Simmons First's (SFNC) CEO George Makris on Q1 2017 Results - Earnings Call Transcript

| About: Simmons First (SFNC)

Simmons First National Corporation (NASDAQ:SFNC)

Q1 2017 Earnings Conference Call

April 20, 2017, 12:00 PM ET

Executives

David Garner - Chief Accounting Officer

George Makris - Chairman and CEO

Bob Fehlman - Chief Financial Officer

Marty Casteel - President and CEO, Simmons Bank

Barry Ledbetter - Chief Banking Officer

Analysts

David Feaster - Raymond James

Brady Gailey - KBW

Stephen Scouten - Sandler O'Neill

Matt Olney - Stephens

Peyton Green - Piper Jaffray

Operator

Good day, ladies and gentlemen. And welcome to the Simmons First National Corporation First 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 Mr. David Garner. Please go ahead.

David Garner

Good morning. My name is David Garner, and I serve as Chief Accounting Officer for Simmons First National Corporation. We welcome you to our first quarter earnings and teleconference 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; and Barry Ledbetter, 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 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 risks, 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 report 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.

George Makris

Thanks David. And welcome to our first quarter earnings conference call. In our press release issued yesterday we reported net income of $22 million for the first quarter of 2017, a decrease of $1.4 million or 5.8% compared to the same quarter last year. Diluted earnings per share were $0.70, a decrease of $0.07 or 9.1%. Included in the first quarter earnings were $412,000 in net after-tax merger-related and branch right-sizing costs. Excluding the impact of these items, the company’s core earnings were $22.5 million for the first quarter of 2017, a decrease of $653,000 compared to the same period last year. Diluted core earnings per share were $0.71. For the quarter our efficiency ratio was 60.9%, return on assets 1.07%, return on equity 7.7% and return on tangible common equity 12.2%.

During the quarter the following items impacted pre-tax earnings compared to the same quarter last year, which I will discuss later. First, accretion income decreased by $3.7 million, compliance and other costs increased $2.1 million, the one-time equity grant expense of $840,000, an allowance on the bulk sale of non-performing loans of $676,000.

Our loan balance at the end of the quarter was $5.8 billion. Total loans increased by $144 million during the quarter, which included seasonal reduction in our credit card portfolio of $12.6 million and agricultural production loans of $9.3 million. The legacy portfolio grew by $306 million, of which approximately $50 million migrated from acquired legacy and $112 million acquired loans paid off during the quarter.

We continued to be encouraged by the growth trends in our loan portfolio. Our loan pipeline which we define is loan approved and ready to close was $297 million at the end of the quarter. SBA pipeline was $64 million and we have an additional $465 million in construction loans not yet funded. Our concentration of construction and development loans at the end of the quarter was 50.5% and our concentration of CRE loans was 233.7%. All regions are experiencing good loan growth.

The company’s net interest income for the first quarter of 2017 was $72.4 million, a 3.1% increase from the same period last year. Accretion income from acquired loans during the quarter was $4.4 million, a decrease of $3.7 million from the same quarter last year. Based on our cash flow projections, we expect total accretion for 2017 to be approximately $14 million, compared to $24.3 million in 2016.

Our net interest margin for the quarter was 4.04%, which was down from 4.41% in the same period last year. The decline in net interest margin was significantly impacted by the decrease in accretion income.

Also during the first quarter agricultural loans and credit card balances which have higher yields declined due to the seasonality of those portfolios and the loan balance from our Consumer Finance division continues to decline as we deplete that portfolio, closing that division.

The company's core net interest margin which excludes the accretion was 3.80% for the first quarter of 2017, compared to 3.92% in the same quarter of 2016. Because of the very comparative rate environment and our loan mix, we expect our margin to remain in the 3.70% to 3.80% range.

We’ve experienced positive core deposit growth of $721 million over the last year. We do project that our costs funding will marginally begin to increase as a result of the recent and expected fed rate hikes.

There are some significant differences in our non-interest income that require some comparison both quarter-over-quarter and linked-quarter results. Our non-interest income for the quarter was $30.1 million. Trust income continues to be very positive on both quarter-over-quarter and the linked-quarter basis. Fees on deposit accounts increased primarily due to the addition of Citizens Bank during 2016, on a linked-quarter basis we are down due to the seasonal nature of those service charges.

Since 2015 the loan fees have grown to a significant level. In Q1 we assess $2.5 million in commercial loan origination fees, up which $2 million was deferred. On a linked-quarter basis mortgage lending income was down $800,000 and SBA lending income was down $1.4 million. Gains in our securities portfolio have diminished after the recent rate increases and we do not expect repeat last year’s gains on sales of securities.

Non-interest expense for the quarter was $66.3 million. While our core non-interest expense for the quarter was $65.7 million. Included in non-interest expense was one-time equity compensation true-up of $840,000 2016 restricted share risk.

As well as $2.1 million in the incremental compliance and audit costs over the same period of 2016. Included in the $2.1 million increase was a one-time data aggregation project cost of $1 million.

We continue to prepare for cost in the $2 million asset threshold as a result of closing our three pending acquisitions. The costs of that preparation are significant and most of the costs will be incurs in prior to the benefit of the business combinations.

As an example, our audit regulatory affairs costs have grown from $4.1 million in 2015 to $7 million in 2016 and we are projecting to exceed $9.2 million this year. This does not include an additional $1.5 million to $2 million of lending costs for DFAST. We expect that this cost will incur as we add the pending acquisitions. The issue 2016-9 Stock Compensation Accounting that came effective in Q1, as a result we recognize the income tax benefit of approximately $1.2 million during the quarter.

At March 31, 2017, the allowance for loan losses to legacy loans was $37.9 million, with an additional $435,000 allowance for acquired loans. The company's allowance for loan losses on legacy loans was 0.82% of total loans. The loan discount credit mark was $28.9 million for a total of $67.2 million of coverage. This equates to a total coverage ratio of 1.16% of gross loans.

During the first quarter our annualized net charge-offs including credit card charge-offs to total loans were 18 basis points. Excluding credit card charge-offs our annualized net charge-offs total loans were 11 basis points. The provision for loss from the quarter was $4.3 million compared to $2.8 million during the same period last year, but equal to the fourth quarter of 2016. Based on our projections we expect total provision for 2017 to be approximately $15 million compared to $20.1 million in 2016.

In February we executed the sale of 11 substandard loans which were primarily acquired loans with the net principal balance of $11 million. We recognize the loss of $676,000 on this sale. We continually explore options to manage problem asset remaining from the acquired FDIC and Metropolitan portfolios, as well as options to further reduce problem loans and expect to execute additional [inaudible] of assets.

Our capital position remains very strong. At quarter end the common stockholders’ equity was $1.2 billion. Our book value per share was $37.30, an increase of 5.5% from the same period last year. Our tangible book value per share was $24.51, an increase of 7.3% from the same period last year.

On January 17th we merged our finance company into Simmons Bank. We expect making new loans in that group. At March 31st loan balance in this portfolio is $44 million, compared to $51 million at year end. The average in banking wise expect to see these loans ranges from 15 months for direct consumer loans to 53 months on real estate consumer loans. We project an annualized impact to earnings of approximately $1 million if this continue these type of loans as a result of the decline in loan balance whilst non-interest income and ongoing expense of servicing remaining loans.

During March we also exited the indirect lending market. The balance in this portfolio is $237 million with an average yield of 2.44% including fee income. In direct lending is one margin unit we made a financial decision to reallocate our capital resources.

We announced the acquisition of First Texas BHC, Inc. headquartered in Fort Worth, Texas on January 23, 2017. This acquisition along with our previously announced acquisition Hardeman County Investment Company and Southwest Bancorp will increase our total assets by approximately $5 billion and allow us to move into an attractive Oklahoma, Texas and Colorado markets, while expanding our market share in Tennessee and Kansas. We are currently progressing through regulatory application and shareholder approval processes for each of these mergers, as well as planning full integration.

In the first quarter we announced the purchase of the former Acxiom building in River Market District in downtown Little Rock. The 175,000 square foot plus building and its adjacent park will provide an excellent opportunity for Simmons to consolidate into Arkansas locations and it provide space for our additional expected growth. We will transition our current associates into Arkansas area into the new building over the next 12 months.

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 will ask the operator to come back on the line and once again explain how to queue in for questions.

Question-and-Answer Session

Operator

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

David Feaster

Hey. Good afternoon, guys.

George Makris

Hi, David. How are you?

Bob Fehlman

Hi, Dave.

David Feaster

Doing well.

George Makris

Good.

David Feaster

So I want to start off on credit quality, I know you guys sold some problem loans and talked about working through some mortgage, but not accruals ticked up in the quarter and I just wanted to hear what drove this? And may be your general thoughts on credit and if there is anything specifically you are seeing in your book that might be causing you any concern?

George Makris

Okay. Well, so, first I want mention, David, is that all of the asset ratios that we publish are based only on our legacy loan portfolio, which is $4.6 million of the $5.8 million. So that ratio did rise primarily because of two loans that went to non-accrual both of them in the Wichita market, both of them managed by the same loan officer. We will say that we had some personal changes in that market during this quarter. Both of loans have not deteriorated to the point that we have any specific reserves against them.

We are still working through those. One of them was a first year start-up business that missed their first year projections, at the beginning of the second year looking better. There was a Four Plan loan that had additional collateral associated with it. Four Plan was not managed appropriately on our end of the deal. Our loan review crew caught that and therefore those have been conservatively placed on non-accrual at this point.

Otherwise, our legacy portfolio continues on a steady state. Now, I think, it’s important to talk about our total loan portfolio, so I am going to add some numbers today with regard to the acquired loans. So, our non-performing loans in our legacy portfolio went up from $39 million to $53 million during the quarter, an increase of $13.7 million.

However, we include non-performing loans in our acquired portfolio and add them to our legacy portfolio that total actually went down from $85.5 million to $84.5 million, so our non-performing loans in total went down $1 million during the quarter.

Our non-performing assets in our legacy portfolio that went up from $66.8 million to $79.9 million, increase of $13.1 million, but when we add the progress in our acquired portfolio that total went down from a $112.9 million to $111.3 million, so it actually went down $1.6 million. I know it’s also confusing it is to us we have these two buckets of loans to address but the calls our allowance in our asset quality only deals with legacy loans, sometimes those numbers are little bit misleading with regard to the overall picture.

So once again the increase on our legacy non-performing loans were primarily two loans out of Wichita which totals $11 million, but overall, it actually improved for our company. So I hope that gives you a little more color about the asset quality.

David Feaster

Yeah. That’s great color. Thank you very much.

George Makris

Yeah.

David Feaster

Your legacy loan growth has been very strong notably in CRE this quarter. I know you are still well about the thresholds, but could you just talk about what you're seeing here? What’s the competitive environment like and maybe by segment and region as what's driving the CRE growth?

George Makris

Well, so to take it overall, but Barry Ledbetter may want to pipe in on regional approach there. I would say that we are still learning how to take advantage of our new size and scope. And we are developing relationships with customers that previously, we just didn’t have the capacity to take care of and there are several residual facts on our company on those relationships and we are going to talk about commercial loan origination fees here in just a little while and how that’s grown within our company and what that means to our non-interest expense.

But we are pretty pleased with what we are seeing in our CRE opportunities, a pretty diversified CRE portfolio. It’s diversified not only from segment but also by geography. We monitor very closely geographic concentrations. We experienced that during the downturn in 2008, while we didn’t have concentrations overall we did in some markets that has specific problems. So we are pretty in tune to that geographic concentration.

We continue to see really, really good opportunities not only from moving some exciting business in our buying with some new relationships as well. We have been very successful in hiring an excellent team of commercial lenders, as a result of our size and those hires are really paying off. Barry, I don’t know, if you want to mention more specifics about geography or type. But overall we are very pleased with not only our past performance but also now looking our own pipeline.

Barry Ledbetter

George, I would say, most of our loan growth last quarter has been in Arkansas and Missouri. In Arkansas it’s really been in Central Arkansas as well as Northwest Arkansas. In Missouri we have been tremendous loan growth. In Kansas City, in fact, their loan growth increase about 45% from the fourth quarter of ’16.

We have added a new leadership there with the new market president there. We have added new -- two new commercial lenders in the last 30 days in Kansas that we think will continue to improve our loan growth there. We continue to have very strong loan growth in St. Louis and limited loan growth in Tennessee. But as we look forward in the pipeline we talk about $287 million of loans.

In the past it’s always been really Arkansas and Missouri that’s really spun loan growth and now with Tennessee we have added a very strong commercial loan manager there and if we look at our pipeline report a $287 million, that’s really eventually distributed between all three markets.

So we are starting to see benefit of adding commercial lenders in Kansas City, new leadership there and I think we will continue to see strong loan growth in middle of Tennessee with the addition of the commercial loan manager.

David Feaster

Okay. That’s helpful. Last one for me, could you just give us an update on the Hardeman deal that got delayed. Is there any update there as sort of timing and thoughts about any potential delays for your other pending acquisitions in Texas?

George Makris

Sure, David. I think I expressed my frustration on the last call with the process that is in place currently for public comments. Not that all public comments are without merit, but we have address all of the Federal Reserve’s questions regarding not only the comments but other questions that they have -- having to do with our application.

We generally get eight days to respond, we may ask the question, they have no set timeline respond to us with their decision. We are hopeful that the decision on the Hardeman transaction will be forthcoming in the near future. We have not filed our applications on Bank SNB or Southwest Bank yet.

We have some planning to do that needs to go into those applications and quite honestly we won’t hesitate to file those until the resolution on the Hardeman application comes forward. It is an extremely frustrating process not only to us but especial for the acquired banks.

If you can imagine the end decision in the minds of the associates of that bank about their future and the future for this transaction will actually transpire or not, the risk that this current process present to the M&A system and the financial system in the United States is an unbelievable experience to them.

Now the questions we got we feel like we address very well. We don’t think that there are any issues that were called up, positive resolution to the application, but because ex parte rules kicking in soon that comes through, we really can’t have those discussions to find out, all of our communications is in writing. So until we get that back from the Washington fed we are just in limbo mood.

So I think you can tell that it’s a frustrating process not only for Simmons but other banks that have to go through this. We are very hopeful that will streamline approach might be develop in the future, because the risk associated with this delay is extreme.

David Feaster

Well, thank you for the color and hopefully it gets resolve soon.

George Makris

Yeah. Thank you very much.

Operator

Thank you. And our next question comes from Brady Gailey of KBW. Your line is now open.

Brady Gailey

Hey. Good morning, guys.

George Makris

Hi, Brady.

Brady Gailey

So is $500 million of annual loan growth still the right way to think about the growth opportunity to all this year?

George Makris

Brady, we -- I guess, I would tell today we would expect at least $500 million of loan growth. The only downsides to our loan growth are the two business units that we exited. So we have got now $44 million left on our books in our consumer finance portfolio. It will continue to deplete over the years.

We have also discontinued indirect lending that particular portfolio increase several million dollars last year, it will also wind down and not produce any initial growth for us. But I can tell you from our pipeline which you heard in our prepared remarks, it’s very, very healthy.

And the percentages of that pipeline currently have over the last two to three quarters that $500 million number should be surpassed. So conservatively, yeah, I would say, the $500 million is a good number.

Bob Fehlman

And Brady there is about a $500 million a month pay down on both the consumer and indirect. So as George said, that’s the headwind we are overcoming is about $500 million a month pay downs from those two units.

Brady Gailey

Okay. Right. That’s helpful. And then I know there the tax rate was a little lower. You have some little pieces there to help. What’s the best way to think about the forward tax rate?

Bob Fehlman

I think, first off, but going forward, I think, our average rate is about 33% to 34% is a good go-forward rate. As we said, we have the one-time adjustment this quarter for the accounting change. So you kind of have to back that $1.2 million out of the number and to get to go-forward rate.

David Garner

Brady, this is David Garner. Q1 is always our biggest equity comp divesting period because of incentive plans. So that number is significantly higher than it will be in future quarters going forward. I would estimate that 90% of our vestings occur during the first quarter.

Bob Fehlman

We also have some previously acquired companies that best thing happen in the first quarter, so it’s a little marginal impact.

Brady Gailey

Okay. And then finally to circling back on the three pending deals, I mean, hopefully, Hardeman will close this quarter and then for the Texas deal and for OKSB I think 3Q is a still a realistic timeframe or do you think it’s more pressed towards at the end of the year.

George Makris

Well, I would say, yes. As far as we are concerned on our end the third quarter is certainly still realistic goal. The wildcard writing once again is any delays we may have as a result of any public comments or any questions that come up in our application process.

I will say this from an application standpoint. These applications are going to be with that a little differently we expect than ones in the past, because reason one it will get us pass $10 million. We expect to put in these applications in very specific detail around organizational design and specifically around risk management organization design not only at our current level with that that is projected after we integrate our acquisitions.

So it could be a little more back and forth on this application process before we have been use to in the past, but we are certainly be prepared on our end to move forward with a Q3 closing, but as I said before probably not going to be up to us when we put that that happens or not.

Brady Gailey

Okay. Great. Thanks for the color guys.

George Makris

Sure. Thanks.

Bob Fehlman

Thank you.

Operator

Thank you. And our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open.

Stephen Scouten

Okay, guys. Thanks for taking my question.

George Makris

Yeah.

Stephen Scouten

So I am curious maybe just as it pertains to the NIM, what sort of benefit you guys are seeing so far from the December hike that’s kind of embedded within your current net interest margin and what incremental benefit you expect to see from the March hike maybe in your 2Q NIM and it didn't sound like your guidance is really changed still on that 3.70%, 3.80%, but any color you can give around the benefits or puts and takes on those rate hikes?

George Makris

We -- most of the rate hikes will affect our floating rate portfolios particularly things like our credit card portfolio, that usually has a 30-day delay and of course it came during the time when our credit card portfolios decline instead of increasing. So I am not sure we saw much benefit overall from that increase in that particular portfolio.

We are seeing some upward momentum in rates as far as new loan and the new loans we have not seen much of the need to increase deposit rates thus far but we expect that that will change somewhat in the near future. We will just hope that we are able to raise our loan rates a little faster than we raise our deposit rates but on a conservative basis we are looking to those going up relatively close to each other throughout the rest of the year.

Stephen Scouten

Okay. Great. And then maybe thinking about the expense run rate little bit, I think, you guys had given kind of a $64 million kind of run rate number last quarter on the call and I know there were some puts and takes in the number that was supported this quarter. But trying to figure out where do you feel that run rate is today moving forward and do you think you can get down to that $64 million number still.

George Makris

I still feel $64 million is a good run rate. Let me mention two items that were one-time expenses in the first quarter. We have already mentioned little over $800,000 in equity true-up in 2016. We fail to capture that cost appropriately in 2016. We caught it in our audit process, that was immaterial and we booked it in the first quarter of 2017.

Without that if you look at our personal costs compared to Q1 of 2016, you will see that that personal cost is flat. Now during 2016 we integrated Citizens Bank so we took on over 100 of their associates and 10 new branches and over $500 million of assets and that result first quarter is no increase in personal expense. So we are pretty pleased with our integration process and how our entire company adjusted to make up for that additional expense that we picked up with Citizens acquisition.

The second one-time expense was a $1 million consulting fee that data aggregation project during the first quarter. If you recall with all our acquisitions we actually had I think six different mortgage systems for all these data was added and as we took look at cleaning that up for HMDA reporting, for CRA reporting, it require getting all that information consolidated that was a huge project and one we just didn’t feel like we can handle with our internal staff and put that additional burden on them, so a consultant came in, helped us aggregate that and our data quality, data integrity is in excellent shape today. So that was a one-time expense, but necessary because we did to bring all that information together in one bucket.

Stephen Scouten

Okay.

George Makris

So, yeah, if you take those two out we are $60 -- we are $64 million maybe just….

Stephen Scouten

Yeah. Yeah. That’s really helpful. Thanks George. And then maybe one last kind of question for me as it pertains to the credit outlook. I guess the couple things, one, on the acquired loan sales, the incremental loss there. Can you speak to maybe your remaining credit marks on other acquired loans and if you think those are sufficient or if you think you would have to have take incremental loss. I know your disposition is there? And then also maybe on the OKSB front we have seen some booking this from other companies this quarter on healthcare lending. Any concerns about their healthcare portfolio or maybe reassess the mark there?

George Makris

Yeah. So let me address the OKSB question first. We are not aware of any deterioration in their healthcare portfolio. They have -- they are pretty diversified as you probably know in their range of healthcare lending. I am going to let [ph] Mark (38:33) speak to that appropriately. At the right time I would just tell you that we are not aware of any deterioration in that portfolio. The second question?

Stephen Scouten

Yeah. On the acquired loan portfolio, but mark is adequate and the only reason this time was we have a sale and it was the liquidation?

George Makris

Let me explain why that sale was appropriate in our mind. The loans that we sold were those that we would call perpetual special assets. So they would be ones that we would have to work with very closely over a long period of time. Our experience is that many of those ultimately end up in foreclosure and we really don’t want to go through that process. We don’t want to take the real estate in our OREO.

There is always a question about the market ability of that real estate. Our experience is that for every year we hold that real estate. We get to write it down 20% because next year’s appraisal, obviously, didn’t support the previous year’s valuation, because we couldn’t sell it. So we took a look at those levered loans and said it was better to take the loss on that book sale now then we go through the expense in the future potential risk associated with foreclosure on those assets.

Now I wish I can tell you that those were only 11 where we have identified that really fall into that bucket and we were being willing to park with. That’s not the case. We do have some others that we are taking a looking at today. We are hopeful that we are able to move them along the same line as we did in the first quarter. We think that really limits our long-term risk and of course remaining in that portfolio.

So we have got little low hanging fruit. We still have some acquired loans we are glad to keep for the long-term. I think what we are concentrating now are those that we consider to be long-term risk to our company.

Stephen Scouten

Okay. That’s really helpful guys. Thanks for all the color. It definitely paint the different picture. I appreciate it.

George Makris

Sure.

Bob Fehlman

Thanks.

George Makris

Thank you.

Operator

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

Matt Olney

Hey. Thanks guys. How are you?

George Makris

Hi, Matt. How are you?

Bob Fehlman

Hi.

Matt Olney

I am great. I want to go back to credit quality and the two loans that were added to the non-accrual bucket that George highlighted few minutes ago. Have there been completed impairment test yet on these loans or is that still something that’s in process that we could see the results of that in 2Q. And I am just trying to get better idea of when did problem loans were discovered and have you guys time to scrub the remaining portfolio from that specific lender? Thanks.

George Makris

I will speak to scrubbers of the portfolio of that lender. Yes, we went in immediately, took a look at entire portfolio, no other issues we found. These two were just not managed appropriately on our end and we got some good folks looking at it today. We are hopeful that we will take these into performing loans here in the near future. But I am going to let Marty or Barry to address the impairment testing and any future write-downs that we may expect here?

Marty Casteel

George, I will answer that. This is Marty. And I do believe we have these loans marked appropriately based up on the information that we have available today. We have had times to dig pretty deeply in both credits and feel like we have good handle on where we are. So my answer would be yes. We have identified any losses today. They are marked appropriately.

Matt Olney

Okay. Thanks Marty. And then reconciling that back to George’s outlook on loan loss provision expense of $15 million for the year, I think, that implies the provision expense could decrease from 1Q levels, any more color you can give us about what -- why were decrease and what was unique in the first quarter that drove the higher provision? Thanks.

George Makris

The loan sale had an effect on our provision for acquired loans. So we made a one-time provision a little over $700,000 into the acquired provision. So that was a difference between what our quarterly projection was and the first quarter projection. It’s really going to depend on our loan growth. We are very comfortable with level of our provision today. We have a really good model that we use to determine what’s appropriate. So there is no question in my mind that about the adequacy of our allowance today, but if we continue to experience good loan growth we will continue to add provision appropriate going forward. We think that we have accounted for the future growth.

But once again, it will be a give and take. We will show good results on the interest income and some of them unfortunately will go into the provision. I will also mention that as we continue to migrate loans from the acquired bucket into our legacy bucket, some of that accretion income is going to be eaten by additional provision. So remember that that’s sort of give and take between the benefit and the additional allowance.

Matt Olney

Okay. Understood. That’s helpful. And then going back to fee income discussion, it sounds like there were some seasonality there in the first quarter that you guys mentioned previously. How should we be looking at the fee income for the next few quarters?

George Makris

Okay. Here is I got three, four things to say about that. First is that, our service charge fees, all our deposit account fees are seasonally low in the first quarter compared to the fourth quarter. So as we take a look at linked-quarter numbers, those service charges were down $600,000. That’s normal for us. We have got a lot of retail accounts, income tax refunds in the first quarter, overcoming the Christmas spending. Those kinds of things really reduce that fee income on our deposit accounts. So that’s sort of normal for us.

A big number for us has to do with the accounting for materiality of our commercial loan origination fees. We talked a lot over the last three quarters about the rise in our loan portfolio, really good increases, most of that come in our CRE area and many of those loans come with substantial origination fees.

In 2015, our commercial loan origination fees were negligible, almost none. They started to increase in Q2 of 2016 and by the end of the year on an annualize basis, they were going to be material in 2017, which required that we adjusted our accounting for those two comply with FAS 91 and differ most of those fees over the life of the loans. And most of those large fees are over extend in construction periods or over fix periods, maybe not fix grades, but fix periods of multiple years.

So in Q1 we differed $2 million of loan origination fees which previously would have been current period income. So as you take a look at Q4 of 2016 versus Q1 and you look at the fee number we differ $2 million that previously would have been in current period income if we accounted for as we did in 2016. It all deals with the materiality of those fees collectively over an annual period of time.

Bob Fehlman

And also keep in mind those fees were over 1000s of loans.

George Makris

Yeah.

Bob Fehlman

And administratively we really only expected about the $1 million or less in fees last year and it actually just exceeded expectation towards the end of the year. In first quarter it showed up as George said, it was significantly higher in the first quarter.

George Makris

So, Matt, I will tell you for two to three quarters, we may experience that same decline and recognize commercial loan origination fees as we continue to differ significant income into the future.

Now I have got a couple more that I want to touch on. One is mortgage revenue and I am going to combine that with SBA revenue because really that line item is the sale of mortgage and SBA loans has nothing to do with our loan balances in either one of those categories. These are strictly sales of loans. Obviously mortgage business is little bit soft now compared what it has been in the past and I think that accounts for the $800,000 decline from the fourth quarter in mortgage lending income.

SBA is hard for us to predict. In the fourth quarter we had substantial sales of SBA loans. In fact, our SBA income was down $1.4 million in the first quarter compared to the fourth quarter. We do have annual target for income and the sale of SBA loans, but it is pretty choppy throughout the year. So we make a conscious decision on whether we would keep those loans on our books, but the interest income when the timing is right to sell those and take advantage of premiums that we can get on the sale of those loans.

In the first quarter, the timing wasn’t right to sell those loans, so those loans are still on our books. So that’s going to be something that we will just have to continue to monitor and we are continue to report on as we make a decision on how much of our SBA portfolio we are going to sale and what the timing is behind that.

So I also want to mention one other thing and that is gain on sales of securities. Our gain on sales it was down $1.4 million in the first quarter compared to the fourth quarter of last year. As you know, after we got the rate increases gains on the sales of securities is basically the only way. Also all the gains we had in our portfolio have evaporated, so we really don’t have that opportunity going forward and that’s one of the reasons we took advantage of that as we did in 2016, we think that was a good move, but we don’t expect that gain on sale income to come close to what we did in 2016.

So between all the levers we believe that that explains fairly clearly the difference between the Q4 non-interest income and what we experienced in Q1. And I will say, Q1 is more consistent with the run rate than Q4 was. Certainly as we look at 2017.

Bob Fehlman

And Q1 would still be the lower end of the run rate because of the seasonality.

George Makris

That’s correct.

Matt Olney

Okay. That’s great color. So a few things within your response there George, as far as the timing of the SBA loan sales, you said the timing just wasn’t right, does that reflect more the margin you didn’t like there in the market or it reflect something outside of the margins in the market?

George Makris

We have sort of an internal goal on SBA loans we like to keep on the books. Currently it’s little over $200 million. If our pipeline fills up as we said at $64 million is currently in our SBA pipeline, we would expect to sale to keep that SBA portfolio on our books in the $200 million to $240 million range. So it’s currently $210 million or so today. So we didn’t want to sell all any of that portfolio. It’s really has more to do with the balances on our books. It does the timing and the margin we can get from the premium of the sales.

Matt Olney

Okay. And then on the origination fees, I understand what you are saying as far as recognizing those fees over the life of the loan, so obviously longer duration. Do those fees still come in within the fee income or those fees accrue through interest income?

Bob Fehlman

Interest income and will also on the other side be differ on the expenses provided to incentives and so forth and salaries.

Matt Olney

Okay. Is it fair to say, Bob, we saw little bit of pick up in loan yields from that in the first quarter or is it fully material [ph] in the last year (53:29)?

Bob Fehlman

It -- yeah, right now enough to even take up a basis point, but over time, you build $2 million a quarter, is going to start having a benefit over time.

Matt Olney

And does that effect your outlook on the margin over time, because it sounds like the outlook was relatively the same as it was a few months ago?

Bob Fehlman

Yeah. I would say, not in the near-term, I think, as we did towards the end of the year and have more clarity and we look into the first part of ’18, we will see how that is, but right now in the near-term we don’t see it having a material effect?

George Makris

Yeah. We are going to suffer comparatively through the rest of this year and we all expect positive results in Q1 of ’18.

Matt Olney

Okay. All right. You answered my questions. Thanks a lot for your help.

Bob Fehlman

Thanks, Matt.

George Makris

Thank you.

Operator

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

George Makris

Hi, Peyton.

Peyton Green

Yes. Good morning.

George Makris

Almost good afternoon.

Peyton Green

Question for you George, maybe in terms of the long run, if you look back over the last five years, you have grow the bank roughly the asset base by about 255%, share counts going up about 180% and net income is going up about 355% over that timeframe, so it certainly very good long run perspective, the value that’s been created. Question maybe as we move forward over the next couple years, these acquisitions are different from the acquisitions that you accomplished over the last five years that led to a lot of the asset growth, but just baking on the overall ROA trajectory. I mean, what would you think the bank should be able to do in a post once you cross the $10 million asset threshold and how comfortable are you that the competitive condition of the current rate environment accommodates?

George Makris

Well, Peyton, internally and I think I mentioned before that we believe good long-term target or our ROAs is 150% and that’s couple with the long-term target efficiency fill 55% and we base that on the percent of non-interest income to our revenue. Most of that non-interest income in trust and investments and other areas don’t have the same margins that the rest of our business does.

So, while we ultimately produce the income, it’s not tied to assets and therefore driving up our return on assets, we are going to have expense this going to drive that efficiency ratio might be up of reported will be if we didn’t have those non-interest income lines of business.

We believe that’s still good target for us. It of course has nothing to do with the increase interest rates it may change our profitability a little bit, that’s in the steady state where are today. We are really optimistic about what these acquisitions in Oklahoma and Texas will give us long-term because as you have seen in our current footprint, our new size and capacity has really benefited our loan growth, our opportunity in the marketplace and I will tell you that it fails in comparison to that opportunity and Dallas, Fort Worth, Oklahoma City, Denver, Austin, San Antonia and some of the markets we are getting ready to enter with our new size and scale.

We spend a lot of time these days with both [ph] Bud Brian (57:14) and Mark Funke and their staff planning for that integration and I think we all understand the real long-term benefit of the new size and scale past $10 million.

And quite honestly, it wasn’t for that upside potential Peyton. The pain of getting fruit in the dollars would not be worth it, okay. So, we are all committed to make sure that the pluses outweigh the minuses with regard that $10 million threshold.

Peyton Green

Okay. And so what would be a reasonable in order to achieve that $150 million ROA with an efficiency ratio of 55%, what’s the target non-interest income to revenue mix?

George Makris

35% is a good long-term outlook, so we were from 33% to 40% and that range would give us the opportunity to hit both of those numbers.

Peyton Green

Okay. And then separate question, at the margin, how are you seeing your core loan yields relative to where they were a quarter ago or a year ago?

George Makris

Well, I am going to let Barry answer that my overall reaction is, they are starting to tick up. However, some of the large loans that we are looking at are really, really competitive in the market. So, Barry, if you have any other color would you like add there?

Barry Ledbetter

The one thing I would add to that is we saw considerable loan growth in the third and fourth quarters as far as large loans that we were closing and again George had talked earlier about some of those large loans that we have not funded yet, as we continue to see those loans fund back in loans that we close probably the third quarter and fourth quarter last year were little lower rates than we are seeing today. So we won’t see a significant increase as far as loan yield but the new loans that we are looking at today, we are constant trying to increase those loan yields on the new loans that we are approving today.

George Makris

Peyton, I am…

Peyton Green

Okay. So…

George Makris

… mention, that having the affect on that is in fact that our loan-to-deposit ratio now is 85%, 86%. If you recall several years ago especially within consumer legacy organization our loan-to-deposit ratio is in the 160%’s. So we have increased that substantially. So from a risk appetite standpoint and the liquidity standpoint and the capital standpoint, all those factors show a filter into supply and demand. So we got not unlimited capacity at the current point to all comers. We believe that’s good thing for us. We believe we can seek out absolute best quality with the best yields that there are in the market and that’s what we are looking to do.

Peyton Green

Okay. And then George you reference the unfunded closed by construction loans that will get funded over time and as you look at this commercial real estate loans that you have committed to. How is the -- I mean will that help margin at the margin, I mean, the C&D loan yields better than the overall portfolio, are they in line?

George Makris

Well, as Barry mentioned, some of the large loans that we approved in the third quarter and fourth quarter are those construction and development loans, so several of them have lower rates. Talking about the C&D portfolio, as we add to it, a lot of its drop off, some of it stays in our CRE portfolio, some of it eventually goes in the secondary market, so we can’t always depend on those C&D loans that and to stay permanently in our CRE portfolio, so it’s a balance and that taking going forward, we wouldn’t expect that C&D will fill up our capacity in CRE and we take a look at our combined portfolios of Bank SNB and Southwest.

I think we calculated at the end of the year. I am not sure I have done it at the end of first quarter because it obviously don’t have the numbers from those two bank share. But we calculate it, we have an extra $1 billion of capacity based on our merged portfolio pro forma CRE capacity, which you know is wonderful. We think we fill that up relatively quickly.

Peyton Green

Okay. And I guess taking that comment there was $2 million in fees that were differ, was there associated expense that was differed or will that hit going forward?

Bob Fehlman

Yeah. There was some expense on, it would be there 20% of that number basically is differed. That would be for the incentive piece of it.

Peyton Green

Okay. Great. Thank you for taking my questions.

George Makris

Thank you.

Bob Fehlman

Thank you, Peyton.

Operator

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Makris for closing remarks.

George Makris

Well, thanks very much for joining us today. We have a lot of unusual items in the first quarter as I look at Bob Fehlman and David Garner, it reminds me what the accountant give us, the accountant take it away. The accounting for all these acquisitions and other things, I know keeps you guys busy, but we appreciate your support and we look forward to visiting with you in the future.

Operator

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

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