Simmons First National Corp (SFNC) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to the Simmons First National Corporation fourth-quarter earnings conference. Today's conference is being recorded. At this time for opening remarks, I would like to turn things 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 fourth-quarter earnings teleconference and webcast. Joining me today are George Makris, Chief Executive Officer; 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'll 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 risk, 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 fourth-quarter conference call. In our press release issued earlier today, Simmons First reported fourth-quarter core earnings of $7.7 million, an increase of 4.7% compared to the same quarter last year. Diluted core EPS was $0.48, a 9.1% increase quarter-over-quarter. For the year ended December 31, 2013, core earnings were $27.6 million or $1.69 diluted core EPS, a 6.3% increase from 2012.

During the quarter, we had non-core after-tax non-interest expenses of $4 million in merger-related and branch rightsizing costs. In November, we announced the completion of the Metropolitan National Bank purchase. As a result of this acquisition, we recognized $3.9 million in after-tax merger-related expenses. Additionally, during the fourth quarter, we closed one underperforming branch and recorded $66,000 in after-tax nonrecurring expenses related to the closure. Including these non-core extensions, net income for the fourth quarter was $3.8 million or $0.23 diluted EPS. On a year-to-date basis, net income was $23.2 million or $1.42 diluted EPS.

On December 31, total assets were $4.4 billion. The combined loan portfolio was $2.4 billion and stockholders' equity was $404 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 2.2% even after the recent market increase in our stock value. Over the last two years, we have increased our annual dividend by a total of $0.08 or 10.5%. During 2013, we repurchased approximately 420,000 shares at an average price of $25.89. As a result of the Metropolitan acquisition, we suspended the stock repurchase program during the third quarter.

Net interest income for Q4 2013 was $39.6 million, an increase of $9 million or 29.5% compared to Q4 of 2012. This increase was driven by growth in our legacy loan portfolio, earning assets acquired through the Metropolitan transaction and an increase in accretable yield on acquired loans. Net interest margin for the quarter was 4.7%, a 71 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 Q4, our actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded an $8.8 million credit mark accretion to the interest income. This was a $6.2 million incremental increase in accretion from the same quarter last year, a 67 basis point positive impact on margin. Total accretable yield recognized during the fourth quarter was $10.4 million. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss-sharing agreements with the FDIC, which were recorded as indemnification assets. The impact to noninterest income for Q4 2013 was an $8.4 million reduction.

Noninterest income for Q4 2013 was $7.7 million, a decrease of $7 million or 47.7% compared to the same period last year. The decrease was primarily driven by a $5.9 million increase in FDIC indemnification asset amortization. Also included in last year's noninterest income was a $2.3 million bargain purchase gain on our Q4 FDIC-assisted acquisition of Excel Bank of Sedalia, Missouri. Normalizing for the nonrecurring gain and the incremental increase in the indemnification asset amortization, noninterest income for Q4 2013 increased by $1.1 million or 7.5%.

The most significant items of noninterest income were the incremental partial quarter impact in Metropolitan of $1.8 million and the legacy mortgage lending income decreased by $864,000 compared to last year because of substantially lower refinancing volumes due to a market-driven increase in mortgage rates. Pretax noninterest expense for Q4 was $41.7 million, an increase of $9.5 million compared to the same period in 2012. Included in Q4 2013 noninterest expense were the following major items. Merger-related costs for our acquisition of Metropolitan totaled $6.4 million during Q4 2013. During the same period last year, we recorded $1.1 million in merger-related costs for our FDIC-assisted acquisitions. As a result, total merger-related expenses increased by $5.3 million from last year. We closed one underperforming branch during the quarter incurring one-time costs of $108,000.

Also, during the fourth quarter, we had $3.7 million of incremental normal operating expenses attributable to the addition of the Metropolitan operations. Excluding the nonrecurring merger-related costs, branch rightsizing expenses and the Metropolitan operating expenses, non-interest expense increased by $332,000 or 1.1% on a quarter-over-quarter basis. Expense control remains good and we continue to search for additional efficiency opportunities.

Our combined loan portfolio was $2.4 billion, an increase of $483 million or 25.1% compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans increased by $369 million net of discounts while our legacy loans increased $114 million or 7%. Excluding the decrease in student loans, which is no longer part of our lending initiative, our legacy loan growth was $122 million or 7.7%. We are encouraged by the continued growth in our legacy loan portfolio during the fourth quarter while 8% organic growth represents a significant improvement over the last three years and Q4 marks the fifth consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth was driven by a $102 million increase in real estate loans and a $28 million increase in commercial loans, partially offset by an $8 million decrease in consumer and other loans.

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-sharing indemnification. Therefore, all acquired assets are excluded from the computation of asset quality ratios for our legacy loan portfolio. It is important to remember that the acquired noncovered loans are protected by our credit mark and the acquired covered loans are protected by a credit mark and 80% loss coverage by the FDIC. At December 31, 2013, the allowance for loan losses was $27.4 million and the loan credit mark was $101.4 million for a total of $128.8 million of coverage. This equates to a total coverage ratio of 5.1% of gross loans. The ratio of credit mark to acquired loans was 13.3%. The allowance for loan losses equaled 1.57% of total loans and approximately 298% of nonperforming loans.

Nonperforming loans as a percent of total loans was 53 basis points, down 3 basis points from last quarter. At December 31, nonperforming assets were $74.1 million, an increase of $38.2 million from the prior quarter. Included in this total was $42.1 million of acquired noncovered OREO net of the credit mark from the Metropolitan acquisition. The annualized net charge-off ratio was 22 basis points for the full year of 2013. Excluding credit cards, the annualized net charge-off ratio was only 15 basis points for the full year.

Our credit card portfolio continues to compare very favorably to the industry. Our annualized net credit card charge-offs to loans was only 1.31% for Q4 and 1.33% for the entire year. Our loss ratio continues to be nearly 200 basis points below the Federal Reserve's most recently published credit card charge-off industry average of 3.24%. For Q4, the provision for loan losses was $1.1 million, flat compared to the previous quarter and $211,000 lower than the same quarter of 2012.

Before I close, let me update you on the Metropolitan acquisition. The loan, OREO and fixed asset mark is $81.5 million, relatively close to our original projection of $84.4 million. While we will not experience the full impact of cost savings until the third quarter of 2014, we still project savings of 35% on an annual basis. We have made substantial progress on our operational integration and our system conversion is scheduled for March 21.

After a survey of our combined pro forma footprint, we identified 27 branch locations that will be operating in close proximity and will not meet our performance expectations within the near future. These branches are scheduled to close in concert with our system's conversion. We are convinced that the resulting branch footprint of 28 Central Arkansas branches and 10 Northwest Arkansas branches will allow us to provide enhanced quality service to our customers, including additional financial services and an improved branch staffing model. 11 of the closed branches are legacy Simmons First locations and we estimate after-tax branch closure expenses of approximately $3.5 million during Q1 of 2014. Our shelf offering filed in 2009 recently expired. We intend to file a universal offering in the first quarter to ensure that we are prepared for opportunities that may require additional capital.

In closing, we remind our listeners that Simmons First experiences seasonality in our earnings due to our agricultural 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 lines for questions from our analysts and institutional investors. Let me ask the operator to come back on the line once again to explain how to queue in for questions.

Thank you. (Operator Instructions). Brian Zabora, KBW.

Thanks, good afternoon. A question maybe to start with margin. When you have a full quarter of Metropolitan, any sense of what that margin can be compared to fourth quarter?

Brian, this is Bob. I would tell you, first, we obviously had a pretty big pickup from September through December going from 4.27% to 4.70%. The biggest piece of that pickup was the accretable yield with the excess credit mark that we had. And I would say that piece of it, the excess, was somewhere between the 80 and 100 basis points. Metropolitan will be accretive when it comes on. Yet the amount for the excess will be a little bit lower on a quarterly basis going forward. So I would tell you that, going forward, we are probably in that 4.60% to 4.75% range on a go-forward basis.

Great. That's very helpful. And then a question -- maybe you could follow on on accretion income. Thank you for putting the 2014 estimates in the press release. But if you look out to 2015 and beyond, it looks like accretion is still pretty sizable, about $11.6 million. What is left on the FDIC indemnification expectations, with it running out, it's only about $5 million or $5.5 million? Is this going to be -- is the accretion going to be over a couple years or is it going to be -- I can see a lot more benefit maybe in 2015 than we do in 2014.

Just a reminder how we have to take care of the accretion and the indemnification. The indemnification is written off over the shorter of the life of the loan or the agreement with the FDIC. So then obviously the expense on that is much higher and quicker on the amortization. On the income side, that is accretive to income over the life of the loan. Has no relevance to what the FDIC agreement is. So we will get to a point down in 2015, 2016 that some of the earlier deals the FDIC will have done away with coverage and so all of that will be going to income. So yes, you will see some, in those latter years, where the income piece of that will be higher than we have seen in these last couple. But as you see in the press release, we have again $21 million in 2014 coming to interest income, $20.6 million and then after that, it will probably be a higher piece that will be in income than the expense piece that we have to write off.

Great. Well, thank you for taking my questions.

Sure, thank you, Brian.

(Operator Instructions) Matt Olney, Stephens.

Hey, I wanted to ask about your overall capital levels. I heard you mention the shelf filing that you expect and you could pull at a big chunk of the excess capital in Metropolitan. How are you thinking about capital today relative to your overall M&A expectations?

Matt, I will attempt to answer that. The Metropolitan deal was all cash. We did take quite a bit of our capital to do that. We got down to 7.2% of TCE and that's traditionally a little lower than where we like to be. But we would expect to be close to 8% by the end of 2014. We continue to look at opportunities for traditional M&A. Our preference and most of our discussions to date have been either all or majority stock deals. So we don't anticipate any deal that is coming down the pike or might come down the pike that would require additional capital. But you're familiar with our history and we really don't like to cut it close. So we want to be prepared in case we find an opportunity that has a cash component that would require us to go to the market and raise a little additional capital. But nothing is required at this point.

Okay.

I was just going to point out also, as George said, on the deals we have been able to price at this point, anything looking forward, the capital has been either neutral or accretive, so we still have capacity in there if you were to look forward.

And how should we be thinking about the timing of adding potentially another acquisition? Is there anything that would prevent an acquisition the first half of the year or how are you thinking about timing going forward?

Well, obviously, we would have to talk to the regulators and make sure that they felt the same way we felt. But I will tell you that the Metropolitan transition has gone better than expected. I would tell you that the production folks have done a great job and our leadership in Little Rock and Northwest Arkansas have really taken the ball and run with it with regard to production. We have got the conversion that is going to happen on March 21. That will be really the last piece of the Metropolitan acquisition's merger. And I feel very good about how that process is going and I feel like very shortly after that we would be in a position to tackle another opportunity.

Okay. That's helpful. And then as far as one of your other priorities over last year has been bringing on new lenders. Is that still a big priority of yours today or has that really slowed down more recently with the integration of Metropolitan Bank? And what is the outlook for bringing on new lenders in the future?

Matt, we are always interested in good production people. And I would tell you that will probably never go away. We probably don't have that same sense of urgency today that we had a year ago. Because of where we were in our FDIC acquisitions, we really have no production staff to speak of in Missouri and Kansas. So we hired seven new lenders there. They put on the books more than $70 million by year-end. We expect them to continue that kind of production into 2014 because really most of them didn't start until midyear. So that $70 million of production is only six month's worth of what they were able to do in the market. We continue to look in those markets, particularly for new production people and as we find them, we will put them on board.

We do have several new lenders through the Metropolitan acquisition in Central Arkansas and Northwest Arkansas. We picked up a wonderful mortgage lending group that we are awfully proud of in the Central Arkansas market. So while we may not be out actively looking for additional lenders, we picked up several in that acquisition that we expect great things from.

Matt, one other thing. This is David Bartlett. One other thing too with the Metropolitan lenders that have come on board, they have been a little hand strong with the opportunities they could go out and try to put together because of their agreements with the regulators and those being out of their way, there is some production opportunity they are excited about. I agree with what George has said. I think we will see some nice loan production, new loan production, out of those officers as well.

Sure, that makes sense. Thanks, guys.

(Operator Instructions). And at this time, we don't have any further questions. Mr. Makris, I will turn the conference back to you for closing remarks.

Okay. Well, thanks to everyone that called in and thanks to Brain and Matt for your questions. And we look forward to another good quarter and we will talk to you in about three months. Have a great day.

And that will conclude today's conference. Again, we thank you all for joining us.