Simmons First National Corp (SFNC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation first-quarter earnings call and webcast. (Operator Instructions)

I would now like to turn the call over to David Garner.

Good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our first-quarter earnings teleconference and webcast. Joining me today are 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 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 of the 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'll turn the call over to George Makris.

Thank you, David, and welcome, everyone, to our first-quarter conference call. In our press release issued earlier today, Simmons First reported first-quarter core earnings of $7.5 million, an increase of 23% compared with the same quarter last year.

Diluted core EPS was $0.46, and 24.3% increase quarter over quarter.

During the quarter we had non-core after-tax noninterest expenses of $3.1 million in merger-related and branch rightsizing costs. During the quarter we completed the system integration and branch consolidation associated with the Metropolitan acquisition. Also during the quarter we announced the acquisition of Delta Trust & Bank.

As a result of these acquisitions, we recognized $700,000 in after-tax merger-related expenses and $2.4 million in branch rightsizing costs. Including these non-core expenses, net income for the first quarter was $4.4 million or $0.27 diluted EPS.

On March 31, total assets were $4.4 billion. The combined loan portfolio was $2.3 billion, and stockholders' equity was $470 million.

During the first quarter we increased our quarterly dividend from $0.21 to $0.22 per share. On an annual basis the $0.88 per share dividend resulted in a return of approximately 2.4%. Over the last two years we've increased our annual dividend by a total of $0.08 or 10%.

Net interest income for Q1 2014 was $41.5 million, an increase of $11.5 million or 38.1% compared to Q1 of 2013. 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 4.54%, a 53 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 accruals acquired in our FDIC acquisitions. In Q1 actual cash flows from our acquired loan portfolio exceeded our prior estimates.

As a result, we recorded $7.4 million credit mark accretion to interest income. This was a $4.4 million incremental increase in accretion in the same quarter last year, which had a 40 basis point positive impact on our margin. Total accretable yield recognized during the first quarter was $10.1 million.

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 incremental negative impact to noninterest income for Q1 2014 was $4.6 million. Noninterest income for Q1 2014 was $9.2 million, a decrease of $2.1 million or 18.7% compared to the same period last year.

The decrease was due to the $4.6 million increase in FDIC indemnification asset amortization. Normalizing for the incremental increase in the indemnification asset amortization, noninterest income for Q1 2014 increased by $2.5 million or 17.7%.

The most significant items in noninterest income were the first-quarter impact from the Metropolitan acquisition -- the acquired deposit accounts, primarily created in service charge and fee income increases of $3.5 million, while mortgage lending income decreased by $406,000 compared to last year because of the substantially lower refinancing volumes the entire industry has experienced.

Pretax noninterest expense for Q1 2014 was $44.6 million, an increase of $12.6 million compared to the same period in 2013. Included in Q1 2014 noninterest expense were the following major items: number one, in March we completed the branch consolidation plan related to Metropolitan acquisition. During the quarter we recorded branch rightsizing costs of $3.9 million associated with the closure of 11 legacy Simmons branches.

Number two, merger-related expense for Metropolitan and Delta Trust acquisitions totaled $1.3 million during Q1 2014. During the same period last year, we recorded $300,000 in merger-related costs by our FDIC-assisted acquisitions. As a result, total merger-related expenses increased by $1 million from last year.

Excluding the nonrecurring, merger-related costs and branch rightsizing expenses, noninterest expense increased by $7.7 million or 24.4% on quarter-over-quarter basis, primarily due to incremental operating expenses of the acquired Metropolitan locations. Our combined loan portfolio was $2.3 billion, an increase of $518 million or 28% compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans increased by $328 million net of discounts, while our legacy loans increased $191 million or 12%.

The legacy loan growth was driven by a $154 million increase in real estate loans and a $41 million increase in commercial loans, partially offset by $5 million decrease in consumer and other loans. When we make a credit decision on an acquired, noncovered loan, the outstanding balance migrates from acquired loans to legacy loans. Our Q1 legacy loan growth included $27.4 million in balances that migrated during the quarter. Excluding the acquired loan migration, legacy loans increased by $164 million or 10.3%.

We're encouraged by the continued growth in our legacy loan portfolio during the first quarter. The 10% organic growth represents a significant improvement over the last three years, and Q1 marks the sixth consecutive quarter with legacy loan growth on a quarter-over-quarter basis.

We continue to have good asset quality. As a reminder, acquired assets are recorded at the 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. Therefore, all acquired assets are excluded from the computation of the asset quality ratios for our legacy loan portfolio.

It is important to remember that acquired noncovered loans are protected by a credit mark, and the acquired covered loans are protected by a credit mark and 80% loss coverage by the FDIC. At March 31, the allowance for loan losses was $27 million, and the loan credit mark was $96.5 million, for a total of $123.5 million of coverage.

This equates to a total coverage ratio of 5% from gross loans. The allowance for loan losses equaled 1.52% of total loans and approximately 216% of nonperforming loans. Nonperforming loans as a percent of total loans were 70 basis points.

At March 31, nonperforming assets were $70 million, a decrease of $4.1 million from the prior quarter. The annualized net charge-off ratio was 32 basis points for the quarter. Excluding credit cards, the annualized net charge-off ratio was 22 basis points.

Our credit card portfolio continues to compare very favorably to the industry. Our annualized net credit card charge-offs to loans was only 1.20% for Q1.

Our loss ratio continues to be nearly 200 basis points below Federal Reserve's most recently published credit card charge-offs industry average of 3.13%. For Q1, the provision for loan losses was $908,000, down $176,000 compared to the previous quarter, and $11,000 lower than the first quarter of 2013.

We're still on schedule with our previously announced charter consolidation. We will merge and consolidate three of our subsidiary banks into Simmons First National Bank during May and the remaining three banks in August. We also remain confident that the Delta Trust & Bank merger will be completed in July of 2014.

In closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural and credit card portfolio lending. For instance, on a quarter-over-quarter basis, credit card and agri loans were up $8.4 million and $5 million, respectively. Nice growth on an annual basis.

However, on a linked-quarter basis, we experienced seasonal decreases of $13.6 million and $26.7 million in these portfolios. 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 and once again explain how to queue in for questions.

(Operator Instructions) Matt Olney, Stephens.

George, you mentioned the charter consolidation in your prepared remarks. Can you highlight for us what type of savings you are anticipating from that consolidation and over what time period?

Matt, we think that by the fourth quarter we ought to be at an annual run rate of about $1 million after tax. But there's still some issues that we haven't quite -- I don't want to say resolved, but we haven't concluded yet based on the Delta conversion, which we expect to happen in the fourth quarter. But if nothing else changes, we expect $1 million after tax on an annual run rate.

Okay. And then looking at expenses overall, it looks like you guys made a lot of progress in the first quarter on Metropolitan. Can you give us an update of where you are on that initiative compared to the original expectations and where you want to be? And do you still expect a clean EPS run rate from Metropolitan by the third quarter?

I didn't hear the last part of the question.

Do you expect a clean run rate on the --.

Sure. Sure, Matt. You know, we completed the conversion and the branch consolidation and the branch closures on March 21. So the first quarter includes a full quarter of expenses of operating all those branches.

As you saw in our release, we had over $3 million in branch closures expense due to the 11 Simmons legacy branches that we've closed as part of that consolidation. Beginning in the second quarter, we ought to see a further reduction of approximately $2 million a quarter based on that consolidation and conversion of the Metropolitan franchise. And we think that that will be pretty steady going forward. It may not be fully in the second -- in Q2, but Q3 going forward.

And how does that compare to original expectations on the cost savings?

Well, I would say it's probably a little higher than the total of 35% which was in our original projection, but somewhere between 35% and 40%.

Okay. And switching gears, it seems like a year or so ago the Company announced the corporate goal of achieving that 1% ROA. And since then, you guys have announced a few acquisitions. Can you talk about the challenge today in reaching that 1% ROA goal? And what is a reasonable time frame for you guys to achieve this?

Matt, we expect that after the Delta conversion, which we anticipate to happen in October, we will be at 1% or higher ROA on an annualized basis. So that's our goal, and we think that that is -- these guys are going to kill me when I say easily achievable, but we think that's a very realistic time frame to get that 1% ROA.

Okay, that's helpful. Thank you very much.

Thank you, Matt.

Brian Zabora, KBW.

A question on the legacy loans -- I guess the acquired loan portfolio. You talked about how you make a credit decision and then the loan moves buckets. Was there a lot of those loans kind of early in this quarter, since you have had maybe just one quarter of Metropolitan? And is that slow? Or can you just kind of talk about kind of the pace of what you may see as loans moving from those two buckets?

Brian, we had, I think, $27 million and some change in the first quarter where we had renewals, and we made a new credit decision on Metropolitan loans. That will probably continue for the rest of the year at about that pace.

A pretty even pace.

So it just depends on when that renewal time comes up and when we have an opportunity to make a new credit decision. And when it goes into our legacy loan portfolio, it goes into our loan loss calculation. So we will be adjusting our loan loss reserve based on that migration from acquired loans into our legacy portfolio.

Now, the FDIC loans are a little bit of a different animal. They don't migrate nearly as quickly because of our accountability to the FDIC and loss share coverage. So that could be over a protracted period of time and not nearly as quickly as these acquired loans through Metropolitan.

Sure, sure. And then on the margin, maybe just the outlook for the year. Do you think it's, maybe, stable from here? Or just any thoughts around the margin?

Well, I would tell you on the margin -- first quarter, remember, due to seasonality we're going to be at our lowest level, with the agri portfolio paying down and also on our credit card. So we are at about 4.50%. I would say on the high end, when we hit Q3 this year, we'll probably be in the 4.65% range. So somewhere in that 4.60% range for the balance of the year is what I would expect.

Again, this should be our low point of the year with the seasonality. I would also tell you, in Q4 we reported we had about 100 basis points related to the accretion on the acquired loans. That number is down to about 70 basis points for this quarter.

Okay, all right. And just lastly, can you talk about -- you've closed some of these branches. They've been closed for about a month now. What's been the impact as far as, maybe, loan balances and deposits? Have you seen any impact as far as customer loss from the closure of branches?

Well, I'm going to let David Bartlett give you the good news, okay?

Yes, Brian, that almost feels like a teed-up question, because -- let me complement what a great job our lenders and our retail people have done in both central and northwest Arkansas, and it ties into the numbers we're seeing in the performance of Metropolitan post-conversion being a part of Simmons First.

In central Arkansas, we've retained about 99% of core deposits. We started out with about 77,000 core accounts and $600 million plus of core deposits, and we are still at that 76,000 core account number and about $590 million in core deposits. Northwest Arkansas: prior to the merger, we were about 18,000 core accounts, $128 million in deposits. And we're up to about $134 million in deposits and roughly 18,000 core accounts.

So the retention has been strong; the account number of dollars has been strong, as well. So our people are really doing a good job in working and retaining those core balances. Loans are doing the same thing for us. We're seeing very good retention of loan customers as well.

Great. Well, thanks for taking my questions.

(Operator Instructions) Kyle Oliver, Raymond James.

I understand the seasonality in the loan portfolio with agriculture and the credit card loans, but I was just wondering which markets and in which categories you were seeing the strongest growth? Obviously, it looked like construction and commercial were strong. But is it widespread, or is it more concentrated in a few markets?

Well, I'll say this, Kyle. We experienced loan growth in almost every market that we measure. And I'll tell you, in our out-of-state markets -- you probably remember that we hired seven new lenders about June of 2013, in that timeframe. Our loan balance in our Kansas and Missouri markets is up $85 million over this time last year.

Our six affiliate banks across the state of Arkansas are up $30 million. Our central Arkansas presence is up $30 million. So I would tell you that we are experiencing good growth in virtually every market we serve.

And how are the pipelines looking now?

The pipelines are looking really good. We anticipate the same kind of growth that you're seeing this quarter.

All right, great. Thanks, guys.

(Operator Instructions) There appear to be no further questions. I would now like to turn the call back over to Mr. Makris.

Thank you very much, and I want to appreciate all of you for joining us today. We will look forward to visiting with you after the second quarter. Thanks. Have a good day.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.