Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation Third Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to you Mr. Burt Hicks. Please go ahead..

Good afternoon, my name is Burt Hicks and I serve as Investor Relations Officer of Simmons First National Corporation. We welcome you to our third quarter earnings teleconference and webcast.

Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, President and CEO of Simmons Bank, our wholly-owned bank subsidiary; Barry Ledbetter, Chief Banking Officer and David Garner, 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 yesterday and to discuss our company’s outlook for the future. We will begin our discussion with prepared comments, followed by a question-and-answer 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 are in a listen-only mode.

A transcript of today’s call including our prepared remarks and the Q&A session will be posted on our new website simmonsbank.com under the Investor Relations tab.

During today's call and in other disclosures and presentations made by the company, we may make certain forward-looking statements about our plans, goals, expectations, estimates, and outlook.

I remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed during this call may constitute forward-looking statements and may involve certain known and unknown risk, uncertainties, and other factors which may cause actual results to be materially different than our current expectations, performance, or estimates.

For a list of certain risk associated with our business, please refer to the forward-looking information section of our earnings press release and the description of certain risk factors contained in our most recent annual report on Form 10-K, all as filed with the SEC.

Forward-looking statements made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.

The company undertakes no obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Lastly, in this presentation we will discuss certain GAAP and non-GAAP financial metrics.

Please note that the reconciliation of those metrics is contained in our current reports filed with the U.S. Securities and Exchange Commission yesterday on Form 8-K. Any references to non-GAAP core financial measures are intended to provide meaningful insight.

These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. With that said, I'll now turn the call over to George Makris..

Thanks Burt, and welcome to our third quarter earnings conference call. First I would like to welcome our newest associates from Citizen's National Bank to the Simmons team. We closed that transaction on September 9th and will convert systems over this weekend. We look forward to continued growth in the east Tennessee markets.

In our press release issued yesterday we reported net income of $23.4 million for the third quarter of 2016, an increase of $1.8 million or 8.5% compared with same quarter last year. Diluted earnings per share were $0.76, an increase of $0.04 or 5.6%.

Included in the third quarter earnings were $953,000 in net after tax merger related and branch right sizing costs. Excluding the impact of these items the company's core earnings were $24.4 million for the third quarter of 2016. Diluted core earnings per share were $0.79. We continued to be very pleased with our operating performance.

Over the quarter our efficiency ratio was 53.8%, return on assets 1.21%, return on equity 8.4% and return on tangible common equity 13.3%. Our loan balance at the end of the third quarter was $5.4 billion, the addition of the Citizen's portfolio added $341 million to the total.

The legacy portfolio grew by $218 million of which approximately $68 migrated from acquired to legacy and $104 million of acquired loans paid off during the quarter.

We're optimistic about future loan growth as our pipeline which we define as loans approved and ready to close has increased from a $156 million as reported at the end of the second quarter to $374 million at the end of the third quarter.

42% of the pipeline loans come from our Arkansas region, 45% from our Missouri Kansas region and 13% from our Tennessee region. Our bank subsidiaries combined capital concentrations on current portfolio balances for construction and development loans and CRE loans are 47% and 201% respectively.

The concentration is based on committed balances that is the total amount of every approved loan for C&D its 84% and CRE its 242%. Company's net interest income for the third quarter of 2016 was $68.1 million, accretion income from acquired loans during the quarter was $4.9 million a decrease of $10 million from the same quarter last year.

Based on our cash flow projections we expect total accretion from 2016 to be $22 million to $23 million compared to $46.1 million in 2015. Our net interest margin for the quarter was 4.09% which was down from 4.82% in the same period last year, the decline in net interest margin was greatly impacted by the decrease in accretion income.

The company's core net interest margin which excludes the accretion was 3.81% for the third quarter compared to 3.93% in the same quarter of 2015. Because of the competitive rate environment and our loan mix we expect our margin to remain in the 3.80 to 3.85 range.

Our non-interest income for the quarter was $36.9 million, we had nice increases in mortgage lending, trust income, debit and credit card income and a $2 million recovery on an acquired charged off loan. Non-interest expense for the quarter was $62.4 million our core non-interest expense for the quarter was $60.7 million.

We continued to be very pleased with our expense control initiatives. It's also important to note that both the revenue and expense numbers include the Citizens Bank operation for 21 days. At September 30, 2016 the allowance for loan losses to legacy loans is $34.1 million with an additional $1 million allowance for acquired loans.

The company's allowance for loan losses on legacy loans was 0.86% of total loans. The loan discount credit mark was $42.9 million for a total of $78 million of coverage. This equates to a total coverage ratio of 1.43% of gross loans.

During the third quarter our annualized net charge offs total loans were 0.82% including credit card charge offs and one single charge off of $5.4 million. The large charge off was related to the water bottling plant loan acquired from Metropolitan National Bank that we have discussed on two previous occasions.

In late 2014 we made a new loan to a startup group for the purchase of assets in connection with the work out of this troubled loan. At the time accounting rules required that we recognize income from the elimination of the credit mark on the problem loan. The amount of income recognized was approximately $4.2 million.

At the same time we set up a specific reserve against the new loan of $2 million based on our valuation of that loan. Earlier this year the new operating company lost its largest customer contract which represented a majority of its revenue.

At that time we classified the loan is non-accrual and added it to the specific reserve because of the reduced cash flow from operations would not service the deb. Attempts to sell the business as a going concern have been unsuccessful. The plants have closed and are in receivership.

We have charged the loan down to the appraised liquidation value of the collateral. We added the charged off amount back to our allowance for loan losses which explains the spike in our provision for the quarter. I’d like to comment on the effect of the remaining FDIC and Metropolitan problem assets on Simmons Bank.

The total amount of loans related to the forward FDIC purchases and Metropolitan represent only 6% of the bank’s loan portfolio. However approximately 31% of its total classified loans and 32% of its total non-performing loans are related to that portion coverage total loan portfolio.

In addition, we have reduced the banks OREO balance by over $58 million or 68% since its high in 2013. Of the remaining OREO balance over 70% is related to the FDIC in Metropolitan acquisitions. During the quarter consolidated non-performing loans to total loans decreased to 1.17% to 0.95%.

Our non-performing assets, total assets decreased from 0.99% to 0.83%. Our asset quality continues to be very good and we continue to make good progress managing the problem assets remaining from the FDIC and Metropolitan portfolio. Our capital position continues to remain very solid.

At quarter end common stockholders’ equity was $1.1 billion and our book value per share was $36.69, an increase of 8.3% in the same period last year. On May 18 we announced acquisition of Citizen National Bank of Athens, Tennessee. We received regulatory approval in July and as mentioned earlier we closed the transaction on September 9th.

We’re very proud of our ability to close transaction in such an expeditious manner. Our team along with the Citizens management team worked very efficiently in their efforts to complete the margin. We continue to have productive discussions with potential merger partners both in our current footprint and in new markets.

We feel we’re well prepared to grow past $10 billion in assets. We have strength in our audit and compliance groups that fully integrated all previous acquisitions and have established best practices from all emerge banks as our basis for growth. We’ve also began our preparation for DFAS.

Our collective team has achieved excellent results in a very short time and we’re very proud of that effort and the results. This concludes our prepared comments, we will now open the phone line for questions from our research analyst and institutional investors.

At this time, I’ll ask operator to comeback on the line and once again explain how to queue in for questions..

Thank you. [Operator Instructions]. And our first question comes from David Feaster of Raymond James. Your line is open..

Could you talk a little bit about kind of -- I guess just pro forma of for the CNB deal.

Do you have any expectations for -- I know you’ve only got 21 days in this quarter of contribution, kind of what would be a good baseline run rate of fee income and expenses pro forma for the deal?.

This is Bob. We’ll have in the fourth quarter, conversion is happening actually this weekend. So it will take us the balance of the fourth quarter to get through our cost saves and figure out where we will be. We’re projecting on a run rate of close to $2.8 million to $3 million a quarter on non-interest expense.

The income side on the non-interest income side would probably be somewhere in the $1 million to $1.2 million per quarter..

Can you talk a little bit too about the core NIM? I get the competitive environment and I know CNB has a lower NIM than you all do, but could you maybe talk about what's pressuring that.

Typically, the third quarter is seasonally stronger with the agro lending business, could you maybe just talk a little bit about what's going on and is that 3.80 to 3.85 good for 2017 too?.

Well we think we will start 2017 in that range. I'll tell you most of you today is dependent on our mix and while we do have higher yields and our agri portfolio and our credit card portfolio. David is our total portfolio grows those amounts come less significantly.

So we’ve got a $150 million, $160 million of agro loans about $175 million, $180 million of credit card loans, two of our highest yielding portfolios, but on a portfolio balance of $5.4 billion they don’t move the needle very much.

So most of the new loans we are seeing at the market today are very competitively priced usually in the 3.75% to 4% range for the A quality loans, which is what we chase here at Simmons Bank. So until we see movement in rates and the whole market moves up we think we’ll be fighting those competitive rates for the growth in our portfolio..

And David this is Bob. I would remind you in the first quarter we’ll be down a few -- maybe 5 or 10 basis points because of seasonality. That will be our lowest point when our credit card pay down some, our Ag loans pay down.

So just do expect in the to the first quarter to see a little bit of a drop there, but as George said we would expect on a go forward basis that 3.80 to 3.85..

Let me mention one other thing that is a positive with regard to that. We have a lot of cash on our balance sheets today. We will invest most of that in higher earnings investment, vehicles. So we’ll pick up a little bit margins as we improve our cash to investment ratio..

Okay and does that include any rate hikes? Your expectations for the 3.80 to 3.85 or is that?.

We quit worrying about that loan a long time ago. We have been waiting for rates to go up since 2010..

Okay, good. And one more macro question.

With all this Wells Fargo stuff is going on, what is your expectations on your -- did you expect any fallout from this? Or have you done any investigation into your own lines of business and done any prep for any potential regulatory scrutiny?.

We have. All the incentive plans, all have the appropriate level of risk management associated with it. We believe all of ours do.

We are prepared for more questions from the regulators going forward, not only on our incentive plans, but all our compensation plans to make sure that they feel we have the appropriate risk management in place to avoid those kinds of situations..

Okay. One last quick one for me.

What do you expect the pace for your acquired book to run off going forward?.

Well as we projected for this year, we’ll probably the another 3.5 million to 4 million for the balance of the year that will put us in, I think it’s about 22 million or so for the year.

Next year, we’re projected in the 13 million to 14 million -- I’m sorry, I’ve talk about the accretable yield, but about 13 million to 14 million next year in the accretable yield. On the acquired book, it’s about $100 million a quarter..

Okay. Great. Thank you..

Thank you. And our next question comes from Peter Ruiz with Sandler O'Neill. Your line is now open..

So maybe if you guys could talk about the moving parts and loan growth. I know that was great color on the pipeline and what was -- what came from migration.

But can you talk about maybe what’s caused the slowdown here in the last couple of quarters is it more pay downs or is it any other macro events going on?.

We’ve added a lot of new loans to our portfolio, but the play downs are what’s really driving that lower than expected net loan growth. For instance this month or this quarter we had over a $100 million of play downs during the quarter. We expect that will slowdown, but we have a lot of lines on the books the churn really quickly.

So we will always be fighting that pay down number, because it’s just part of our portfolio..

Okay, that’s great. And also you gave a little bit of color on that other fee income line item which was good.

But can you also talk -- is sort of something that level maybe around the 2 million? Is that sort of safe to assume, I know it could be lumpy, but could we assume something at least some sort of recoveries in every quarter?.

Yes. We do have recoveries every quarter. That $2 million was on a single loan, so we thought it was significant enough that we needed to mention that is an extraordinary item. We have about $1 million each quarter of recoveries. We expect that to continue, let me mention a couple of other things about our non-interest income.

We’ve had a really good year from a mortgage lending standpoint. Of course a lot of that is dependent on rates, if we do see rate hikes we can expect to refinance business to slow down a little bit. Currently it’s about 40% of our mortgage mix. But if rates stay where they are, we think we’re well position to continue the mortgage lending revenue.

The rest of our pieces continue to just eat better as we get them rolled out across our entire footprint. So we’ve got a new manager of our credit card portfolio with some growth initiatives in place, we’re pretty optimistic about that. We’ve got really good retail investment advisors. So that point of our business is picking up.

Our trust business is doing really well especially after the additional of the trust company at Ozarks last year. It's in one of our largest markets up in Springfield, so it's doing really well. And as we continued to roll those out, we'll look for continued growth in that area..

Thank you, [Operator Instructions] and our next question comes from the line of Matt Olney of Stephens. Your line is now open..

Want to go back to the loan pipeline that George mentioned a few minutes ago. Sounds like there are some improvements there.

Anything you can point to as far as the pipeline number now versus previously?.

Well, a couple of things that I'll mention and Barry may want to comment. One is Matt, I believe we're learning how to use our new size and scale, in some of our markets.

We're going to take a look at some loans that we probably would not have had a chance to look at previously, just because we were too small to accommodate the borrowers, and that somewhat explains the pressure on the net interest margin, these are really good borrowers, and they demand really good pricing in the market.

But we have also had some pretty key hires that we've talked about before. We hired a new community president in Kansas City market. He's done a great job. Our St. Louis market's up $100 million this year, a loan in their loan portfolio balance.

Northwest Arkansas, Port Smith are doing really-really well and as usual our central Arkansas team continues to do really well in the Little Rock, MSA area. So I would say it's across the board.

You know new opportunities that we're getting because of our size, but also some talent that we've been able to attract our company that's really paying dividends.

Barry I don't know if you have something else there?.

Think you covered it well. One thing I may add that even in the past with our pipeline report I think is at 156 in the last quarter, and several of our larger loans refunding or lines of credit that we’ll fund over 12 months to 24 month period of time.

So I think you'll continue to see increase in our portfolio from the previous loans we've made, but I think George just covered the markets that we're doing well in and the reasons for that..

Okay, that's helpful, appreciate that. And then on the fee income side, George you answered a few of my questions. But I also want to address, the service charges were up strong in the quarter. I want to understand how sustainable service charges are here and then investment banking was also up year over year quite a bit.

Trying to get a better idea of what to expect on those two lines in the next few quarters..

Well the service charge -- Matt this is Marty and on our service charges, some of that is seasonal, some of it has to do with some NSL fees that this time of the year we see more of those. More customers adding new balances to our mix.

So it's really not any one thing, but we do think it's sustainable, some of it’s a little seasonal but we expect to see a continuation in those service fees.

Your other question had to do with mortgages, investors?.

I believe you guys called it investment banking, income was up strong year-over-year..

Our institutional investments were up a little this quarter and our retail investments as picked up some so we’re seeing I think some real lift in our scale with our retail investments and our institutional investments had a decent quarter. We saw more revenue this quarter than we had out of that.

But you also may know that we have decided to get out of the institutional business, we’re doing that because of the longer term profitability of that business has not been there for us. We are deleveraging the risk on our books.

It’s been a business that’s really moved away from us and it’s not core to our central banking areas and we’re just leaving that business. The net result will be negligible, you will not see much in the way going to the bottom-line, one way or the other..

Matt it will probably be about 300,000 quarter on the revenue side. But likewise about 300,000..

It’s been break even per quarter. I’m sorry that’s per month..

Okay. And on the loan loss provision expense, obviously there has been some volatility this year on credit. That’s a difficult line for us to forecast.

What kind of guidance can you give us as far as the best way to look at loan loss provision quarter-to-quarter?.

Matt I’ll tell you the way that we will budget, that will be 3 million to 4 million a quarter. We have a process to determine and set an appropriate range in our loan loss provision, we are very disciplined in that regard. So barring significant events like the single charge-off we had this month, that will be good number of going forward.

Every year we sit down and we challenge ourselves on that loan loss provision methodology. It’s the time of the year where we sit down and do that again is when we get ready to budget for 2017. You’ll notice that the 0.86% on legacy loans is fairly thin, but I think it’s very reflective of our credit quality and our portfolio.

So once again 3 million to 4 million is what we expect the budget each quarter next year. If we have significant charge-offs to get us below the appropriate range for allowance, we’ll add back to the allowance. But we hope that those events are behind us..

Okay. That’s very helpful George. Thank you. And in last question for me. In the past you guys have targeted the core efficiency ratio being below 55% and I think we achieved that this quarter.

I’m trying to get a better idea of how sustainable you think it is here below 55% on the core efficiency ratio?.

Well, I’m not totally optimistic that it’s going to be below 55% in 2017. I believe, it can be 55% and we may hit quarters a little above or little below. We have quite a bit of expense already in those numbers in preparation for the $10 billion mark.

We mentioned that we’ve already started the DFAST preparation and we’ve already done the GAAP analysis, we will be spending a little money on IT and other systems get ready for that. We have beefed up our audit in our compliance group in preparation for moving fast $10 billion.

We don’t want any surprises after we get there so we are expanding on the front ends. We’re pretty pleased with where we are today. We closed 10 branches recently, so we’ve got some benefit there. Our pep count is down from 2,000 at the beginning of the year to just over 1,850 today. So that’s been a 7% reduction in our headcount which is good.

We continue to be very disciplined in our staffing models. I think I’ve mentioned before that we’ve had third parties come in and help us to understand some metrics to use in our staffing models and we’ve done a really good job of meeting those. But we are a retail bank and a community bank.

And there are some expenses that we will always have in our system related to product deliver. So we think it based on our current mix of products, our current mix of revenue, that a 55% efficiency ratio today is still a good target..

Okay great that’s a great color and good luck this weekend on the conversion..

Thanks very much. If we turn on the machines and we are in business on Monday morning, that’s a good conversion weekend, so that’s our goal..

Good luck, thanks..

Thank you. And our next question comes from Peyton Green of Piper Jaffray. Your line is now open..

Yes, thank you for taking my questions.

George, if we can step back and take a little broader view of what the outlook would be over the next 12 to 24 months, what would you be more optimistic about today relative to where you were earlier this year? And then what kind of clouds do see on the horizon that might not have been there six to nine months ago?.

Well, first of all of that I think we are starting to get some pretty good traction with regard to loan growth Peyton. You know we’ve said all along that our goal is to get our loan deposit positive ratio up to the 90% range. It’s a little over 80% today.

If we keep feeding the pipeline like we did over the last quarter, we’ll get a lot closer to 90% over the next year. Even though the yields on those loans are pretty low, they are better than any other alternative we have today. So we are optimistic about that.

We are also very optimistic about some of the new initiatives we have in our non-interest income lines of business, particularly credit card. We have new leader in that group who has 40 years of payments experience.

We’ve been through some pretty significant studies on ways to enhance that program and I think we’ll see significant progress in 2017 in our credit card portfolio. I'll tell you that the regulatory scrutiny has not let up and as we get bigger we will expect more of that.

And that’s one of the reasons that we have beefed up audit and compliance because for Simmons Bank safety and soundness has always been the corner stone. But there is as you know a lot of emphasis today on consumer compliance and we are in tune with that.

So, we would expect that our internal language will shift a little bit just from growth to growth and compliance. And our business unit managers have done a very good job of establishing their risk metrics within their units.

But that's a new wrinkle in our operation, it's taken a much higher level of interest today than it ever has been and I really don't see that decreasing. As far as headwinds go, you know our ability to attract the talent that we need in markets, our ability to grow in some of the key markets, maybe a little slower than we would like.

We're not going to be rushed and make a bad decision, we're looking for the right people and I think our track record has proven that our patience pays off. The team we have in St. Louis and the team we now have in Northwest Arkansas, and in Kansas City are just exceptional. And for the long haul that’s in the best interest of the bank.

So we will continue to look for excellent talent in our markets and quite honestly we've had pretty good success in attracting what we consider to be the best of the best in those markets, we'll continue that track.

I don't know if you have any specific questions about any other headwinds that the industry may face, I’d be glad to address that if you do..

Okay. And then as a follow-up to the loan-to-deposit question, getting from 80% to 90%.

Is that the time frame that you would expect to utilize the excess liquidity on the balance sheet? Or is that a longer-term prospect?.

We think we can get there in 12 months to 24 months. You know that would certainly be our goal. Now as you can probably tell our cost of funds has come down, so we're not being really aggressive out in the markets today as far as trying to gather half priced deposits.

So we've got plenty of liquidity to work with on our balance sheet today, to grow those loans to a 90% loan to deposit ratio..

Okay, alright, great, thank you for taking my questions..

Sure, thank you..

Thank you, and that concludes our question and answer session for today. I'd like to turn the conference back over to Mr. George Makris for closing remarks..

Well thank you very much, and thanks to all of you for joining us on our conference call today. We appreciate your support and look forward to visiting at the end of the next quarter, thanks and have a great day..

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone..