Simmons First National Corp (SFNC) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Simmons First National Corporation second-quarter earnings call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(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 second-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 other guests in this conference 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, 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 achievement. 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 second quarter conference call. Second quarter was a landmark quarter for Simmons. We announced two acquisitions totaling approximately $3 billion in assets, and today reported record core earnings and record core earnings per share for the quarter. In our press release issued earlier today, we reported second-quarter core earnings of $9.2 million, an increase of 42.8% compared to the same quarter last year. Diluted core EPS was $0.56 a share, a 43.6% increase quarter over quarter. Core earnings exclude $755,000 in net after-tax earnings.

Let me give you an overview of the non-core items from the second quarter. First, we announced the acquisitions of Community First Bancshares in Union City, Tennessee, and Liberty Bancshares in Springfield, Missouri. As result of these acquisitions, along with previously announced Delta Trust and Bank acquisition, we recognized $823,000 in after-tax merger-related expenses.

Also, we had net after-tax gains of $1.2 million related to the sale of previously closed branches, which were offset somewhat by costs related to maintaining the properties. These were sales of branches closed during the first quarter related to the integration of Metropolitan National Bank into Simmons Bank. We also incurred $252,000 in after-tax charter consolidation cost during the quarter. Finally, we recorded a $608,000 after-tax gain on the sale of our merchant services business.

Including these non-core items, net income for the second quarter was $9.9 million, or $0.60 diluted EPS, compared to $6.6 million, or $0.40 diluted EPS, or a 50% increase over the same period last year. Year-to-date core earnings were $16.6 million, and core EPS was $1.02 per share, compared to $12.5 million and $0.76 last year.

On June 30, total assets were $4.3 billion. The combined loan portfolio was $2.4 billion, and stockholders' equity was $414 million. Net interest income for Q2 was $40.4 million, an increase of $10.8 million, or 36.7%, compared to Q2 2013. This increase was driven by growth in our legacy loan portfolio, and earning assets acquired through the Metropolitan transaction, offset by a decrease in accretable yield on acquired loans.

Net interest margin for the quarter was 4.34%. Normalized for the accretable yield adjustment impact, net interest margin was 3.74%, compared to 3.76% in Q1. 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 Q2, actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded a $5.9-million credit mark accretion to interest income. This was a $2.7-million incremental increase in accretion from the same quarter last year, which had a 19-basis point positive impact on margin.

Total accretable yield recognized in the second quarter was $8.2 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 of non-interest income for Q2 was $3.3 million. Non-interest income for Q2 2014 was $15.4 million, an increase of $4.1 million, or 36.5%, compared to the same period last year.

Included in non-interest income for the quarter were a couple of significant non-recurring items that I previously mentioned. We recognized $2.3 million in pre-tax gains from the sale of branches that were closed as part of our Metropolitan integration. We also recorded a $1-million pre-tax gain from the sale of our merchant services business. We made a strategic decision to sell this unit. While we will have a reduction in revenue, the net financial impact to the Company will be relatively unchanged, with a significant reduction in risk exposure.

Another large item offsetting these gains was the $3.3-million increase in FDIC indemnification asset amortization. Normalizing for the non-core income and the incremental increase in the indemnification asset amortization, non-interest income for Q2 increased by $3.9 million. The increase was primarily driven by the impact of service charge and fee income from deposit accounts acquired as part of the Metropolitan deal.

Pre-tax non-interest expense for Q2 was $39.8 million, an increase of $9.5 million compared to the same period in 2013. Included in Q2 non-interest expense were the following major items. Merger-related expenses increased by $1.8 million from last year. We recorded pre-tax branch right-sizing expense of $300,000, associated with the maintenance of branches previously closed and held for sale. During May we consolidated three of our subsidiary banks into Simmons First National Bank, and recorded $414,000 of charter consolidation costs, mostly related to systems conversion.

Excluding the non-recurring, merger-related branch right-sizing, and charter consolidation expenses, non-interest expense increased by $7 million, or 22.7%, on a quarter-over-quarter basis, primarily due to incremental operating expenses of the acquired Metropolitan locations.

Our combined loan portfolio was $2.4 billion, an increase of $512 million, or 27.3% compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans increased by $293 million, net of discounts, while our legacy loans increased $218 million, or 13.2%. The legacy loan growth was driven by a $155-million increase in real estate loans, and an $85-million increase in commercial loans, partially offset by a $22-million decrease in consumer and other loans.

When we make a credit decision on an acquired non-covered loan, the outstanding balance migrates from acquired loans to legacy loans. Our Q2 legacy loan growth includes $16.2 million in balances that migrated during the quarter. Excluding the acquired loan migration, legacy loans increased by $175 million, or 10.6%.

We are encouraged by the continued growth in our legacy loan portfolio during the second quarter. The double-digit organic growth represents a significant improvement over the last three years, and Q2 marks the seventh consecutive quarter with legacy loan growth on a quarter-over-quarter basis. During the second quarter we sold the majority of our student loan portfolio at par, which was approximately $24 million.

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-sharing 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 the acquired non-covered 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 June 30, the allowance for loan losses was $27.5 million. The loan credit mark was $88.8 million, for a total of $116.3 million of coverage. This equates to a total coverage ratio of 4.7% of gross loans. The allowance for loan losses equaled 1.47% of total loans, and approximately 245% of non-performing loans.

Non-performing loans as a percent of total loans were 60 basis points. At June 30, non-performing assets were $64.7 million, a decrease of $5.4 million from the prior quarter. The year-to-date annualized net charge-off ratio was 28 basis points. Excluding credit cards, the year-to-date annualized net charge-off ratio was 17 basis points.

Our credit card portfolio continues to compare very favorably to the industry. Our year-to-date annualized net credit card charge-offs to loans was only 1.17% through the second quarter. Our loss ratio continues to be more than 200 basis points below the Federal Reserve's most recently published credit card charge-off industry average of 3.32%. For Q2, the provision for loan losses was $1.6 million, up $694,000 compared to the previous quarter. Provision expense included a net $161,000 for acquired covered loans.

We are still on schedule with our previously announced charter consolidation. We will merge and consolidate our remaining three subsidiary banks into Simmons First National Bank during August. During June we received Federal Reserve approval to acquire Delta Trust and Bank. We anticipate the merger will be completed during August 2014. Regarding the Community First and Liberty acquisitions, the regulatory applications are in the process of being filed, and we believe we are still on course for a Q4 2014 closing.

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. 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.

Good afternoon guys, this is actually Tyler Stafford in for Matt. How are you doing?

Hi, Tyler. How are you?

I'm doing well, thank you. I wanted to start on the loan growth. It looks like you had some nice loan growth within your legacy portfolio, even outside of the seasonal strength of ag portfolio. Can you talk about the trends you're seeing within that legacy book, and what markets are driving that growth?

Tyler, I will start, and then I will turn it over to David Bartlett for a little more detail. I would tell you that our growth is coming from virtually every market we serve. We're seeing some of the new lenders that were hired about a year ago in our Kansas and Missouri markets starting to really have some production success up in those markets.

But I will turn it over to David and ask him to talk about the trend that we see, and maybe a little more detail about some of the markets.

Hi, Tyler, David Bartlett here. Thanks for the question, and quite frankly we're seeing some nice loan growth in the core areas, primarily in St. Louis, Kansas City, and Wichita. Little Rock, central Arkansas, is still driving some nice loan growth for us as well in our legacy portfolio. We anticipate around a 7% to a 10% growth in that portfolio going forward. That's pretty well where we see our legacy growth portfolio.

What about your pipelines as they stand today?

Tyler, as David mentioned, if everything comes through that we see the pipeline that 7% to 10% growth rate ought to be pretty easy to attain. I would tell you they're pretty steady with what you've seen over the last two quarters, at least.

Okay. Then switching over to M&A and a bigger-picture question, if you will. You've got three pending bills now. How do you balance the pipeline of additional M&A opportunities with everything that's on your plate with the integration of the existing deals? Can you give any color on that?

Sure. Well, I will tell you our focus right now is squarely on the integration of these deals. We are spending a lot of time talking to our newest friends at Liberty Bank and First State Bank and Delta Trust to make sure we understand how to integrate their successful lines of business with ours. We are well down the road to understanding some of their product lines that we didn't previously have at Simmons, and are getting even more excited about that opportunity once we get to roll those out across the entire franchise. That's a high priority for us right now.

I will tell you that because of our pending size, and that is about $8 billion, we are going to have to spend a little time visiting with regulators about how things will change for us once we pass $10 billion. As we take a look at out-of-state opportunities, we would like those acquisitions to be big enough to be a stand-alone region on their own. For us that means about $1 billion or more.

I will tell you that we continue to have a keen interest in the states we are in and filling in footprints; and also in some other contiguous states we've mentioned before, like Oklahoma and Texas. We are going to defer any serious discussions until at least the end of this year, and probably into the first quarter of 2015. We are pretty well booked between now and April of 2015 with regard to closings and conversions, so anything we would do would have to occur after that timeline.

I'm not speaking of any relatively small deal that we may run across in the mean time that would make a strategic sense for us. For instance, some very specific line of lending, or very compressed geographic coverage area that would fill in very well, we might be able to handle something like that. But any large acquisition we think is a 2015 project.

Okay, that's helpful, George. I appreciate it.

Sure.

Brian Zabora, Keefe, Bruyette, Woods.

One question I had on the gains you recorded, specifically the merchant gain, was that in other income, other fees, or did that flow through another line item? I just wanted to double-check where it came from.

Other income, Brian, on the income statement, in the non-interest income category.

Okay. Credit card fees -- that's all organic, that was pretty strong. Can you give a sense, are you expanding your operations to maybe Metropolitan, or maybe talk about a little bit of the strength of the credit card fee line item?

I tell you first the credit card income was really up about 4% or so. That was really a re-class related to the Metropolitan after the conversion. If you look up in other service charges and fees, that was done about that like amount.

Okay.

It looks like it is up about 30%, but that's really a re-class after the conversion.

Great. Okay, that make sense. Could you give us a sense on how much accretion interest income did you receive from Metropolitan this quarter compared to last?

Let me just give you the total numbers. For this quarter our accretable yield was $8.2 million, versus about $10.1 in the first quarter. If you look also in the press release we give you the numbers for the quarter on the excess we have to accrete and the write-off we have in non-interest income.

Our excess, we accreted to income $5.8 million, while our indemnification asset went down $6.4 million. We actually had a negative impact to the P&L this quarter from that related to that.

Sure.

Metropolitan, their accretable yield was relatively flat from this quarter to the first quarter.

Okay. Do you -- with the margin there's going to be -- I know there's some seasonality, but how do you think about the margin going forward in the second half of the year? I know you've got acquisitions potentially closing in the fourth quarter, but any thoughts around the margin would be helpful?

I think first off I would tell you when you look at us, first you need to look at what the core margin is, and that takes out a lot of this accretable component of it. But we are at $374 million compared to about $375 million in the first quarter, so relatively flat. Third quarter will pick up. That will be our highest yielding for seasonality.

As we put more assets, as these loans -- we talked about going from 7% to 9%, 10% loan growth. As we move that from the lower costing funds and Fed funds, that yield will go up. I would say on a core basis of the $375 million we will be improved from those numbers.

The top number, the reportable number is going to be volatile as we go up and down with you accretable yield over the next couple quarters. I would say that $435 million is going to be in that -- anywhere from the $420 million to $435 million range.

Okay, that's helpful. Lastly, the business you sold, can you give a sense on maybe the annual revenues and expenses, just for modeling purposes?

I tell you, first off we think the revenue down -- I don't have that number, but it is going to be down $1 million or so. But on net side, the expenses that go with it, it's basically a wash.

Okay.

What we've done here is we were able to get out of this line of business and take off a lot of liability off the books, and yet keep our revenue. We having revenue sharing going forward, so our revenue and the increase going forward we think will be about a wash, if we were in the business line.

On the gross side we'll see a little volume, but on our size balance income statement it will be relatively negligible in there.

Sounds great. Thanks for taking all my questions. I'm sorry, go ahead?

Brian, this is George. Just a little bit more on the merchant services sale. It is always hard to make a decision to get out of a service area. This one was not as difficult for two major reasons. One is in 2015 the conversion to the chip credit cards is coming into play, which means that many merchants are going to have to convert their card readers. That is a huge capital expense that we were looking forward to. We don't have that expense now going forward.

The second thing is, and Bob mentioned it, is the risk associated with merchant services business. All that has left us at this point. We still have a great marketing agreement, so we still have a great revenue stream coming in, and we can focus on what we do well -- that is sales to our customers and providing that service through a third party who quite honestly over time is going to be much more proficient in providing that service than we were going to be able to be.

I really appreciate all the color.

Sure.

(Operator Instructions)

Michael Rose, Raymond James.

Wanted to get your thoughts on the provision from here. One of your in-state competitors today just reiterated the fact that they are going to build reserves as the bank they've acquired moved from loss -- they're not loss-share accounting, but switched accounting basically to more of a core basis, and then building reserves because of that.

Clearly you're adding three deals with a fair amount of assets here. How should we think about the absolute level reserves as those deals are layered in as we move into 2015, and what provisioning can look like?

Michael, we are experiencing the same things. We're moving loans from our acquired bucket to our legacy bucket. We have to start accounting for those loan losses in a traditional manner. You can see that we have deferred income of about $6.5 million, with a differential between the accretable yield and the indemnification asset.

A lot of that -- not all of it, but a lot of that's going to be taken up in the addition to our provision as those loans migrate into our legacy portfolio. You could expect a similar process with our pending acquisitions. Even though the marks aren't quite as substantial on those as you have been used to seeing with our Metropolitan acquisition, and certainly nothing like the marks we had on the loan portfolios of the FDIC acquisitions.

But yes, you're going to start seeing that mark go down and our provision go up, as those loans move into our legacy portfolio.

Michael, one of the follow-up items I'd say, too -- as we move it, just for clarification, those loans that are impaired will stay in the acquired bucket, and those are the ones that have the substantial mark against them. As long as they're on the books until they either pay off or we resolve them other ways, those marks will stay with them.

But the unimpaired loans, we'll be accreting those marks to income under FAS-91 type rule. As George said, those will migrate to our legacy portfolio. As they migrate, I would say those loans on average will have about a 1.5% allowance, if it's typical to the rest of our portfolio, whereas the higher percent is allocated to those impaired loans.

For example, this year we had $16 million of Metropolitan's loans migrate from their acquired bucket to the legacy bucket in this quarter. I think it was $25 million in the first quarter. We probably have somewhere in the $50-million range for the balance of the year that will migrate.

As we move into the other acquisitions, those numbers will substantially increase. These accounting rules that we are under now, it makes -- related to the loans -- makes it a challenge for I know for you all on the outside to look at what are the expectations on the provision and that allowance change, But that's the rules we're under right now.

Okay, so maybe the way to think about it is as mortgage loans migrate and you also have a pick-up in your legacy portfolio, it sounds like the trim lines there are relatively good. We should not only expect the dollar amount of provisioning to go up, but also the reserve-to-loan ratio to move up as well. Am I thinking about that correctly?

Exactly. You hit it.

Okay. Then just a follow up. You mentioned potentially starting a plan for crossing that $10-billion threshold, and obviously these three deals will get you definitely a lot closer. Have you quantified, or can you quantify, any sort of incremental costs that would come, or that would be required? Then what would the potential Durbin hit be for you? How long do you think it would take you to be able to replace those revenues? Thanks.

I tell you, the Durbin hit could be substantial for us, in the $4-million range. That's going to be a big hit for us. We don't have a timeline for making up that revenue.

I will tell you this also. Most of the banks that we've talked to who are currently over $10 billion were over $10 billion when the rules went into effect, so they sort of had the shock effect all at one time. I'm sure that we have ramped up considerably over that period of time, and we are absorbing a lot of that cost now, not all of it.

One of our objectives is to be able to quantify what that additional cost from the increased scrutiny and regulation is going to be, and particularly things like the Durbin Amendment that's going to be a huge impact on us. We are not quite there yet. We know it is going to be an impact, but we can't put a dollar amount with it.

Okay. In terms of infrastructure compliance costs, do you have any sort of outlook for what that may be incrementally?

No, we really don't. We do what I consider to be an excellent job in the compliance arena now. We are picking up excellent compliance people in the Liberty and Delta Trust and the First State acquisitions. As far as trained personnel, I don't have any problem with being able to ramp up in that area.

What that means with regard to how much more we have to do internally than we're currently doing, that's one of the big questions that we have to answer. I really can't tell you right now.

Okay, no problem. One final one, if I could. Any change to the expected closing timelines for any of the three deals?

The only change will be the Delta Trust closing date. If you recall, I think we announced, oh, a couple weeks ago that we had made an agreement with Southern Bank Corp. for the sale -- actually the gift of a current Delta location in Eudora, Arkansas.

That was a branch that caused us an anti-competitive issue that took us a little longer to resolve than we expected on the front end. We didn't have any other issues with the application. We just had to get that resolved before we could get regulatory approval. Of course this requires the Delta shareholder approval, so that timeline got pushed back until we got the regulatory approval.

All that's on track now, it just got pushed back a little bit. We had originally anticipated that the closing would be at the end of July. It's now going to be the middle of August. I would tell you that we have filed the S-4 for the Delta acquisition this week. We expect to file the S-4s for the Liberty and the First State acquisitions before August 1, so we are actually ahead of schedule with regard to our regulatory filings.

Okay, great. Thanks for taking my questions.

Sure.

(Operator Instructions)

There appear to be no further questions. I would now like to turn the call back over to George Makris for closing remarks.

Okay, thank you very much. I want to clarify one comment I just made. We will file the S-4 for Delta this week, it has not been filed as of today. I appreciate everyone listening in today. If we don't have an occasion to talk to you for another three months, we'll look forward to talking to you then. Have a great 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.