Simmons First National Corp (SFNC) 2013 Q2 法說會逐字稿

Good day and welcome to the Simmons First National Corporation second-quarter earnings conference call. 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.

Thank you, good afternoon. I'm David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our second 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.

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 George Makris.

Thank you, David, and welcome everyone to our second quarter conference call. In our press release issued earlier today, Simmons First reported second-quarter earnings of $6.6 million or $0.40 diluted earnings per share, [and increased] $0.02 or 5.3% compared to the same quarter last year. On a year-to-date basis, net income was $12.5 million or $0.76 diluted EPS, an increase of one penny over last year.

On June 30, total assets were $3.4 billion. The combined loan portfolio was $1.9 billion and stockholders' equity was $402 million. Our equity to assets ratio was a strong 11.7% and our tangible common equity ratio was 10.1%.

The regulatory tier 1 risk-based capital ratio was 19% and the total risk-based capital ratio was 20.2%. Both of these regulatory ratios remain significantly above well-capitalized levels of 6% and 10% respectively, and ranked in the 90th percentile of our peer group based on March 31 peer versus June 30 actual.

During first quarter of 2013 we increased our quarterly dividend from $0.20 to $0.21 per share. On an annual basis, the $0.84 per share dividend results in a return in excess of [3%] based on our recent stock price. Over the last two years we've increased our annual dividend by a total of $0.08 or 10.5%.

As we previously reported, based on our capital level, we continue to allocate our earnings less dividends to our stock repurchase program. This year through June 30, we've repurchased $8.3 million or approximately 327,000 shares at an average price of $25.50. We believe our stock at its current price continues to be an excellent investment.

Net interest income for Q2 2013 was $30 million, an increase of $2.3 million or 8.6% compared to Q2 of 2012. This increase was driven by growth in our legacy loan portfolio and earning assets acquired through FDIC assisted transactions. Net interest margin for the quarter was 3.96%, an increase of 9 basis points from the same period last year.

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 accruals acquired in our FDIC acquisition. In Q2 actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result we recorded a $3.2 million increase to interest income.

The increases in expected cash flows also reduce the amount of expected reimbursements under the loss-sharing agreements with the FDIC which are recorded as indemnification assets. The impact to noninterest income from Q2 2013 was a $3.1 million reduction. The net pretax benefit of these adjustments was $88,000.

Noninterest income for Q2 2013 was $11.3 million, an increase of $180,000 or 1.6% compared to the same period last year. Let me take a minute to discuss some of the noninterest income changes.

The most significant increases in noninterest income were, number one, service charges on deposit accounts increased $544,000 or 13.8%. The increase primarily resulted from accounts added as part of our 2012 FDIC assisted acquisitions, recently implemented paper statement fees and an increase in NSF income.

Number two, trust income increased by $102,000 or 8.2% due primarily to additional personal trust and investor management fees. Number three, income on investment banking increased by $254,000 primarily due to market value increases in trading securities.

Also included for the quarter were a couple of items reducing noninterest income. Number one, we recorded a nonrecurring $193,000 loss from the sale of securities as we liquidated the investment portfolios remaining from our 2012 FDIC-assisted acquisitions. Selling the securities was part of our initial acquisition plan as portfolios were mostly mortgage-backed securities that did not fit in our corporate investment strategy.

And number two, the net loss on covered assets increased by $462,000. This was primarily related to reduced gains on sale of FDIC OREO in Q2 2013 compared to gains recognized in Q2 of 2012.

Moving on to the expense category, noninterest expense for Q2 2013 was $30.3 million, an increase of $2.1 million compared to the same period in 2012. Included in Q2 2013 were $1.9 million in normal operating expenses attributable to our 2012 FDIC assisted acquisitions.

Excluding those acquisition-related expenses, noninterest expense increased by only $222,000 or 0.8% on a quarter-over-quarter basis. Obviously we continue to have excellent expense control coupled with our ongoing efficiency initiatives.

During Q2, we reversed $467,000 in merger-related expenses that were accrued for system-related conversions for our 2012 FDIC assisted acquisitions. Much of these savings were the direct result of our experience in integrating and converting acquisitions.

Our combined loan portfolio was $1.9 billion, an increase of $148.7 million or 8.6% compared to the same period a year ago. On a quarter-over-quarter basis, loans acquired in FDIC-assisted acquisitions increased $113 million net of discounts, and legacy loans increased $35.7 million or 2.2%. If you exclude the student loan decrease, which is no longer part of our lending initiative due to government legislation eliminating the private sector from providing student loans, our legacy loan growth was over $45 million or 2.9%.

Let me spend a minute talking about the progress we're making in our legacy loan portfolio. The 3% organic growth represents a significant improvement over the last three years.

In Q2, 2013 marks the third consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth is driven by a $55.6 million increase in real estate loans and an $11.3 million increase in commercial loans, partially offset by a $6.3 million decrease in consumer loans and a $15.1 million decrease in Agri loans due to slower loan fundings because of weather-related delays in the planting season.

We expect 2013 total Agri fundings to peak at levels comparable to last year.

We continue to have good asset quality. 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 [contemplation] of the asset quality ratios for our legacy loan portfolio.

The allowance for loan losses equaled 1.66% of total loans and approximately 292% of nonperforming loans. Nonperforming loans as a percent of total loans was 57 basis points, down 17 basis points from last quarter. At June 30, nonperforming assets were $39.8 million, a decrease of $2.8 million or 6.6% from the prior quarter.

Included in this total was $8.6 million net of the credit mark of acquired noncovered OREO related to our 2012 FDIC-assisted transactions. Excluding the acquired OREO, the balance of nonperforming assets was $31.2 million.

The annualized net charge-off ratio was 34 basis points for Q2. Excluding credit cards, the annualized net charge-off ratio was only 23 basis points for the quarter. 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 1.25% for Q2.

Our loss ratio continues to be nearly 250 basis points below the most recently published credit card charge-off industry average of 3.72%. 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 Q2 the provision was $1 million, up $115,000 on a linked quarter basis and $259,000 higher than the same quarter of 2012.

Bottom line, we continue a positive trend in organic loan growth, good noninterest expense control, favorable asset quality compared to the industry and a strong capital base with a 10.1% tangible common equity ratio and risk-based regulatory ratios that rank in the 90th 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 Agri lending and credit card portfolio. Quarterly estimates should always reflect this seasonality.

This concludes our prepared comments and we'd like to now open the phone lines for questions from our analysts 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.

George, I know that hiring new lenders has been a big priority for you guys in recent months. Can you give us some kind of update on the progress of this initiative, and how many you've hired and in what markets?

I sure can. I'm going to let David Bartlett give you the details. I'll just tell you real quickly we've hired 8 new commercial lenders and 4 new mortgage loan lenders. Most of them have started in the last three to four months. We're really excited about it, and I'm going to let David tell you where they are and what our expectations are for the rest of the year.

Hey, Matt. We've got three commercial lenders out of the Kansas City market and we've added one in central Arkansas. That one came on within the last 30 days; one out of the St. Louis market. We have one out of Springfield, Sedalia and Wichita. So George is right, we've got a total of 8 new commercial loan officers.

And as far as our mortgage lending staff, we've complemented -- we've got a couple of people out in the Kansas City market one out of [Saline] and then one out of Springfield. We're pleased with them. We've got some expectations of loan production somewhere in the $50 million range for the remaining part of 2013.

Okay, that's great, David. Thank you and how should we think about this initiative going forward? Would you consider hiring additional lenders for the rest of the year? Or is it more of a -- let's wait and see how these guys do for the next few months?

These guys have hit the ground running. We've had some real good success even since the end of the quarter. I would tell you that that tap is still open. Particularly in our newer markets in St. Louis, we were really fortunate to hire a gentleman up there that has a pretty good following and a team that is considering coming over with him. So I would tell you that this initiative is going to be on going. When we find the right fit, we're going to make that move.

Matt, as you recall, George is right. As you recall, though, we put two of our more seasoned leadership people -- one in St. Louis and one in Kansas City, Pat Anderson and Larry Bates. And those guys have been putting out feelers and making those contacts.

So, first of all, we have got the credit culture knowledge. And then were bringing in people to appear to be very satisfied and very excited about our culture and the type of -- the way we do business.

Okay, that's great detail. And then as a follow-up, George, in your prepared remarks you made some comments about selling a few securities that didn't really fit the profile anymore you were looking for. In the press release it looks like you were also buying some municipal securities. Can you just can't walk us through kind of with the overall strategy is within the securities book, given the higher rates today compared to a few months ago?

Sure, Matt, I'd be glad to. As you know we had about $0.5 billion in overnight funds. And when we took a look at the maturities on our current investment portfolio, we had about $300 million that was going to mature over the next 12 months.

We made a conscious decision to take $70 million out of our overnight funds, invest them in municipal securities in the range of 15- to 30-year maturities. Those tax equivalent deals are north of 5%. We have funded about half of that $70 million as of today.

Unfortunately, all of our municipals have been Arkansas municipals, and you know that that market is just not readily available. So we've taken a look at some Texas school bonds. And believe it or not, they are rated higher than the Arkansas bonds and the yield right now, the tax equivalent yield is higher than we can get in Arkansas. So we've even plugged into that market a little bit.

That is all we are prepared to do at this point, and that is $70 million. We think it's a good strategy because when you look at the historical tax equivalent yields of municipals, we have very little interest rate risk in that timeframe. So, that's what you're seeing as a difference between our last call and this call.

And Matt, this is Bob. I would out also that in addition to that when you take the other $200 million to $300 million that's going to mature or call in the next 12 to 18 months, we have decided to move those to less than 24 months with no calls. So we're going to -- basically the duration of our portfolio is going to stay the same or shorten over that period of time.

Last comment I'd make is that the loss that we did have is we picked up about $12 million of [oddball] MBS securities that did not fit our portfolio at all. There was little bit of timing of when you could sell those with the collateral. So we did sell those in this quarter. There was a loss I'd say a couple of weeks later is when the [ten-year] went up, and it would have significantly been more of a loss. So that was just kind of cleaning up related to our acquisition.

Okay, thanks guys; that's great detail, I appreciate it.

Brian Zabora, KBW.

A question on the buybacks -- you increased it this quarter. Should we think about this pace going forward or maybe just your thoughts around what the pace could be?

We made a conscious decision to speed up our buyback during the second quarter. We'll slow it down a little bit actually for the rest of the year. We've got about 250,000 shares left in our plan. We will probably use that up by the end of the year and reauthorize another plan in the fourth quarter.

Bob, you may want to give a little more detail on that.

Yes. Exactly what George said is -- we sped up a little bit of the earnings from the end of the year and really took advantage of the price when it was at a lower price earlier in the quarter. So we still have the same strategy as of right now is to buyback earnings less dividends, but it was a little bit higher in this quarter.

Okay, so do you think at the most it will still be about 100% payout ratio combined? Or it could be a little bit higher this year?

Yes.

Our target is to still be at 100% to slightly be over. But as of right now we still have the strategy of trying to find a way to put that excess capital to work on mergers and acquisitions.

And just on that mergers and acquisitions, can you just talk about conversations you've had recently, if you think the bid-ask spreads are coming in at all and what the opportunities could be?

Brian, we probably -- we're in discussions with about six different organizations, some of them further down the road than others. I will tell you that as we've said before, the ideal size for us is, say, in the $0.5 billion range.

And many of those banks are local community banks who still have founders involved and the hardest thing for us to overcome is the education part of those owners with regard to the value of their Company. And we all see what the averages are in the M&A market today, and I will have to tell you the sellers' expectations are still a little higher than the market will bear right now.

So we're trying to educate them. If they get serious about it, and if they get an advisor, we think that they will find out that we are being very open and fair with them. We have some that would be really good fits for our organization if we can get past that expectation part of it.

Thanks for taking my question, guys.

Kyle Oliver, Raymond James.

My question just got answered, but thank you.

At this time, we have no other questions.

Okay. Well, thank you all for tuning in today and we appreciate your support.

Matt came back online.

Matt Olney, Stephens.

Hey guys, just a follow-up. On the margin, Bob, obviously lots of moving parts there. What kind of direction should we expect on that margin going forward?

Matt, I'll let Bob speak to it in just a second. We still expect a 4% margin. In the third quarter we had a little bit shift in our loan mix because that yield would go down a little bit.

If you recall, we are about $15 million behind in the funding of our Agri portfolio due to the late plantings. That yields usually 5% or north of that. We were also down a little bit in consumer loans which has from an 11% yield in our credit card portfolio to down to a 6% yield and just regular consumer loans.

And our growth has come in -- in our real estate and commercial area -- where those rates are typically 3.5% to 4.5%. So that mix shift caused our margin to fall just south of 4% for the quarter. We expect it to be back up in the 4% range for the third quarter, and then as Agri loans pay off in the fourth quarter, we expect it to fall back probably just below 4% again.

Okay, and then also I wanted to ask you guys about -- to go back to the M&A strategy, you have been talking a lot about live bank M&A and I saw the FDIC release and data a few weeks ago about some failed bank bidding in Tennessee. And I saw that Simmons First was on there for a bid that you guys put in.

Could you just remind us what your target markets are for failed bank M&A? And has this changed at all in recent months?

Matt, this is David again. You know, the one bank that you saw that recently came up is almost a year old. And that dated back to June 2012. That was the First National Bank, I believe, at Lynchburg. It was about a $200 million bank, not too far outside of Tennessee.

We always, though, had a commitment to look at Tennessee from both a FDIC and traditional merger and acquisition opportunity. An opportunity came up a little bit further outside of our normal guidance for FDIC acquisitions in Sevierville, Tennessee. And we did take a look at that and put a bid on it because it complemented what we hope to eventually see out of the Tennessee market from Central Arkansas going east.

And that particular bank was just posted, and that particular bid was placed about 60 days ago. It was about a $450 million bank, Mountain National Bank in Sevierville. So that's the two that I think you're referring to as far as recent FDIC activities and bids that we put on Southern institutions.

Matt, I would tell you we have not changed our strategy. Our bid on Sevierville was nonconforming. It was quite different than what they put out for us to consider. It doesn't surprise me really that we didn't get that one.

We prefer to stay within our 350 mile radius. But as you know, those opportunities have not been forthcoming. We saw an opportunity within this bank for Simmons and we structured our bid as such. It just wasn't something that the FDIC was interested in.

Okay guys, thank you.

(Operator Instructions).

Okay. Once again, thank you very much. We appreciate your support. Have a great day.

This does conclude today's conference. We thank you for your participation.