Simmons First National Corp (SFNC) 2012 Q1 法說會逐字稿

Good day, and welcome to the Simmons First National Corporation First Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Garner. Please go ahead, sir.

Good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our First Quarter Earnings Teleconference and Webcast. Joining me today are Tommy May, Chief Executive Officer; David Bartlett, Chief Operating Officer; and Bob Fehlman, Chief Financial 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. We will begin our discussion with prepared comments, and then we will entertain questions. We have invited institutional investors and analysts from the investment firms that provide research on our Company to participate in the question-and-answer session. All other guests in this conference call are in a listen-only mode.

I would remind you of the special cautionary notice regarding forward-looking statements, and that certain matters discussed in this presentation 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 from our current expectations, performance, or achievements. Additional information concerning these factors can be found in the closing paragraph of our press release and in our Form 10-K.

With that said, I will turn the call over to Tommy May.

Well, thank you David, and welcome everyone to our first quarter conference call. Let me again apologize for my voice. I'll try to keep it as high-pitched as I can, but I think we'll be able to take it through okay.

In our press release issued earlier today, Simmons First reported fourth-quarter earnings of $6.4 million, an increase of $1.3 million, or approximately 25.4% from the same quarter last year. Diluted earnings per share for Q1 2012 was $0.37, up $0,08, or 27.6% from Q1 2011. Obviously we are pleased with the results of this quarter. We benefited significantly from continued pristine asset quality, which has resulted in a reduction in our provision for loan losses, which I will discuss in more detail later.

On March 31, total assets were $3.3 billion, and stockholders' equity was $409 million. Our equity to asset ratio was, once again, a very strong 12.3% and our tangible common equity ratio was at 10.7%. The regulatory tier 1 capital ratio was 12.1%, and the total risk-based capital ratio 23.5%. Both of the regulatory ratios remain significantly above the well-capitalized levels of 6% and 10% respectively, and rank in the 93rd percentile of our peer group, based on December 31 peer numbers versus our March 31 actual.

Simmons First has one of the strongest capital positions within our peer group, as we have reported previously. Obviously, a portion of this capital has been allocated for our acquisition program, and we plan to leave this portion of our excess capital available for this purpose. Based on the level of our capital, the slow growth in the economy, and minimal growth in our balance sheet, we do not need to continue to accumulate more excess capital. As such, we plan to continue to allocate our earnings, less our dividends, to our re-instituted stock repurchase program. As you know, last month we increased our quarterly dividend from $0.19 to $0.20 per share. On an annual basis, the $0.80 per share dividend results in a 3.2% return, based on our recent stock price.

Since our reinstitution of the repurchase program, we have repurchased approximately 274,000 shares at an average price of $24.78, with approximately 372,000 shares remaining under the plan. Net interest income for Q1 2012 was $27.7 million, an increase of $884,000, or some 3.3% compared to Q1 2011. As discussed in our last conference call, the increase was primarily due to additional yield accretion, recognized as a result of updated estimates of the fair value of the loan pools acquired in our two FDIC acquisitions.

According to GAAP each quarter, we estimate the cash flows expected to be collected from the acquired loan pools, and adjustments may or may not be required. The cash flow estimate has increased based on payment histories and reduced loss expectations of the loan pools. This resulted in increased interest income that is spread on a level yield basis over the remaining expected lives of the loan pools. The increases, our expected cash flows, also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. The impact for Q1 2012 was a $3.2 million increase to interest income, and a $2.8 million reduction in non-interest income, with a net pre-tax benefit to earnings of $407,000.

Because these adjustments will be recognized over the remaining lines of the loan pools, and the remainder of the loss sharing agreements respectively, they will impact future periods, as well. The current estimate of the remaining accretable yield adjustment that will positively impact interest income is $20.8 million, and the remaining adjustment to the indemnification assets that will reduce non-interest income is $18.3 million.

Of the remaining adjustments, we expect to recognize $8 million of interest income and a $7.2 million reduction of non-interest income, for a net addition to pre-tax income of approximately $800,000 during the remainder of 2012. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loan pools.

Net interest margin for Q1 2012 was 3.93%, an increase of six basis points from Q1 2011, and 17 basis points from Q4 2011. Non-interest income from Q1 2012 was $10.7 million, a decrease of $1.9 million compared to the same period last year. As previously discussed, there was a $2.8 million decrease due to the reductions of the indemnification assets, resulting from increased cash flows expected to be collected from the FDIC-covered loan portfolios that we just discussed. Again excluding the indemnification asset adjustment, non-interest income increased $899,000, or 7.1%.

Let me take a moment to discuss some items that impacted non-interest income. First, income from the sale of mortgage loans increased by $668,000, or 107% compared to last year. This improvement was primarily due to lower mortgage rates, leading to a significant increase in residential refinancing volume. The second item, credit card fees, increased $136,000 or 3.5% on a quarter-over-quarter basis. This increase was due to a higher volume of credit and debit card transactions.

Number three, other non-interest income increased by $344,000 over the same period last year. This increase was primarily due to a $176,000 of gains on the sale of OREO and another assets. Additionally, we recognized a $180,000 positive marked-to-market adjustment on an equity investment in a CRA-qualified economic development entity.

Moving on to the expense category, non-interest expense for Q1 2012 was $28.6 million, a decrease of $0.3 million, or 4.4%, compared to the same period in 2011. The decrease was primarily attributable to a $468,000 decrease in FDIC insurance, 2011 merger-related costs of $190,000, with none in 2012, and the impact of our ongoing efficiency initiatives.

Concerning our combined loan portfolio, as of March 31, 2012, we reported total legacy loans and covered loans net of discount of $1.7 billion, a decrease of $154.8 million, or 8.5%, compared to the same period a year ago. However, approximately $80 million of the decreases related to FDIC-covered loans, which we would anticipate, leaving a decrease of $75.7 million, or 4.7% in our legacy portfolio from Q1 2011. Approximately half of this decrease is associated with two items, student loans, $13 million, and a single construction loan of $23 million that we discussed in our previous earnings teleconference.

On a positive note, as you know, our Company experiences seasonality in our loan portfolio due to agricultural lending and our credit card portfolio. While the loan portfolio decreased $36 million on a link quarter basis, when you normalize for seasonality and the continued decline in student loans, the decrease was only $1.7 million, which is a significant improvement from previously discussed seasonally adjusted link quarter numbers. In fact, our analysis dates back to Q4 2008, obviously the midst of the economic crisis.

While each of our eight banks are beginning to report some improvement in their local economy, the proof of the pudding will be in the pipeline. During the last quarter, we have seen some slight improvement in our pipeline, primarily from the central Arkansas region. Likewise, we had received reports that the economy and loan demand is showing some improvement in the Northwest Arkansas region, and the Northeast Arkansas region continues to show modest loan growth. While it is too early to call, we are cautiously optimistic about the beginning of a somewhat improved loan pipeline.

Although the general state of the national economy has shown signs of improvement, it remains somewhat unsettled. Also, despite the challenges in the northwest Arkansas region that we've seen over the last several years, overall our Company continues to have good asset quality. As a reminder, covered assets acquired from the FDIC are recorded at their discounted debt present value, and the resulting FDIC loss share indemnification provides significant protection against possible losses.

Thus, FDIC-covered assets or excluded from the computations of the asset quality ratios for our legacy loan portfolio. The allowance for loan losses equal 1.83% of total loans and approximately 215% of non-performing loans as of March 31. Non-performing loans as a percent of total loans, decreased from 102 basis points to 85 basis points.

Non-performing assets as a percent total assets were 114 basis points, down four basis points from Q4 2011. Non-performing assets, including TDRs, as a percent of total assets were 1.48%, compared to 1.52% in Q4 2011. These ratios continue to compare favorably to the industry and our peer group. In fact, our non-performing assets to total assets, excluding covered loans, put us in the 80th percentile within our peer group, based on December 31 peer, once again, versus our March 31 to actual.

The annualized net charge-off ratio for Q1 2012 with 66 basis points, up some 17 basis points when compared to linked Q4 2011. Excluding credit cards, the annualized net charge-off ratio was 52 basis points, compared to 24 basis points for Q4 2011. The debt charge-off ratio was somewhat elevated in Q1, Q2 charge-offs on two credit relationships, both of which had specific reserves. We remain aggressive in the identification, quantification, and resolution of problem loans.

Our credit card portfolio continues to compare very favorably to the industry. In fact, our Q1 2012 annualized net credit card charge-offs to loans decreased 45 basis points to 1.75%, compared to 2.2% for Q4 2011. Our loss ratio continues to be more than 300 basis points below the most recently published credit card charge-off industry average, at 4.97%. One of the real strengths of our credit card portfolio is and has been its geographic diversification, with no concentrations over 7% in any state other than Arkansas, where we have approximately 40% of our portfolio.

We are very conscious of the potential problems associated with high levels of unemployment, and we continue to reserve accordingly. Despite our 1.75% loss ratio, we are currently maintaining our reserve at 3% for our credit card portfolio. As I mentioned at the beginning of this call, the provision for loan losses was considerably lower than in previous quarters. For Q1 2012, the provision was $771,000, compared to $2.8 million for Q4 2011.

Since the decrease was so significant, let me take a minute to discuss. Our Company has historically been very proactive in reserving for both the known challenges, as well as the uncertainties that come with an economic crisis. While we philosophically believe, and I guess while I philosophically believe that counter-cyclical reserving is appropriate, it is obvious that the accounting profession and others do not embrace that theory.

Likewise, because our asset quality has historically and continues to be among the best in our peer group, our credit card portfolio loss ratio continues to be at levels below what we have historically reserved. Because some of the previously reserved loans were upgraded and no longer require reserves, we have reduced our provision for the first quarter.

Bottom line, we continue to experience good asset quality compared to the industry, highlighted by our low credit card charge-offs, allowing for lower-than-normal provision expense. Also, efficiencies-driven improvement in our non-interest expense, and most importantly an extremely strong capital base with a 10.7% tangible common equity ratio and risk-based regulatory ratios that rank in the 93rd percentile of our peer group. Simmons First is well-positioned based on the strength of our capital asset quality and liquidity to capitalize on opportunities that will come with increased loan demand, rising interest rates, and/or acquisition opportunities.

In closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agri lending and our credit card portfolio. Quarterly estimates should always reflect this seasonality.

This concludes our repaired comments, and we would like to now open the phone line for questions from our analysts and institutional investors. Let me ask our operator to come back on the line and once again explain how to queue in for questions.

(Operator Instructions)

Matt Olney, Stephens, Inc.

Hi guys, good afternoon. Tommy, good to hear your comments on the pipeline, loan pipeline, looking somewhat better. Can you give us any more color as to what type of customer it is that appears to be getting more optimistic and wanting to use more bank debt in the future?

I think, first of all, we've seen that agri continues to be good, but that's a seasonally adjusted number that we can talk about later. We think it will continue to do well. I think on the commercial side in the central Arkansas region, and then I think we are seeing a little bit more activity on the consumer side in all of our regions. I think on the -- serving some of the construction demands we are seeing in central Arkansas, those direct us in a positive change.

Tommy, a lot of your Arkansas peers are discussing the intense competitive environment in the state, and it's affecting, it sounds like, both loan yields and loan balances. Can you speak to the competition from your point of view, and give us an idea of how you're defending the market share that you guys have?

Well, I think competition is certainly keen. I think it probably is in with a lot of other areas just simply because there has been such low loan demand for such a long time. From a competitive standpoint, we see a lot of -- I don't know that I would call it irrational pricing at this point, but certainly we've seen some very aggressive pricing, probably more so on the terms, the length of the terms of the credit. We certainly, I would guess, have seen some changes in maybe underwriting standards, also. I think the way we have tried to approach it is first and foremost, realizing that we've had several quarters of challenge in maintaining our portfolio.

We have introduced a few special loan programs, one in agri and one in commercial, and then another in consumer. We've been relatively aggressive on the interest rate side of that particular program, not relative to underwriting standards, and I'm sure that's what you would expect of us. We've also tried to be fairly aggressive with that in our new markets of Missouri and Kansas, where we think there is still some opportunities to be gained for us. I guess protecting our turf, we've tried to again compete where rates would allow us to compete, but certainly not compromise our standards, and that's going to be a tough challenge as long as the demand stays as low as it is.

Okay that's great color, I appreciate that. Bob, as far as the margin, lots of moving parts given the seasonality that's always there but also the additional yield accretion from the covered loans. Can you give us an outlook for the margins the next few quarters?

Yes, Matt we've got -- the margin for this quarter was up probably 20-some basis points from the third quarter related to the accretion, like you are saying. We look forward to the remainder of the year being somewhere in the range we're at, from the 3.90% up to 4.10%, 4.15% when we get into our peak season and our seasonality with agri and credit card. Obviously, loan pipeline will have a big impact on that. If we do see some more loans, we've got a lot of liquidity that if loans pick up, that will give a benefit in there. We think right at this 4% range is where we'll be the remainder of the year. As that accretion over the next year or so goes off, it will have a negative impact on the margin. We think the loans coming on, as Mr. May said regarding the pipeline, will replace that, and will maintain right at this 4% level.

Matt, let me -- David Bartlett, I mentioned central Arkansas region. You might say a word about what we've seen in the northwest Arkansas region also, relative to maybe some improvement there.

Thanks, Mr. May. Matt, that was a good question and Mr. May is right, we're starting to really feel the solid bottom in northwest Arkansas, have started seeing a couple of requests that are coming in on some new commercial projects, primarily owner-occupied commercial building space. Residential in the $150,000 to $200,000 range is appearing to start having some pick-up with some new home, new roofs starting there. That markets starts to fill and firm up a little bit, and starting to show some positive signs of growth. Of course, northeast Arkansas is just -- that market's just continuing to plug along, really seeing a steady increase in loan demand.

And David, within northwest Arkansas, obviously that market's had a lot of volatility the last few years. How would you classify the competitive environment in northwest Arkansas versus other markets you are in right now?

That's a good question. I would tell you everybody's been sitting on the sideline in northwest Arkansas for so long, as these new deals come up, they're attracting some attention. As Mr. May's already said, we're going to stick with our credit underwriting and not let that slip, but I think pricing's going to be pretty aggressive as well.

Okay guys, those are all my questions, thanks for the color.

Thank you Matt.

David Bishop, Stifel Nicolaus.

Good afternoon, gentlemen. A question for you, obviously some weakness and -- related to some of the fee income numbers, service charges down, which can be somewhat seasonal in nature, I know, in some relation. Any initiatives under way to offset some of the regulatory fiats that have come down in terms of that are affecting you on the transaction, the fee side there, to pass that through to the customer to try to offset those actions this year?

No. I don't think, David, we've reached the point of introducing any fee increases in any of the areas to try to offset that. I think we're continually looking for new fee income opportunities. Does not mean that we won't ultimately make some adjustments in some fees, or possibly start charging some fees where we have not in the past. But I think at this point our focus has been to be as efficient as we can be on the non-interest expense side, number one. Then number two, to explore some opportunities that would generate some numbers. Here on a quarter-over-quarter basis, I think we're relatively flat, except for those adjustments that were made as a result of the FDIC transaction. Did that --

Yes, the service charges on deposits were relatively flat as you said, David, but some of that also is that first quarter is hard to get a judge on. Obviously, what flows into there is also not only service charges on deposits, but fee income from ODPs and so forth. That first quarter there's more people filing electronically now, and that has a significant impact in the first quarter, more than it used to, and so it's hard to judge. This is -- obviously, we had big impact from Reg E just like everybody else did over the last couple of years. All of that is built into the numbers. Outside of service charges, we were fairly, you know pretty happy with the non-interest income with credit card up, mortgage income up and other income.

I'd say our mortgage production unit has done better than we had anticipated. Our dealer bank operation maybe has done a little bit better. That on a positive side disguises it in an affirmative way. Obviously, the offsetting entry to the accretion issue (inaudible -- technical difficulty). Specific to your question, we have not yet decided that we needed to take fee adjustments to try to offset that.

How about on the other side of the equation? You alluded to the stringent expense controls there. As we sort of look out into 2012, 2013, should we expect relatively flat levels of operating expenses here on out?

Yes, I would tell you on the expenses what you saw in the first quarter, you'll see that to down slightly each quarter going forward. We're still on the tail end of almost have all of our initiatives implemented. We still have our loan administration that we're in the process of completing that centralization. Very pleased with how the implementation has gone overall, but we're in that last phase right now, and though I would expect David, you'd see that number, non-interest expense for the balance of the year being pretty close to what you saw in the first quarter, maybe a little bit under those numbers.

Let me add something to that. I think that it's so positive when you consider part of our strategy over the next year, while we're trying to bridge from this major recession and lack of loan demand and low interest rates, part of our mission is to be able to take our capital and put it to work in the form of acquisitions. Obviously, there are two pieces of that I'm sure you'll want to talk a little bit about, both traditional and FDIC-assisted. The real advantage, I think, that during this lull, this bowl period, becoming as efficient as we can be, and centralizing some of the back-office operations, i.e., the duplicative expenses that we had at the eight banks, will show even greater value going forward as we acquire other banks. That's something that gets a little bit lost in the numbers here. I see some real value once the acquisition portion of our program gets accelerated.

Great, thank you gentlemen.

Derek Hewett. Keefe, Bruyette & Woods.

Good afternoon, gentlemen. Given the fact that the pace of FDIC DLs has slowed; in the past you've talked about going to look more at traditional acquisitions, kind of in the 2013, 2014 time period. Are you kicking the tires with traditional M&A deals at this time, or do you still think there is an opportunity for FDIC deals over the next 12 to 15 months?

I'm going to ask David Bartlett to spend a little time talking about that. I just want to say at a high-level, M&A, part of our past, part of our future. We did say that on the traditional side that we felt like the possibilities of success were in the out years of 2013 and 2014, but that was more relative to the credit mark then anything else, the challenges that the banks had in their portfolios -- and I'm talking about good banks that still had AQ challenges to be able to do that traditional deal and deal with the credit mark impact.

We just saw that as being a big challenge. But that does not stop us, and I'll let David speak to that. Lastly, the FDIC deals, we're absolutely as convinced today as we were last year or when we entered the process in 2009 that the opportunities are going to be there, but we are in a political year. Dave, why don't you start with the traditional side, because I know you're doing a lot of work right now in that area.

Derek, hi, how are you? As you'll recall, we talked over the last year about taking our in-state and out-of-state footprint and starting to what we call square it off. We wanted to look at the southern half of Missouri, the southeastern part of Kansas, the eastern part of Oklahoma, and then any fill-in the blanks that we might have for footprint need within the state of Arkansas. Needless to say, with locations in Kansas and Missouri already set, we're looking and taking a pretty hard look at the $250 million to $0.5 billion asset-size banks with good asset quality to start with.

Needless to say, those are the banks that aren't being pressed to sell, but we're wanting to start planting seeds with those banks in markets to talk about the Simmons culture and talk about our traditional merger and acquisition activities over the last 10 to 15 years that have been very positive for our Company. That process is in place of identifying, quantifying, and going out and meeting these banks. That's exactly what we're doing, we're meeting. We're not putting any proposals together right now. We're going out and getting in front of several different organizations to talk about our institution.

As far as traditional merger and acquisition -- sorry, as far as FDIC -- I'm going to be honest, we haven't seen an FDIC opportunity in the area we are interested in for the first quarter of this year. Our last due diligence was actually performed at the end of the fourth quarter of last year. Mr. May alluded to this, as well -- it's a political year. I don't know how much that has to impact on closures, but I do agree with Mr. May. I don't think we're anywhere near the end of the FDIC closures. We haven't seen any failures to speak of this year, but the number of problem institutions is not declining.

Okay great, thank you very much. Also, maybe this is for Bob. Could you talk about the loan loss provision expectations going forward? Assuming that loan growth is relatively flat, you look at credit and there is really no issues there. Should we continue to expect that the provision will kind of be at this level, assuming no material loan growth?

Derek, Tommy. Let me touch on that, if I could. One of the things I've said in the text there, that I personally, Tommy May, am a believer in counter-cyclical reserving. I'm also a believer that even under the old system that we try to operate under today, that in this economy, that you cannot identify and quantify items in a reserving like you once could. We all know that the accounting profession in general and others, they'll feel a little bit different and are very sensitive about levels of excess reserve. That's just fact. That's the way it is, and we have to live with that. We also are sensitive to that.

In the first quarter, when we saw that, number one, our credit card charge-offs were significantly better than we had anticipated, about the 171 basis and we were reserving at 3%. Then we had a couple of fairly large credits that were upgraded during examinations. Then we had a couple of credits that were of some size that we had aggressively put specific reserves against, and we charged those down in anticipation of maybe moving those at some point into the OREO area, that we in fact were going to have more excess reserves than maybe would be maybe where we should be.

As a result of that we reduced our provision in Q1. As you saw, that provision to $775,000, compared to Q4, of $2.8 million. I think from the standpoint of the go-forward number, if you try to think of it in terms of averaging, if you took the fourth-quarter number and the first-quarter number and averaged those, my guess is you'd come pretty close to what you would expect to see in Q2, Q3, Q4, assuming that we did not see a significant increase in loans or we did not see any kind of change in our extremely good asset quality, or that we did not see any kind of change in our credit cards. That would be my best answer.

Okay that was very helpful thank you very much.

Thank you.

(Operator Instructions)

It appears we have no additional questions. I'd now like to turn the call back over to Tommy May for any additional or closing remarks.

Okay, well I thank all of you for being here. We'll look forward to the next opportunity to visit again. Have a great day.

Ladies and gentlemen, once again that does conclude today's call, we do appreciate everyone's participation.