Simmons First National Corp (SFNC) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the Simmons First National Corporation fourth-quarter earnings conference call. This conference is being recorded. I would now like to turn the conference over to David Garner. You may begin.

Good afternoon. I am David Garner, Investor Relations Officer for Simmons First National Corporation. We want to welcome you to our fourth-quarter earnings teleconference and webcast. Joining me today are Tommy May, Chief Executive Officer; George Makris, CEO-Elect; David Bartlett, Chief Banking Officer; and Bob Fehlman, Chief Financial Officer. We want to welcome Mr. Makris to his first earnings conference call with us today.

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 on 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.

Thank you, David, and welcome everyone to our fourth-quarter conference call and a special welcome to George Makris, our CEO-Elect.

In our press release issued earlier today Simmons First reported excellent fourth-quarter earnings of $8 million compared to $6.3 million for the same quarter last year, an increase of 27.4%. On a per share basis diluted EPS increased $0.11 to $0.48 per share, or an increase of 29.8%.

The results of the quarter just ended include the impact of the FDIC-assisted acquisition of Excel Bank which closed on October 19, 2012. This acquisition resulted in a bargain purchase gain of $2.3 million and merger-related costs of $1.1 million, a net benefit out $735,000 after tax due the fourth quarter of 2012, or $0.04 to diluted earnings per common share. For the year ended December 31, 2012, net income was $27.7 million, or $1.64 diluted EPS, an increase of $0.17, or 11.6%, from last year's EPS.

Let me take a moment to update you on our most recent FDIC acquisitions. On October 19 we announced the FDIC-assisted acquisition of Excel Bank of Sedalia, Missouri. As a part of this acquisition, we acquired $180 million in total assets at a discount of $21 million with $169 million in deposits and $108 million in loans and other real estate owned.

Additionally, of the assets acquired, $81 million were covered under a loss share agreement with the FDIC. This acquisition was the fourth of several that we anticipate making over the next several years, which is the reason we raised the $71 million in additional capital in November of 2009. Obviously our continued expansion into the Missouri market complements our existing presence in Springfield, St. Louis, and Kansas City.

In addition to our strategy of organic growth in these markets, we fully expect to pursue other opportunities to expand our footprint in the geographic region through other FDIC and/or conditional acquisitions going forward.

On December 31 total assets were $3.5 billion and stockholders' equity was $406 million. Our equity to asset ratio was a strong 11.5% and our tangible common equity ratio was 9.9%. The regulatory Tier 1 risk-based capital ratio was 19.1% and the total risk-based capital ratio was 20.3%.

Both of the regulatory ratios remained significantly above the well-capitalized levels of 6% and 10%, respectively, and rank in the 82nd percentile of our peer group based on September 30 peer versus our December 31 actuals.

As we have previously reported, we continue to allocate our earnings, less dividends, to our stock repurchase program. During 2012 we repurchased $17.6 billion, or approximately 726,000 shares, at an average price of $24.24. We believe our stock price at its current price continues to be an excellent investment.

Beginning with the third quarter of 2012 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.

Net interest income for Q4 2012 was $30.6 million, an increase of $3.3 million, or 12.1%, compared to Q4 2011. Now this increase was driven by growth in our legacy loan portfolio, earning assets acquired through FDIC-assisted transactions, and accretable yield differences resulting from better-than-expected principal collections of acquired loans.

As discussed in previous conference calls, interest income on acquired loans includes additional yield accretion recognized as a result of updated estimates of the fair value of the loan pools acquired in our FDIC acquisitions. In Q4 actual cash flows from our covered loan portfolio exceeded our prior estimate. As a result, we recorded a $2.6 million increase to interest income. The increases in expected cash flows also reduced the amount of expected reimbursement under the loss-sharing agreements with the FDIC which are recorded at indemnification assets.

The impact to non-interest income for Q4 2012 was a $2.5 million reduction. The net pretax benefit of these adjustments was $137,000. Non-interest income for Q4 of 2012 was $14.8 million, an increase of $1.9 million, or 14.8%, compared to the same period last year.

As we have just discussed, there was a $1.8 million incremental decrease due to reductions of the indemnification assets resulting from increased cash flows expected to be collected from the FDIC-covered loan portfolios. Additionally, Q4 2012 non-interest income included a $2.3 million market purchase gain on the Excel Bank acquisition.

Normalizing for these items, non-interest income increased $1.4 million, or 10.7%. The most significant drivers of this increase were an increase in the credit card fee income of $337,000, or 7.8%; an increase in service charges on deposit accounts of $356,000, or 8.3%; and a $292,000 increase in the net gain on covered assets.

Moving on to the expense category, non-interest expense for Q4 2012 was $32.2 million, an increase of $3.7 million compared to the same period in 2011. Included in Q4 2012 were $1.1 million in merger-related expenses and $2.4 million in normal operating expenses attributable to our FDIC-assisted acquisitions.

On a normalized basis non-interest expense increased by only 1% on a quarter-over-quarter basis. Obviously, we continue to have very good expense control coupled with our ongoing efficiency initiatives. Our combined loan portfolio was $1.9 billion, an increase of $184.3 million, or 10.6%, compared to the same period a year ago.

On a quarter-over-quarter basis loans acquired in the FDIC-assisted acquisitions increased $135.6 million net of discounts and legacy loans increased $48.7 million or 3.1%. As you will hear in a moment, if you exclude the student loan decrease, which is no longer a part of our lending initiative due to government legislation eliminating the private sector from providing student loans, our legacy loan growth was over $62 million or 4.1%.

Let me spend a minute talking about the progress we are making in our legacy loan portfolio. The 3% organic growth represents a significant improvement over the last three years. This marks the first time since 2008 that we have seen annual growth in our legacy loan portfolio as of year-end.

The growth is driven by a $61.9 million increase in real estate loans and an $8.1 million increase in agri loans partially offset by a $13.3 million decrease in student loans and a $4.4 million reduction in our credit card portfolio. We continue to have good asset quality, and as a reminder, acquired assets are recorded at their discounted net present value.

Additionally, acquired assets covered by FDIC loss-sharing agreements are provided 80% protection against possible losses by the FDIC loss share indemnification. Thus, all acquired assets are excluded from the computation of the asset quality ratios for our legacy loan portfolio.

The allowance for loan losses equal 1.71% of total loans and approximately 232% non-performing loans. Non-performing loans, as a percent of total loans, was relatively unchanged at 74 basis points when compared to last quarter.

The year-end non-performing assets were $45.6 million. Included in this total was the $11.8 million net of a conservative credit mark of acquired non-covered OREO related to our two recent FDIC-assisted transactions. Normalizing to what we call our legacy OREO the balance of non-performing assets was $33.8 million, a decrease of $1.2 million from Q3 2012 or 0.96 or 96 basis points of total assets.

The annualized net charge-off ratio was 38 basis points for Q4 and 40 basis points for the year. Excluding credit cards, the annualized net charge-off ratio was only 24 basis points for the quarter and 26 basis points for the year.

Our credit card portfolio continues to compare very favorably to the industry. In fact, our annualized net credit card charge-offs to loans was only 1.54% for Q4 and 1.50% for the year. Our loss ratio continues to be more than 225 basis points below the most recently of this credit card charge-off industry average, which was 3.9%.

We are very conscious of the potential problems associated with high levels of unemployment and we continue to allocate reserves accordingly. Primarily due to our improving asset quality and low charge-off rates the provision for loan losses remained lower than our recent historical levels. For Q4 the provision was $1.3 million, unchanged on a linked-quarter basis and $1.5 million lower than the same quarter in 2011.

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, the efficiency driven improvements in non-interest expense, a positive trend in organic loan growth, and most importantly, a strong capital base with a 9.9% tangible common equity ratio and risk-based regulatory ratios that rank in the 82nd 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 additional acquisition opportunities.

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

Now this concludes our prepared comments. We would like to now open the phone lines for questions from our analyst and institutional investors. Let me ask the operator to come back on the line and once again explain how to queue in for questions.

(Operator Instructions) Matt Olney, Stephens.

Good afternoon. Tommy, encouraging to see the core loan growth in the fourth quarter and definitely it sounds like you're getting more traction in each quarter. Can you give us any more commentary about the pipeline today and how you feel about loan growth, organic loan growth for 2013?

Well, I agree with your first assessment. It is great to have an organic growth positive number, and as I mentioned, first time that we have had two consecutive reporting quarters to have that for some time.

I think on a go-forward basis, as we look at our eight banks and we look at the pipeline right now, we would expect that remembering our seasonality we would see the same trends in Q1. That would be a seasonal downturn and then would expect it to go up in Q2 and Q3 and with a slight increase in Q4.

Probably to the best that we can see right now at levels either equal to or maybe even slightly above the numbers that we have reported this year. And all of that would be organic. Now, needless to say, we could have one credit that would leave on a temporary basis that might distort a reporting period. But, overall, I think we are optimistic that we would see numbers at least at the same level, if not slightly above that.

Okay. That is helpful.

And that would be, obviously -- we showed 3.1%. You take out student loans, that puts it at 4%. So anywhere between those same numbers and 5% or so.

Matt, don't forget the seasonality, especially in the first quarter in credit card and agri. You see each of those buckets go down probably about $15 million, $16-some-million. The rest of it will relatively be the slight increase in those.

And, obviously, again on the student loans we have been running off -- those have been paying off at about $2 million to $3 million a quarter.

Okay, that is helpful. Then shifting over on the fee income side. I know we have talked about fee income and the opportunity there at the bank in the past. If I remember correctly it seems like that most of this fee income today it is generated by the lead bank in Pine Bluff and the affiliate banks haven't really gotten the traction they need to.

Can you just remind us kind of what the opportunity there is and how you think about cross-selling those with your current customer base?

Well, I think that our greatest opportunity right now -- I mean credit cards continues to be an area that we are very positive about. Even though it is going to be a challenging year to grow the portfolio, we just believe that the opportunities there long term are very good.

Likewise, we believe in the trust area. In both the credit card and the trust we can grow them organically or we can acquire assets. So in both of those scenarios they have the potential of enhancing our non-interest income.

Another area that I think that is very positive is our newly acquired markets in both the Kansas and the Missouri areas. We know that we start with a relatively low base of relationships. We are investing some pretty significant manpower and other dollars in those markets to hopefully be able to grow those relationships, which will create non-interest income opportunities.

Okay, that is very helpful. Thank you, guys, for the color.

(Operator Instructions) David Bishop, Stifel Nicolaus.

Good evening, gentlemen. As it relates to the Kansas City and the Missouri markets there in terms of developing relationships there, any sense in terms of the added footpower you need there in terms of your bench strength there related to your commercial bankers? Sort of what is the hiring outlook within those markets?

Let me say a word and then I will let Marty Casteel, who is the new Chairman and CEO of the lead bank who is the bank that houses those markets speak to that.

But as I said, we acquired each one of these markets with the objective of growing them. In fact, that is our most important mission to expand our footprint into markets that have maybe greater growth potential. We know that just our arriving and putting our signs up is not the answer.

So, Marty, you want to say a word?

Yes, Dave, I will start out with St. Louis that is obviously where we are newest. We have relocated an executive level banker there that has been with us for many years; very seasoned, very experienced. His primary focus is on hiring the right people to help us grow.

He has had some success in that and he continues to look for people that can bring us good, solid commercial loan relationships. And that is a process that we are committed to and expect to fully realize in the St. Louis market.

Kansas City market, where we have been for two years now, we have had some success in hiring and attracting some commercial lenders that we are seeing some volume generated by. We are happy with their success, but we are looking for others.

It is a slow process, as you would imagine in finding the right people, hiring the right people that have the same asset quality culture that we have. As I mentioned earlier, we have seen that happen in Kansas City. We are confident it is also going to happen in St. Louis.

David, I think that your point is well taken in your question about making the right hires. We realize that we do have a very talented executive that is going into that market that his role and scope is -- number one, he is very familiar obviously with our culture; number two, he understands the mission; and number three, is finding those people that Marty has talked about. Our responsibility is to allocate the resources to make that happen and we are committed to do that.

These are good markets and good opportunities, and some of the markets we are entering them at the right time.

Great. Then as a follow up, we have had a number of our management teams discuss that fourth-quarter growth could have been impacted somewhat by the change in administration, change in tax laws. Anything lumpy in terms of loan volume, loan demand, or even payoffs related to sales of underlying businesses underneath some of these commercial loans? Any of that crop up during the quarter?

No, we have really not seen any of that at all that would have any kind of material impact on anything that we have reported.

Great, thank you.

(Operator Instructions) Derek Hewett, KBW.

Good morning, everyone. Good afternoon, excuse me. Maybe a question for Mr. May first. What is your outlook on M&A going forward? You did a couple of FDIC deals at the end of last year. Are you looking more for FDIC deals at this point or are you a little bit more interested in returning back to traditional M&A?

I tell you what, I am looking for some real excitement but Mr. Bartlett is the one that has to execute it and he did a pretty good job with his team this last year. So I'm going to let him say a word about it, but --

Derek, thank you. This is David Bartlett. Crystal balling, and that is exactly what I am trying to do, we are still focused on FDIC opportunities but recognize we may be at the downturn on those opportunities.

We still have our excess capital; recognize that we can use that in traditional M&A. Those seeds are being planted. I have mentioned that in previous quarters.

I would tell you if you just wanted a gut feel on how we are trying to allocate resources between the two, it is probably 50/50 right now; knowing that we are close. We are reaching maybe the end -- the start of the end of FDIC and as sellers become regulatorially fatigued and ready to be realistic about what their price, their value is worth we are ready to start moving in on those.

I think David got it right, both with our capital deployment and also our energy, that maybe our energy over the last two years was 90% FDIC. But not just because it is changing, as David says. Obviously there is some change there, but we are also seeing maybe the opportunities on the traditional side begin to step up.

And I would just add this; that one of the good things about us as a traditional acquirer is that we are not looking to buy $1 billion or $2 billion banks. We are looking for opportunities of good community banks that are in our sweet spot of that $200 million, $300 million, $350 million level. And those institutions in different parts of the three- or four-state geographic region are going to be interested in finding partners like us with the strategic initiatives that we have where they continue to have some autonomy and say.

So we think that our type of structure becomes more and more appealing as we move further and further into this timeframe of regulatory reform. So we are going to accelerate that pace because we do believe that the tradition of acquisitions are hugely important to our growth initiatives.

Okay, great. Then maybe a question for Bob. The margin was up maybe 5 bps or so. Typically the fourth quarter is a historically weak margin, but I am assuming you had some accretion come in from the last two FDIC deals.

As we look to the first quarter, which is another -- typically a weaker quarter for the margin, do you think the margin could be relatively flat or are we going to see some downward pressure?

Well, you are correct; in the first quarter we are definitely going to see a little bit of tick down because of seasonality from both credit card and the agri portfolio. But we did have the accretion come on from these acquisitions and actually putting some of the earning assets to work in these deals.

Our projections right now going forward into 2013 is for the year to maintain at about that 4% level. That would be based on the acquisitions we currently have plus the loan growth we have. But, again, you are going to see first and second quarter maybe a couple of bps below that and then a little bit higher in the latter part of the year.

Okay, great. Then maybe a technical question on the tax rate. The effective tax rate was up a little bit if you look at it fourth quarter versus third quarter. Was there anything --?

Yes, it would be the amount of gain that was in the quarter that kind of distorted it. On an annual basis it wouldn't be, but for the quarter you are putting more tax in. When you have more taxable income in that piece versus the rest of the year when it is nontaxable mix in there. So I would say your normal range that you use.

Okay, great. Thank you very much.

Okay.

Matt Olney, Stephens.

Just a follow up, Bob, probably more focused on the expense side. You have had that efficiency initiative in place for a while, but of course it is tough for us to see from our end the results of that initiative due to all the acquisitions.

Can you give us an update, or at least some commentary, on your core expenses? Where you are at today; is this where you want to be or is there more opportunity the next few years?

Well, first off, we always think there is more opportunities and efficiency to get better so we will continue to work on that. The initiative project you are talking about, we are substantially complete on that. And during 2012 we have achieved most of those.

You are correct; it is hard to see those numbers when you look at the acquisitions. When we put our numbers together and kind of normalize it we have had expenses that have been down to flat for about four years now. And when you are running about $100 million expense base and you still have salary increases of 3% to 4%, 5% range for your associates and you're maintaining at that level that is where the expense savings is coming in. So I would tell you in 2012 most of those savings has hit.

But let me give you a little bit of help going forward on a non-interest expense with these acquisitions. We had about $2.4 million of non-interest expense related to the two acquisitions in Missouri. I would say going into 2013 on a quarterly basis the first quarter is going to be higher because both systems will be converted. They will be fully integrated, both systems, by the end of this quarter. One of them converted this last weekend in St. Louis and so we are through that process.

So expenses will be higher as in this first quarter. So I would in modeling I would put $2.5 million or so as run rate for these two acquisitions in Q1 and maybe $1.9 million to $2.0 million as a run rate for the balance of the year in those three quarters. That kind of -- and then, based on that plus where our expenses were last year would be on a pretty level basis, maybe 1% up.

So, again, when you are sitting there with $100 million expense base staying flat to 1% you can see over the last couple of years we have achieved that $5 million in expense savings.

Also, like you said, we do have other and initiatives that we are beginning to put on the table. We are trying to absorb these other cost savings, let those take place, but we believe in latter part of 2013 and into 2014 we will have some more initiatives that we will be implementing.

And those initiatives, Bob, would be focused on the expense side. Is that fair?

Well, both sides, but the expense sides for the efficiency which would be -- we continue to always look at our branch right-sizing. We have lot of branches and we are always looking at which markets do we need to be in and if we don't need to be and if we need to move to another location. So we will continue to look at those as the balance of this year and into the next year.

That would be on the efficiencies. We always are looking on our fee-based. Are we at competitive levels? Do we have opportunities to change those or add new lines? But as of right now, those are all in our plan for 2013 and into 2014.

One thing, Matt, I would say maybe big picture-wise and complements what Bob has said that we are proud of this 27% increase in our net income. But as I said in the release, we are even more excited about the way we have accomplished it through the execution of our strategic plan that we have kind of laid out to everybody. In other words, we knew we could deploy the capital and we are not through, but I think we have been very effective in what we have deployed relative to eliminating that portion of the dilution.

And I think in addition to that one of the exciting things, as you have already mentioned, is that we have introduced some initiatives in these banks to grow these loan portfolios and it has worked. Again, we are very pleased with that. We have done all that and continue to improve on our asset quality.

As Bob said, we continue to look for efficiencies and none of that speaks to the potential ALCO impact of a movement in interest rates that is going to happen someday. And we are not willing to sit and wait on the someday to do these other things. We are proactively doing those and that to me is what is very exciting.

We sort of put ourselves in a position to be able to do that and now we are starting to see the fruits of some of that labor. I am very proud of our management team and overall team for a lot of real hard work that is really paying off.

All right, thanks for in the commentary. I appreciate it.

(Operator Instructions) Derek Hewett, KBW.

Good afternoon, guys, again. I have just one really quick follow-up question. Have you guys considered redeeming your trust preferreds?

Derek, we did retain the $10 million back in I believe it was October of last year. That was at a higher interest rate. We currently have about $20 million outstanding.

The interest rate is pretty low, very cheap cost of capital, regulatory capital. While we have a lot of excess capital right now, the bottom line pickup is minimal and as long as it is considered regulatory capital we would continue to keep it on the books. You can't put new trust preferred on the books and count it as regulatory capital the same way you can now.

So right now we would keep it on the books as long as we can. There is regulatory changes possibly coming on Basel III that some of that would roll off over a 10-year period. That has all been tabled, so we don't know exactly when that will start or not.

When we get to a point that it is no longer counted as regulatory capital or begins in that process or the rates go to a different level, then we would. But right now to have a cost of capital at an after-tax basis below 3% you can't get capital any cheaper than that.

Okay, great.

[We can get the] short-term pickup, but we --

On EPS, but lose regulatory capital.

-- we like having it there available for what we are planning going forward.

Okay, great. Thank you.

David Bishop.

Just a quick follow-up related to the NIM here. As you sort of diversify the geographic base are you noticing any pricing differences within these markets where there could be a funding advantage? When loan growth does pick up there might be some advantage to pick up cheaper funds or moved pricing around to spur growth here at a more profitable way.

Yes. I think that is a great observation and a good opportunity. And let Marty speak to that please.

Dave, yes, we do notice pricing differences by different markets. I wouldn't say that there is a real advantage in any of the markets we are in right now. Funds are pretty well driven down pretty much everywhere as far as the rates you are having to pay on deposits, but I think as that changes there will be opportunities in markets where we can take advantage of pricing differentials.

Not seeing a lot of opportunities now, because -- at the low base we are starting with. But I think that will change as rates start having some movement on deposits.

I think that one of the exciting things in this whole thing, too, is we have lots of liquidity and we are very excited about the opportunity to put it to work. So we think that we can have some loan initiatives to put to work in some of David's eight banks that is some pretty good priced cost of funds. And during this period, again, of waiting for other places to put that money to work that is a good opportunity.

Great, thank you.

Since we have no further questions, I will now turn the call back over to Tommy May for any additional or closing remarks.

I want to thank all of you for being with us again. We thank you for your support, your patience, and I want to thank Mr. Makris, our CEO-Elect, for being here. He has hit the road running since coming on board on January 2.

Four hours after arriving we were on the road beginning to meet and greet not only associates but investors and others. So, George, we are glad to have you and look forward to you sitting in this chair in the near future. Thank all of you again and hope you have a great day.

This does conclude today's conference. We do thank you all for joining us.