy loans since the second quarter. 72% of the energy portfolio is upstream and only 7% is service related. In the future, we will emphasize that energy loans we make should be the customers with deep banking relationships to Simmons. I'd also mentioned that losses like this impact not only the bank itself, but also inappropriately its management. And I expect the White Star loss to have a substantial impact on the compensation payable under the incentive plans for over 80 company executives.

Our capital position remains very strong. As of September 30, common stockholders' equity was $2.5 billion. Our book value per share was $26.36, an increase of 11.4% from last year. While our tangible book value per share was up $15.73, an increase of 16.7% from the same period. The ratio of tangible common equity to tangible assets was 9.1% at September 30. Our total risk-based capital ratio was 13.2%, while our Tier 1 leverage ratio was 9.1%.

In our press release earlier today, we shared our initial projection for the expected increase in the allowance for credit losses that will occur as adoption of the new accounting standard. Based on current work completed to date, we estimate that the ACL will increase by approximately 130% to 170% over the allowance based on June 30, 2019, loan levels. However, when purchase discounts are considered, our ACL will increase by 10% to 30% over June 30, 2019 total created coverage ratio. The estimated increase is driven by changes within the new standard and approaches used in modeling, not due to perceived increase in risk within the portfolio. This projection is simply an estimate as of point in time modeled under fairly stable economic conditions and does not include the impact of our pending merger with The Landrum Company.

We will continue to refine our methodology and assumptions and any adjustment to future reserve levels will be based upon the forecast of economic conditions of that time and a composition of our portfolio among other factors that will be subject to change.

While we expect significant changes related to CECL, we do look forward to a single line item representing the entire allowance for the total loan portfolio. The double accounting will still require some explaining with the current shift from acquired to legacy loan pools and the related provision expense can go away.

We're excited to announce that we're still on target to complete our previously announced acquisition of The Landrum Company on October 31, within expected system conversion during the first quarter of 2020. We're really excited about the expanded market presence in several states as a result of this merger.

Last week, our board approved a new stock buyback program up to $60 million. We look forward to using this mechanism as market conditions warrant as a method to increase shareholder value.

Over the past 5-plus years, we've acquired 10 new banking partners. During that period, we have adopted new associates, products, services, processes and certainly new markets. Over the next few months, we will evaluate our new organization and make adjustments consistent with our longer-term strategy. We will continue to build the Simmons brand throughout the states we serve by investing in those communities. We will examine our lineup of products and services. We will review the make up of our loan and deposit portfolios. We will plan from an optimization of our physical locations. We will increase our efforts behind digital offerings to our current and future customers, and we will work to make sure we achieve the efficiencies we expect from our investment in technology.

Future M&A activity will be strategic and will be prioritized to provide additional scale and market share in our current footprint. Similar to our expectations regarding our newest partnership with Landmark Bank.

This concludes our prepared comments. We will now take questions from our research analysts and institutional investors. I'll ask the operator to please come back on the line and review the instructions and open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Feaster of Raymond James.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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I'd just like to start on the core margin and kind of what your expectations are looking forward and the impact of incremental 25 basis point rate cuts given the market implications of potentially 2 in the fourth quarter?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [3]

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Well, I guess, I'll start that. I think we've said this before that based on our loan portfolio, which is 50% variable pricing, our pricing of loans is just going to accelerate versus the repricing of our deposits and it happened in rising interest rate environment. It's also happening in a lower interest rate environment. And certainly 1 or 2 additional cuts will make that problem even worse. Now -- I'll say this, while we certainly pay attention to our net interest margin, we also try to manage our net interest income, which I think we did very effectively through the other means in the third quarter.

So we will expect to continue to have downward pressure on our net interest margin as long as the Federal Reserve continues to lower rates, especially 25 basis points at a time on consecutive meetings. I suggest not a very good position for the banking industry today. It's certainly not driven by readily available economic data. It is really hard to plan around and our work will be cut out for us just like every other bank.

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [4]

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David, this is Bob. I would also point out that in Q4, Landrum will merge into the company and their margin is lower. So to get a comparable, it will definitely be down few basis points just from the Landrum.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [5]

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Okay. And then switching gears to loan growth. It sounds like demand is there, given where your pipeline is. Could you maybe quantify the payoffs and pay downs in the quarter? And expectations for growth going forward given your commentary about cautious optimism in the market? And then just on the competitive side, I mean we're hearing anecdotes about less equity in deals and more non-recourse and challenging pricing dynamics. Are you seeing this as well and is this causing you to pass on more deals even though demand is good?

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Matthew Steven Reddin, Simmons First National Corporation - Chief Banking Officer for Simmons Bank [6]

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David, it's Matt. I'll take the first stab at that. Our payoffs -- early payoffs was $500 million in the third quarter, but to your point on loan opportunities, loan growth, with our pipeline at $639 million, I will tell you while that's above -- quite a bit above the last quarter. We are seeing what others are seeing in the market on commercial real estate. While we're managing our concentrations prudently, there is a realistic possibility that some of that approved loan ready to close will fall out because of more competitive banks that are out there both on rate and on the structure that we'll price it and structure it the way to our credit standards and if it falls out, it falls out. And I expect -- we expect to see some of that with that return on pipeline. But the demand is there, but we're cautious on our commercial real estate opportunities that come across our desk. But I will tell you in the third quarter, we grew C&I lending $400 million, which was very encouraging and of that C&I reduction was true core C&I customers that we have been pursuing for 12 month on a calling plan and now we're getting the results of that. So that was very encouraging to us in the third quarter.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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Okay. So I mean I guess looking out to next year, do you kind of expected to stay in the low single digit realm or how do you think about loan growth next year?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [8]

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Well, we do expect low single digit loan growth. We'll continue to have to manage our CRE concentration. So while we may originate loans, our correspondent banking unit may help us in selling part of those participations to downstream bank. So I think our pipeline is very strong, we're going to be very disciplined in our underwriting standards. We are starting to see some less desirable structures come into the marketplace today. We're going to do our dead level best, stay away from those. You know it's election year coming up, false economy, again for at least another 12 months. We're just going to try to stay as neutral as we possibly can and knock down either side of the equation.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Okay. And then last one for me. Could you talk about your capital priorities? It sounds like you anticipate being more active in repurchases going forward, but how do you look at buybacks versus M&A? And with the Landrum deal and given that you're kind of already in the capital ranges that you've laid out, do you see opportunities to optimize the capital stack to fund repurchases? Or do you think you could go to the lower end of your targeted ranges?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [10]

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Well, I think in this time of uncertainty, we would prefer to be at the upper end of our range from a capital standpoint. We're sort of in an adjustment period, David, right now, I think I mentioned in the comments that over the last 5 or 6 years, we put a lot of banks together, and we brought a lot of new people, a whole lot of new products, new markets together. Some of that we will build in our long-term strategy. Some of it we'll evaluate, and we may decide we don't like this class as much as we thought we did, and we'll make an adjustment.

The Landrum acquisition, as you know is our largest to date. It's in 3 very distinct markets. So we need some time to be able to integrate excellent associates that we'll pick up from Landmark into the Simmons organization. So I would expect that from an M&A perspective, we're not going to be really aggressive early on in 2020. The valuation in marketplace today makes it much tougher to get a deal done under our disciplined metrics, particularly from a private bank standpoint, who really does understand bank valuation in the aggregate. So we've got plenty on our plate to keep us busy.

From a stock buyback standpoint, you probably saw we sold our Visa shares and quite honestly, we do what most of our investors do and that is we take a look at really good opportunities in the marketplace. You probably know that Visa went from $122 a share in December to today $175 plus the change. That's a pretty good increase from one year, and I don't care what stock it is. And you know that our stock, along with other bank stocks, have been depressed. So from an investment standpoint, we just believe it's better to monetize and off balance sheet investment and take that money and invest it in something that we believe has long-term value.

So that's how we sort of looked at the stock buyback and the timing of the Visa stock. So we're committed to strong capital levels and of course, with CECL coming in and the impact that it's going to have on the capital to begin with, I don't know we're more conscious today of maintaining those levels than we have been in the past.

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Operator [11]

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And our next question comes from Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [12]

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Curious going back to the core NIM, I think in the last quarter maybe the number was about 366 guidance for the rest of the year obviously, we're down at 358 here today with the prospect of more cuts. So are you guys willing to give an actual number there on the guidance for what you think that core NIM will shake out? Is it more of a low 350s kind of number?

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [13]

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Stephen, this is Bob. I would say, right now, given the volatility we're not willing to give a rate out there. What I'd say is we look at the future just like everybody else. A couple of weeks ago, we looked at the rate increase expected for this next meeting, it was down up to 20%. Well, right now it's up to almost 90% and it just changes in just a couple of weeks. So trying to project where that's going to be. We can -- banks in general can manage the NIM when you have moderate increases or decreases in pricing, but when it moves on a regular basis like it has and is projected, it's hard to take the volatility out of those numbers. So as George said earlier, our goal is to manage the net interest income at this point and the income on the -- the net income on the income statement, not necessarily to the NIM rate.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [14]

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Okay, fair enough. And then I think you said on that pipeline the average projected loan yield was like $543 million on that $600 million plus versus I think if I'm calculating it correctly, your current core loan yield is around $519 million. So can you talk about how you're getting a higher average yield on new production today or kind of what the composition of that that's driving the higher yields?

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Matthew Steven Reddin, Simmons First National Corporation - Chief Banking Officer for Simmons Bank [15]

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Stephen, great question. We're -- we remained disciplined to our pricing standards while still, I mean, to Bob's comment on to the marking what rate environment looks like, but we're holding to our bankers accountable to our pricing standards and so far, now we're sitting at now what you don't see in our comments is month over month we track that number. And it is coming down, it's coming down 6 to 8 basis points month over month. So we're still above -- we're pleased with where we're at, but it is coming down with the overall client yields in the market.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [16]

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Okay. And is there any mix shift change from what you guys have done in the past? Or is it still about the same from a variable rate fixed rate perspective?

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [17]

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We have -- we are trying to be very, to put George's point, we're trying to be very neutral, we're trying to be balanced with fixed and variable in a volatile environment right now with interest rates, when as Bob said, 29% to 89%. So we're trying to say 50-50 on fixed and variable.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [18]

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Okay. Great. And then one last one from me. On the CRE concentration, you guys talked about continuing to manage that down maybe with your -- with future sales. Is there -- I mean does that need to go below 300%? Or is there a target where you are working towards and if so, why specifically?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [19]

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Well, obviously, for us, the 300% level is regulatory guidelines. So we would prefer to be within regulatory guidelines. Now I'll remind you that when we roll Landmark Bank into our loan portfolio because of their significantly lower CRE concentration, and that's going to help it quite a bit. We are also continuing to pursue selling or letting non-relationship CRE loans run off the books. So we think that's going to be a natural process over the next 6 to 8 months. You know what we really need to focus on here is not necessarily our CRE overall concentration, but our construction concentration. As we get into less certain times, we want to make sure that construction projects that we are planning are good, solid, regardless of the economic conditions. And I would tell you that we're much more focused on making sure that construction lending is appropriate as opposed to our more adverse CRE portfolio.

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Operator [20]

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And our next question comes from Matt Olney of Stephens Inc.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [21]

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George, I think you mentioned the amount of the energy loans outstanding at this point, can you just go ahead and repeat what that number is? And is there any kind of specific allowance on the energy book? Or since some of those loans were acquired do you have the remaining amount of the discount on those loans? I'm just trying to appreciate what the losses could look like as you exit the $120 million of loans that you're not the agent.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [22]

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So Matt, to go over this one more time, we have $187 million in syndicated energy loans in which we are not the lead bank. So situation hopefully not like White Star, but we don't control our own destiny. That's not typical of Simmons and it's something we're uncomfortable with. So we have already given notice to the lead banks that we want out of those credits. So as the next redetermination date comes up or as they're able to find someone to take our place, we expect to get out. We don't expect any loss to get out of those loans.

We have $17.3 million of nonaccrual energy credits that only is 2 credits, both of those were acquired from the Bank SNB portfolio. We think that we have appropriately reserved for any potential loss in those loans. So we don't expect anymore.

The rest of the energy portfolio is performing fine. I will mention again that this year every energy loan that we put on the books is controlled by Simmons Bank and it has a pretty deep deposit relationship with the bank. We put no new energy loans on the books since the second quarter. So in the third quarter no new energy loans.

So we are really taking a good hard look at our energy portfolio, how it fits into the rest of our lending appetite. We've stepped out a little too far with regards to syndicating credits where we have no other banking relationship and really don't have control of that credit. We have been bitten pretty hard by the White Star loss, and we certainly don't want to go through that again. So we're fairly comfortable with where we are today, Matt. We've got total energy credits of $426 million, which is only 3% of our total portfolio. That number is going to work down as we exit some of these syndicated credits.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [23]

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Okay. Thanks for that color, George. And I guess of those 2 specific loans that are nonaccrual, the $17 million, what's the reserve allocated to those 2 credits?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [24]

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Matt, we're going to have to get back with you on that because we don't have any information right off hand.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [25]

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Okay, that's fine. And then going back to the discussion around the core margin, I guess the core margin was down a call it 9 bps in the third quarter and it looks like the Fed wants to cut again next week. So could you just kind of talk around that 9 bps compression in the third quarter as we think about the fourth quarter? Is that a good place to start assuming the Fed does cut next week and as before we assume any impact from the Landrum deal that's going to close here in a few days.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [26]

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You know, Matt, I wish my crystal ball gave me that answer. Just backing up a little bit, this time last year, we were in the mode of raising some traditionally low deposit pricing. To be fair to our customers because we had lagged behind rate increases, we took a bit of it higher loan rates, but we didn't the pass along anything to our customers. So we've got in the mode of moving up all our deposit pricing and then all of a sudden the Fed turned and all of a sudden we're going back down. So we're in that period of time of trying and make that shift ourselves. Our loans reprice immediately. I mean they're on some index that changes and here we go. We just had to make sure that we're fair to our deposit customers as we adjust deposit pricing.

If the Fed cuts down 45 basis points our loans are going to go down. We're going to continue to move deposit pricing down, but it at a fair rate. If they do it again, it just exacerbates the problems. So they need to make up their mind which way the economy is going, give us some indication so we can manage that in the field. And I'll tell you the real end results of that is our customers are scratching their head, going, you know we don't really see these problems that are justifying rate cuts in the economy today, but they must be out there. Otherwise we wouldn't have rate cuts. So that's the cautious optimism that I was talking about. Our customers don't necessarily see it, but they believe it must exist because of the actions related to interest rates. So it's a very frustrating situation not only for us, but for the entire banking industry.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [27]

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Sure. Yes. And you're certainly not alone seeing the margin pressures. So definitely appreciate that. George, something else that you mentioned that was interesting, you said that Simmons was currently in I think you call it an adjustment period. And I don't think you've characterized it like that in recent every years, but you have acquired several banks. So I just want to understand this adjustment period, what's on the table? Would you consider additional exits of asset classes or geographies or divestitures? So just want to fully appreciate kind of what this adjustment period means for Simmons First?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [28]

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Well, I think, everything's on the table, and I'll start by saying that because of the Landmark acquisition, we have restructured our geographic management. So we're able now to look at state-by-state geographies, that's one real benefit of adding a bank like Landmark to our footprint. It gives us scale and able to manage in certain geographies better than we could before. Our budget process is changing completely. We used to budget by business unit, now we're budgeting revenue by geography. So every business unit is going to be required to have revenue goals in every geography. And that's consistent with what we've said all along and that is that in our community banking structure we want all of our products and services available to all of our customers in every geography where we do business. That is not an indication of the past, a lot of it has been because we don't have or didn't have at the time scale to support some of those revenue generating business units. We do today.

So those are the kind of adjustments that we're really taking a look at today. We have to make sure that we integrate the Landmark locations because Missouri is going to be a stand-alone unit, part of Landmark's locations are in Missouri. Oklahoma and Kansas is going to be a stand-alone unit, part of Landmark's locations are in Oklahoma. Texas is going to be a stand-alone unit, part of the Landmark locations are in Texas. So we've got an adjustment period for all those geographies to make sure that we're all on the same page and understand our long-term goals. So while we always take a look at branch rightsizing and that includes exiting markets, what's more important for us is to make sure that we focus on revenue generating opportunities in our new geographic structure.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [29]

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Okay. Great. And I guess last question for me, I appreciate it on the Visa shares. I appreciate the commentary about reallocating capital elsewhere, so is it safe to assume you don't have any additional Visa B shares remaining at this point?

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [30]

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That is correct.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [31]

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That's correct.

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Operator [32]

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And our next question comes from Brady Gailey of KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [33]

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So looking at the expense base. I know we talked about having expenses around that $100 million mark per quarter, it was a little higher than that even if you had excluded the merger charges a little higher than that in the third quarter. That maybe just your outlook absent of the Landmark deal, that maybe just your outlook for how expenses will trend at Simmons going forward?

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [34]

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Yes. First, Brady, this is Bob. I'll tell you. We're -- the core earnings when you back out the merger related like you said was about $104 million, $4 million of that was specifically related to the foundation. So that would put us right at the $100 million range and that's about the guidance we've been given as close to that $100 million. We were below in the second quarter and a lot of things kind of hit just right. Third quarter was more on a normalized basis. You take that $100 million, and as we've been saying there's probably $2 million in NGB expense that will be going on the books each quarter. So there's that baseline goes up from $100 million to $102 million, $104 million per quarter.

And then just giving you a little color on the Landrum, if you just take their numbers today, they're about $23 million, $22.5 million, [$23] million a quarter folding in on noninterest expense. They will operate on a -- as a stand-alone bank through Presidents' Day is what our expectation is for conversion right now. So we won't have much in cost saves until after that point. Then there will be a measured period over a couple of months. So you can take that $23 million and we announced before 35% cost saves if that's our number, that would put us on a normalized basis with saves by the Q3 to Q4 at additional of about $15 million. So you'd be adding between $23 million per quarter going down to about $15 million by the end of the year.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [35]

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All right, that's helpful. And then the FDIC assessment credit, it looks like that was -- that positively impacted expenses by about $2.5 million. Is there any of that left or was that fully realized in the third quarter?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [36]

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We may have another $1.5 million or so in the fourth quarter. It's all dependent on their final numbers we get from the assessment, but obviously, for all the banks, it's a nice little positive after all these quarters.

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Operator [37]

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(Operator Instructions) And our next question comes from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [38]

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I kind of joined late, so I thought as if you went through this, but in terms of credit, looking at NPAs, excluding TDRs, NPAs were relatively flat this quarter even with the resolution of the White Star credit. So if you talked about kind of inflows to NPA status during the quarter and then also comment on migration of special mention in classified credits during the quarter?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [39]

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Sure. During the quarter -- and I'll tell you that the one thing that I'm looking forward to with regard to CECL is that all our credit coverage is going to be in one place. Currently we have loan mark against the acquired portfolio and we have the allowance against the legacy portfolio. During the quarter, we had a loan that moved from the acquired bucket to the legacy bucket. So then we've restructured, it's all non-accrual. We don't expect any loss, it has about 3 parts to the total loan balance. And that total loan balance is a little under $20 million. So that one relationship is primarily responsible for the flat up a little bit of nonperforming loans, even with the White Star charge-off. So we continue to manage from acquired into legacy and that was primarily the result of the numbers for this quarter, one model we moved over from acquired to legacy.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

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And what type of credit is that one?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [41]

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It's the CRE loan out of the Denver market.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

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I'm sorry out of which market?

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George A. Makris, Simmons First National Corporation - Chairman & CEO [43]

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Denver.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [44]

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Denver. And then just in terms of kind of loan, loan ratings migration otherwise?

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Robert A. Fehlman, Simmons First National Corporation - COO, CFO & Treasurer [45]

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We saw no migrations one way or the other as far as we were -- outside of what George's comment, we were neutral to that point. We saw no trend. We have not seen any trends on the risk rating matrix that are moving towards a negative trend or on the converse. I mean we're proactively looking at our portfolio on a quarterly basis and there are downgrades and upgrades, but no trend that shows a migration one way.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [46]

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You know Gary, of course, the history, this may goes back a long time, I'm not sure that we have we ever had a loss as significant as what we've experienced with White Star and when that happens, you don't hit the panic button but everybody starts taking a look at what's next. And I'll say this I'm pretty confident that our credit team took a good hard look at our portfolio over the last quarter to identify any other surprises that might be out there now. Knock on the wood and as we've said before things can change, but we're fairly comfortable with where we are today.

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Operator [47]

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And this does conclude our question-and-answer session. I would now like to turn the call back over to George Makris for any closing remarks.

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George A. Makris, Simmons First National Corporation - Chairman & CEO [48]

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Well, thank you very much. Bob and I kidded each other that this quarter is going to have more noise than anything ever before, and we had no acquisition that we announced during that period of time. So we appreciate your patience with us this morning. We are awfully pleased with our results in the third quarter. We're not looking forward to additional rate declines, but it looks like they're coming, and we'll just make adjustments there. So if no other questions, have a great day and we appreciate your attendance this morning.

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Operator [49]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.