Simmons First National Corp (SFNC) 2013 Q3 法說會逐字稿

Good day everyone, and welcome to the Simmons First National Corporation third quarter's earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to David Garner. You may begin.

Good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our third-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 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 paragraphs of our press release and in our Form 10-K. With that said, I'll turn the call over to George Makris.

Thank you, David, and welcome, everyone, to our third-quarter conference call. In our press release, issued earlier today, Simmons First reported third-quarter core earnings of $7.4 million, an increase of $796,000, or 12.1%, compared to the same quarter last year. Diluted core EPS was $0.45 per share, a $0.05 increase, or 12.5%, increase over the previous year.

During the quarter, we had non-core after-tax non-interest expense of $439,000 in merger-related and branch right-sizing costs. In September, we announced the execution of an agreement to purchase Metropolitan National Bank. As a result of this agreement, we recognized $116,000 in after-tax merger-related legal and advisory fees. Additionally, during the quarter we closed five underperforming branches and recorded $323,000 in after-tax non-recurring expenses related to those closures.

Including these non-core expenses, net income for the quarter was $6.9 million, or $0.43 diluted EPS, an increase of $0.02 (sic -- see press release, $0.03), or 4.9%, compared to the same quarter last year. On the year-to-date basis, net income was $19.4 million, or $1.19 per share, an increase of $0.03 over last year.

On September 30, total assets were $3.4 billion, the combined loan portfolio was $2 billion, and stockholders' equity was $403 million. During the 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 2.5%, even after the recent market increase in our stock value.

Over the last two years, we've increased our annual dividend by a total of $0.08 or 10.5%. During 2013 we have repurchased approximately 420,000 shares at an average price of $25.89. During the third quarter, as a result of the Metropolitan acquisition, we suspended the stock repurchase program.

Net interest income for Q3 2013 was $31.6 million, an increase of $3.6 million, or 13%, compared to Q3 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 4.27%, a 33 basis point increase 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 pools acquired in our FDIC acquisitions.

In Q3, actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded a $4 million credit mark accretion to interest income. This was a $1.1 million incremental increase in accretion from the same quarter last year, or an 18 basis point positive impact on margin.

The increases in 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 of non-interest income for Q3 was a $3.8 million reduction. This was a $1.1 million incremental decrease in non-interest income from the same quarter last year.

Non-interest income for Q3 2013 was $10.3 million, a decrease of $1.5 million, or 12.7%, compared to the same period last year. Included in last year's non-interest income was a $1.1 million bargain purchase gain on our Q3 FDIC-assisted acquisition of Truman Bank in St. Louis, Missouri.

Normalizing for the non-recurring gain and the incremental increase in the indemnification asset amortization, non-interest income for Q3 was up by $700,000, or 5.5%. The most significant increases in non-interest income were service charges on deposit accounts that increased $235,000, or 5.4%. 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.

Credit card fees increased by $296,000, or 7.2%, mainly due to higher net interchange income resulting from additional transaction volume. Other non-interest income increased by $722,000, substantially due to higher net gains on the sale of OREO and additional rent income from OREO properties.

Also included for the quarter were the following items that reduced non-interest income. Mortgage lending income decreased by $583,000 compared to last year, because of substantially lower refinancing volumes due to a market-driven increase in mortgage rates. Investment banking income decreased by $320,000, primarily due to an increasing interest rate environment resulting in fewer security calls for our bigger bank customers.

Moving on to the expense category, non-interest expense for Q3 was $30.9 million, an increase of $2.2 million compared to the same period in 2012. Included in Q3 non-interest expense were the following major items.

As previously mentioned, we closed five underperforming branches during the quarter, incurring one-time costs of $533,000. Merger-related costs for our pending acquisition of Metropolitan National Bank totaled $190,000 during Q3.

During the same period last year we recorded $815,000 in merger-related costs for our FDIC-assisted acquisitions. As a result, total merger-related expenses decreased by $625,000 from the same quarter last year. Also, during the third quarter, we had $1.7 million in incremental, normal operating expenses attributable to our 2012 FDIC-assisted acquisitions.

Excluding the nonrecurring branch right-sizing expenses and the merger-related costs, non-interest expense increased by $620,000, or 2.2%, on a quarter-over-quarter basis. Expense control remains a focus as we continue to search for additional efficiency opportunities.

During Q4, we are scheduled to close one additional underperforming branch. We will continue to monitor individual branch performance to determine if additional closures are merited.

Our combined loan portfolio was $2 billion, an increase of $98.1 million, or 5.3%, compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans declined by $19.7 million, net of discounts, while our legacy loans increased $117.8 million, or 7.3%. Excluding a decrease in student loans, which is no longer a part of our lending initiative, our legacy loan growth was $125.8 million, or 7.9%.

We were pleased with the continued growth in our legacy loan portfolio during the third quarter. The 8% organic growth represents a significant improvement over the last three years, and Q3 marks the fourth consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth was driven by $108.6 million increase in real estate loans and a $20.7 million increase in commercial loans, partially offset by a $4.5 million decrease in consumer loans.

On September 30, we completed the acquisition of a $9.8 million credit card portfolio. During the fourth quarter, we anticipate completing the system conversion and issuance of new cards. We continue to evaluate opportunities for additional credit card portfolio acquisitions.

We continue to enjoy 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-sharing indemnification. Therefore, all acquired assets are excluded from the computation of the asset quality ratios for our legacy loan portfolio.

The allowance for loan losses equaled 1.58% of total loans and approximately 285% of non-performing loans. Non-performing loans, as a percent of total loans, were 56 basis points, down 1 basis point from last quarter.

At September 30, non-performing assets were $35.9 million, a decrease of $3.9 million, or 9.9%, from the prior quarter. Included in this total is $5.7 million net of the credit mark of acquired non-covered OREO related to our 2012 FDIC-assisted transactions. Excluding the acquired OREO, the balance of non-performing assets was $30.2 million.

The annualized net charge-off ratio was 22 basis points for Q3. Excluding credit cards, the annualized net charge-off ratio was only 11 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 is only 1.21% for Q3. Our loss ratio continues to be nearly 250 basis points below the Federal Reserve's most recently published credit card charge-off industry average of 3.68%.

Primarily due to our improving asset quality low charge-off rates, the provision for loan losses remained lower than our recent historical levels. For Q3, the provision was $1.1 million, up $47,000 from the previous quarter and $218,000 lower than the same quarter of 2012.

Before I close, let me update you on the Metropolitan National Bank acquisition. We have completed and submitted all required regulatory applications. As is normal with a significant acquisition, we have had many discussions with the staff of the Federal Reserve and the OCC.

We expect that the approvals for the Metropolitan transaction will be granted in due course without any delay. We remain confident that the acquisition will close during the fourth quarter, and we will complete the system conversions during Q1 of 2014.

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 would like to now open the phone line 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.

Thank you. (Operator Instructions) Matt Olney, Stephens.

It looks like there was some good positive movements in the balance sheet during the quarter, deployed some of the excess liquidity in securities and loans. Can you just kind of walk us through the strategy during the quarter of deploying the liquidity?

Matt, the first item is we're in our seasonal that we've got the agri-loans and the credit cards that are at their highest point this time, so that would be a portion of it. But if you remember back from the last conference call we talked about moving about $70 million in liquidity into some of our investment portfolio, and what we chose to do with that is go into some Arkansas munis.

We finished that project; it was about $70 million that we moved. And that -- the tax equivalent yield on that is about 5.75%, 5.80%, in that range. What we've moved the rest of our portfolio, if you remember on that, is there's probably another $600 million or so that we have shortened the duration on that. And our maturities on that, we're moving -- targeting less than 18 months.

So, we're trying to pick up a little bit of yield without putting out too much interest-rate risk on the portfolio in that area, and what we've picked up this year is a pretty significant yield in that area. Now, the rest of the movement there would be more on seasonality. We are at our high point for the agri-loans and some of those.

Matt, I will point out though that we've had really good legacy loan growth throughout the corporation. We mentioned earlier that we had hired seven new commercial lenders. We expected them to put about $50 million on the books by year end. They're already at over $40 million, so we expect that number to be a good number, a conservative number.

But I will tell you, all of our banks have done a great job. And I'll mention specifically our South Arkansas bank out of Lake Village and our Northeast Arkansas bank out of Jonesboro has experienced really good loan growth this year. So I would just tell you that we're seeing that throughout the corporation.

And within the branch closings that you mentioned in the prepared remarks, George, can you indicate if -- did the third quarter get the full quarter benefit of those branch closings, or in other words, when did those occur?

Matt, they occurred toward the end of the quarter. We originally thought that they might be closed by July 1, but that didn't happen. Five of them got closed in the month of September. The last one is being closed this month. This Friday, actually.

So we got very little, if any, benefit in the third quarter from the expense savings. We'll get a little bit in the fourth quarter from those five branches. And we've recalculated and we think the full-year benefit is going to be a little north of $1 million after they're all closed.

And my last question is on the capital. Can you remind me what the expected capital levels are in the fourth quarter with the addition, Metropolitan Bank, and then what type of capital build should be thinking about beyond the fourth quarter?

Matt, this is Bob. Based on what our projections are right now, we are estimating a TCE of approximately about 7.10% to 7.20%. We think the rebuild on that will be relatively quick. We'll be back up to 7.5%, I would say, probably within the 12 months or 18 months after that period and continuing to grow.

As we said also, we've suspended the stock buyback program, which will help us build additional capital in that process. Our leverage ratio will be north of 8%; 8.10%, somewhere in that percent. And all of our other capital ratios, the risk-weighted ones, will be significantly above the levels, the required levels there.

Okay. That sounds great, guys. Good quarter. Thank you.

Brian Zabora, KBW.

Thanks. Good afternoon. A question for -- looking at the production. Can you give a sense of what the yield was on the loan production, maybe an average for the quarter? I know it's tough given it's probably across multiple categories.

Well, it is, Brian -- this is David -- it is across multiple areas of our bank. And let me walk us through the seasonality part first.

We peak out in September with about $160 million of agri-crop loans and those are nice yielding assets for us. That $160 million is spread among three different affiliate banks, so it peaks out with the growing season and we start seeing a fairly quick reduction of those agriculture crop loans starting in about October. So there's some seasonality pick up there.

As we start getting our harvest in on the different crops, and I'm going to bore you, if I could, with the crops that we're starting to see already come in because it does go down very, very quickly, but I think it's an important piece of your question. Our farms are starting -- corn's about 95% harvested in the end. The prices on corn are down about $1.50 a bushel from last year and they are running anywhere between $4 to $4.50 a bushel this year.

And the rice is about 60% now harvested and prices are stable to last year at about $7 a bushel. Cotton is about 70% complete in the harvest. Yields are good and the price is stable from last year to about $0.72 a pound.

Soybeans have two types of beans that get planted. One's called an early soybean harvest, and it is 100% harvested now. There's a full season soybean that's about 25% harvested, and the prices on those commodities are about equal to where they were last year at $13 a bushel. So you can see how it takes a while for it to peak up in September, and then as harvests occur it starts paying down very quickly.

Credit card portfolio is another piece that Bob's already mentioned that we'll see some strong seasonality in. It'll peak out in the fourth quarter of this year and the first quarter of next year because of the holiday seasons at the end of the year. And that will start replacing some of the runoff we see from the agriculture loans paying down.

As far as our new markets, now it's competitive out there. We're trying to stay fairly short-term on investments, but -- on the length of the loans, but I'd say on average we're seeing somewhere around a 4% to 4.5% yield on those new loans.

And then are you -- (multiple speakers) I'm sorry.

Let me just say that year over year the total yield on the loan portfolio is basically flat. So what we've been putting on the books is replacing what's going off at about the same yield. Now, that can get skewed a little bit if we have additional yield accretion in the following quarters, but I would tell you that the new loans are basically on par with those that are rolling off the books.

Great. And you talked about the recent hires. Have you been able to attract additional lenders this quarter?

Brian, we have not. Quite honestly, most of our attention has been spent on the Metropolitan group. I will tell you they have a very talented group of lenders and we're excited about getting them rolling again with capital behind them so they can grow.

As you remember, that bank used to be considerably larger than it is today, and we think we can get the bulk of that business back with the group of lenders that they still have in place. So we've been pretty excited about what we found over the last 30 days.

Great. And just lastly, when we think about core expenses before the acquisition closes, do you think you still have more room to push those down, I guess, outside of the branch closings or should we think about maybe flattish expenses? Just any sense on maybe direction of expenses after, really, the branch savings.

The only expenses that I expect to go up are normal cost-of-living kind of jumps in salaries. We are doing a great job of managing our expenses going forward. We think once we get Metropolitan merged, we will fill up some of the capacity that we have had in our bank with the additional volume.

So we see that as very positive and I do not see our legacy expenses growing at all to be honest with you.

Thanks for taking my questions.

(Operator Instructions) Kyle Oliver, Raymond James.

I guess on the acquired credit card portfolio you mentioned you would be willing to do additional deals there. Is there a maximum amount you would feel comfortable getting that portfolio to?

Well, I've mentioned before that several years ago when we were about a $1.3 billion, our credit card portfolio was north of $200 million, so I would tell you that I am personally comfortable with a $250 million range. And we would evaluate it at that point in time as to how high we'd be willing to get it.

But since it's only $180 million now, I think we've got a little room for growth. That's why we are interested in acquiring more credit card portfolios.

Our credit quality has not changed. We still have the high standards that we've always had reflected by our 1.2% charge-off rate. So as banks decide that their smaller credit card portfolios are not something they want to maintain, we try to make sure they understand that we are an acquirer of those assets.

And, Kyle, we've been targeting in the banks, credit unions, other areas the $5 million to $20 million portfolio size, those smaller portfolios we think we have a little bit better opportunity to acquire. The bigger companies aren't as interested in those small portfolios, so that gives us a little bit of opportunity there.

Right. Great. Then just switching to asset quality, non-performing loans were down about 30% over the quarter. Was there anything there larger or just a combination of things?

There was one piece of property in Northwest Arkansas that probably made up the bulk of that that transferred for them non-performing loans into OREO, and that's probably the biggest piece of the change in the asset quality numbers. We still own it. It wasn't a cleanup. It was just moving it from one non-performing category to another.

Okay. Great. And just trends in asset quality, do you still see it going positive from here?

I expected to be at least as good as it is today. We've not changed any of our underwriting standards. We're just getting more looks today. David, you may want to weigh in on that.

Well, obviously with the merger we've got a few more assets that are going to be special mention type assets, so we'll be managing through those after the merger. But as far as the legacy portfolio that we have now, I think we are going to be very consistent with the asset quality that you see.

Okay, great guys, thanks very much.

(Operator Instructions) We have no further questions. I would like to turn the call back over to our speakers for any additional or closing remarks.

Okay. Thank you, and before we close I want to give you a little more information on the Metropolitan transaction. We have done a lot of work, and I'd like to recognize Lunsford Bridges and Susie Smith, particularly, for helping us understand all the issues that we have in this merger going forward. They have been wonderful to work with along with the rest of the associates at Metropolitan.

We put a lot of numbers in front of you when we announced this merger, and we've been testing those numbers. We believe they're all still very accurate, very conservative, so we feel comfortable there. We expect the closing to be late November, early December, which was our original timeline. We have no indication from any regulator that there are any issues with the applications. We expect to have our branch consolidation plan completed and consolidated by the end of March next year.

So we are still on the same timeline that we outlined to you in our announcement. All of the numbers still look very good and very conservative.

So we appreciate your support. We appreciate you calling in today. I will remind you, as Bob just told me, that we will have significant merger-related costs in the fourth quarter.

I think our original projection was a little over $8 million. We're hopeful that that number can be a little less than that, that there's some negotiations that are ongoing that will determine whether that number stays at $8 million or a little less. Thanks for calling in today and have a great day.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.