Simmons First National Corp (SFNC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation fourth-quarter earnings call and webcast. (Operator Instructions) Please note today's conference is being recorded.

I would now like to hand the conference over to David Garner. Please go ahead.

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 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 guest 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 make 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. Welcome everyone to our fourth-quarter conference call.

In our press release issued earlier today we reported record core earnings for the quarter and for the year. Fourth-quarter core earnings were $11.4 million, an increase of 47% compared to the same quarter last year. Diluted core EPS $0.64, a 33% increase quarter over quarter. Core earnings exclude $1.3 million in net income.

Non-core items for the fourth quarter include an after-tax gain of $2.6 million related to the sale of previously closed branch facilities net of expenses related to maintaining the properties. These locations closed during the first quarter related to the integration of Metropolitan National Bank into Simmons Bank, and after-tax expenses of $1.3 million related to merger expenses, change in control payments for Delta Trust, and charter consolidation costs. Including these non-core items net income for the fourth quarter was $12.6 million, an $8.9 million increase, or 234%, over Q4 of 2013, and diluted EPS was $0.72, a 213% increase over the $0.23 reported the same period last year.

Year-to-date core earnings were $38.7 million and diluted core EPS was $2.29 compared to $27.6 million and $1.69 last year. Year-to-date net income was $35.7 million and diluted EPS was $2.11 compared to $23.2 million and $1.42 in 2013.

On December 31, total assets were $4.6 billion, the combined loan portfolio was $2.7 billion, and stockholders' equity was $494 million.

Net interest income for Q4 2014 was $47.4 million, an increase of $7.8 million, or 19.6%, compared to Q4 2013. This increase was driven by growth in our legacy loan portfolio and earning assets acquired through the Metropolitan and Delta Trust transactions.

Net interest margin for the quarter was 4.65%. Normalized for the accretable yield adjustment impact, net interest margin was 3.87% compared to 3.86% in Q3.

As discussed in previous conference calls, interest income on acquired loan includes additional yield accretion recognized as a result of updated estimates of the fair value of acquired loans. In Q4 actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded $8.2 million credit mark accretion to interest income. Total accretable yield recognized during the fourth quarter was $10.8 million.

Non-interest income for Q4 was $21.5 million, an increase of $13.8 million compared to the same period last year. The increase in non-interest income was primarily due to the following significant items.

First, losses on FDIC-covered assets decreased $5.2 million, primarily resulting from lower indemnification asset amortization. Secondly, as I previously mentioned, we recognized $4.6 million in pretax gains from the sale of facilities that were closed as part of our Metropolitan integration. And, third, we had a very nice pickup in trust income, service charge and fee income, and mortgage lending income primarily resulting from the full-quarter impact of the Metropolitan and Delta Trust acquisitions.

Pre-tax non-interest expense for Q4 was $47 million, an increase of $5.3 million compared with the same period in 2013. Included in Q4 non-interest expense were the following major items.

Merger-related expenses decreased by $5.2 million from last year. Pre-tax branch right-sizing expense associated with the maintenance of branches previously closed and held for sale increased by $284,000 from last year. Salaries and benefits increased $5.2 million.

During the quarter $2.5 million was associated with one-time accruals and change of control agreements, with the remainder of the increase a result of normal expenses associated with the Metropolitan and Delta acquisitions. An increase in OREO expense of $833,000 resulting from the write-down of OREO properties based on updated appraisals offset somewhat by decreases in other expenses on acquired OREO.

Lastly, we funded an endowment for the Simmons First Foundation with a $1 million contribution. The remainder of the increase in non-interest expense is primarily due to incremental operating expenses of the acquired Metropolitan and Delta locations.

Our combined loan portfolio was $2.7 billion, an increase of $333 million, or 13.9%, compared to the same period a year ago. On a quarter-over-quarter basis acquired loans increased by $22 million net of discounts while our legacy loans increased $311 million, or 17.9%.

The legacy loan growth was driven by a $187 million increase in real estate loans and a $144 million increase in commercial loans, partially offset by a $20 million decrease in consumer and other loans from the sale of our student loan portfolio earlier this year.

When we make a credit decision on an acquired non-covered loans, the outstanding balance migrates from acquired loans to legacy loans. Our Q4 quarter-over-quarter legacy loan growth included $98 million in balances that migrated over the past year. Excluding the acquired loan migration, legacy loans increased by $213 million, or 12.2%, from the same period last year. We remain encouraged by the continued growth trend in our loan portfolio.

We also 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 providing 80% protection against possible losses by the FDIC loss share indemnification. Therefore, all acquired assets are excluded from the computation of the asset quality ratio for our legacy loan portfolio.

At December 31, 2014, the allowance for loan losses on legacy loans was $29 million and the loan credit mark and allowance on acquired loans was $78.2 million for a total of $107.2 million of coverage. This equates to total coverage ratio of 3.8% of gross loans. The allowance for loan losses on legacy loans equaled 1.41% of total loans and approximately 223% of non-performing loans. Non-performing loans as a percent of total loans was 63 basis points.

At December 31, non-performing assets were $58 million, a decrease of $4.8 million from the prior quarter. The year-to-date net charge-off ratio was 22 basis points. Excluding credit cards, the year-to-date net charge-off ratio was 20 basis points.

Our credit card portfolio continues to compare very favorably to the industry. Our year-to-date net credit card charge-offs to loans was only 1.27% for 2014.

During the quarter we completed the systems conversion and the integration for Delta Trust. We continue to make good progress with our efficiency initiatives, both in revenue enhancement and in expense control. The efficiency ratio for Q4 2014 was 64.3% compared to 70.5% in Q4 of 2013.

This concludes our prepared comments. 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.

(Operator Instructions) Matt Olney, Stephens.

Good afternoon. I want to start off on expenses. It looked to be a little bit higher than I was looking for. Lots of noise in there, some one-time stuff, and I guess you didn't get the benefit post -- full impact of the conversion of Delta.

Any outlook you can give us as far as what to expect from a core expense run rate going forward here, excluding the two pending deals?

I will take first pass at that, Matt. There were really three significant items in the fourth quarter that will not be a part of our run rate going forward. We had a one-time accrual of about $1.5 million related to our equity incentive program.

We went through a study with a consulting firm this year and the way we are going to vest those incentives going forward is going to change, so we had a one-time expense. We used to vest those over an extended period of time and those are going to be vested at the award date. That had not been accrued previously, so all of that came into the fourth quarter.

The second big number is a $1 million contribution to the Simmons First Foundation. I think we've mentioned before that our intention is to fund that through the sale of some Visa stock that we currently do not have access to sell. But the foundation is up and running and we needed to go ahead and give them some capital in order to do some things in the community, so we funded that with a $1 million contribution.

The last thing is that because of the timing of the Delta conversion, we retained all Delta associates through the end of the year and all of that is going to be in our core expense. The Delta associates that are not going to be retained long term and will have severance agreements will be part of our merger-related costs after December 31.

So those are three big items that make up the bulk of our increased expenses. If you will take a look at the third-quarter expenses, a little bit higher than that would be probably the run rate that we would consider to be normalized until we get the other two deals approved and we start realizing some of those expense savings through those mergers.

Matt, if you go back to June you can see we were at about 38.8 -- I'm sorry about $38 million run rate, that was probably normalized before Delta coming in. With Delta and what George has mentioned, we are probably at that $41 million to $42 million just like you said from looking at third-quarter numbers.

Okay. All right, that is very helpful. And then the two pending deals, I know we are trying to get those to the finish line. Any update that you can share with us in terms of timing and expectations on those two pending deals?

Matt, I will be glad to share with you the unofficial word that we are getting almost on a regular basis and that is that the applications are in process. We have not received any request for information that we believe would have any negative impact on the Fed's approval.

We assume that they are going to be approved unconditionally, but quite honestly, we just can't get the Federal Reserve in Washington to give us a firm timeline, nor commitment based on their findings. All of our indications are no issues, it is just taking longer than we anticipated, and we are proceeding along those assumptions.

And I guess looking backwards, when was the last request that they had and when did you, I guess, answer their request? How long has it been since it has been on their side now?

As you recall, we got a public comment on the afternoon of the 30th day of the public comment period, which we felt like did not have much merit. We sent our response to those public comments in September. They have not asked for any additional information related to those comments since that time.

They have asked for additional information to keep their files current, like can you send us third-quarter financial information. So periodically we get a request for updated information, but not anything related to the public comment or any other issues that they have identified as being troubling to them.

Okay. I guess we will just keep our fingers crossed.

As far as the margin, I think you gave us some moving parts there. I think you said $10.8 million was the accretable yield income in the quarter. Do you have a breakdown of how much of that is from covered loan versus non-covered loan?

Matt, we don't have that exact number here but, David, do you know? 600,000? Covered would be a small piece.

I think the most important thing is looking at the core margin. If you look at it on a quarter-over-quarter basis, we went from 3.86% to 3.87% so on the core side. And that is with seasonality paying down, so you are going to see a little bit of decline there because of that and yet we went up a basis point.

You do see an increase for the quarter of 4.36% to 4.65% and most of that obviously was related to the acquisition accretion that comes into play there. I would say on a normalized basis going forward that 3.87% on the core, and you are going to see a lot of volatility just because of how the accounting rules are on the accretion on the GAAP side from us going from 4.36% to 4.65%.

I would expect it to be lower than 4.65%, closer to that 4.30%. But again, as a loan moves out of the acquired portfolio into legacy, if it has any mark on it it then accretes to income, so you can see a little bit of volatility there.

Okay. All right, I got some more questions but I will hop back in the queue and let some other guys ask some questions. Thank you.

David Feaster, Raymond James.

Good afternoon, guys. Your organic growth continues to be real strong. Could you maybe talk about your thoughts on organic growth next year and where you are seeing strength? Commercial and CRE have clearly been performing quite well for some time now. And maybe if you could also mention what kind of runoff you are looking for on your acquired book in 2015.

Okay, I will tell you this: we still expect overall loan growth in the 7% to 10% range. Our growth markets, particularly those FDIC markets, are really starting to pick up for us. As you recall, when we did those FDIC deals we had very little leadership and we had very little production staff in those markets.

It has been a priority for us since we acquired those banks to build that staff. And I will tell you, David Bartlett and his group have done a great job and it is starting to pay off. We saw a tremendous amount of loan growth in the Wichita market, St. Louis market, Sedalia, Missouri, market and we expect that growth in those markets to continue.

In addition to that, we have been very pleased with our opportunities in northwest Arkansas and in our central Arkansas market. Our presence in central Arkansas with the acquisition of Metropolitan and Delta gives us great production capacity and our folks in those markets are doing a great job of finding new opportunities for us. So I would tell you overall, including some of our more mature markets like south Arkansas and the Pine Bluff area, 7% to 10% loan growth for our total company based on our current size is still what we expect.

Okay, that is great color. As to your credit card fees, I always thought that the fourth quarter was typically stronger given the holidays and higher consumer spending. Could you maybe talk to what caused a sequential decline in your credit card portfolio this quarter?

I will try to address that, and it is going to be purely speculation. And you are absolutely correct; usually and historically the fourth quarter has been a very seasonally high quarter for us in our credit card portfolio, but there are a couple of issues going on.

You are probably familiar with consumer confidence at a five-year high today. That usually translates into more money in the pockets of consumers and I think we have seen that with regard to the use of credit during the Christmas season. And we also see it in the form of lower NSF fees.

When consumers have more cash we suffer in our fee income from NSF, and I think both of those categories, which are directly related to disposable income of the consumer, indicate that there is more cash in their pockets and less credit. And gasoline prices, obviously, help put that money in their pockets.

Gosh, that makes sense. One more quick one for me. Can you talk a little bit about what drove the increase in your BOLI and whether it should normalize going forward, or would this be a good run rate to assume?

Earlier this year we did acquire additional BOLI; one, from the acquisitions and then internally on some of our liquidity. The yield on that has been a pretty stable yield over a period of time, but we also did have a true-up that we had in the fourth quarter. So I would say on an annualized basis that number is probably a run rate going forward.

Fourth quarter did have a little bit of bump up as -- we get the numbers from the insurance agency each quarter, but yet the true-up from once you get your guaranteed rate doesn't come in till the end of the year. So that would be the biggest piece in there.

Got you.

David, I would also say as we continue to grow I would expect our level of BOLI investment to continue to increase proportionately.

Okay, that makes sense. That is all for me. I appreciate it, guys.

Brian Zabora, KBW.

One question on the provision expense; it was up in the quarter. Can you just go through maybe what were the drivers of the increase in the third quarter?

Brian, I will be glad to. It was really one transaction. We had a loan that migrated from acquired to legacy that had a pretty hefty mark on it. We actually had a judgment that was sold to a third party and financed that sale.

We did increase the provision, based on that one transaction, by $2 million. So really the increase over what you have seen as the run rate is mostly attributable to that one transaction.

We did that because this is a new entity to us with no operating history. We certainly expect that once this third-party begins operating we will be able to increase the rating on that loan.

That is very helpful.

So, Brian, the balance of that would be related more to the migrated loans, from the acquired to the legacy bucket.

Okay, okay, that is helpful. This may be on that, shifting from legacy to -- or from acquired to legacy, it looked like, if I do my math correctly, you had about $100 million decline in that group from third quarter and it looks like about $50 million went to the flip buckets; is that correct? And maybe are you seeing -- is that correct first?

Then, second, from that other piece are you maybe pushing some credits out or maybe what is going on with those other credits?

Brian, this is David. What happens there is we do have the migration from the acquired portfolio to the legacy portfolio. When it moves into the legacy portfolio it has paydowns just like any other loan will. Then we have those loans in the acquired portfolio with their normal paydowns and then loans from the acquired portfolio that leave the bank.

So we really had about $40 million during the quarter move from acquired to legacy. At the end of the quarter there wasn't $40 million in balance there, but during the quarter we had about $40 million move. The remainder of that was paydowns and acquired loans that left the bank.

And do you see that -- can you project that into 2015? Is paydowns or I guess maturity schedules, does that increase or decrease compared to maybe fourth quarter?

It is relatively flat to maybe a little bit slower than what the fourth quarter was.

And then just lastly -- that is very helpful. Then just lastly, George, could you give us your thoughts on Metropolitan and Delta? Are you at the point now where you are providing all your offerings across the footprint as far as maybe credit card or trusts? Where do you stand there as reshaping those acquired franchises?

Brian, we are still in the early stages and, quite honestly, we have spent a lot of time with folks from Delta, folks from First State Bank, and folks from Liberty, assuming that those transactions get approved sometime in the near future, trying to map out that orderly growth of those fee income businesses across our entire footprint.

We have got credit card. We have got SBA lending. We have got consumer finance. We have equipment finance. We have got insurance. We have got trust. We have investments that have only pockets of business in our footprint right now.

We obviously won't be able to roll it out everywhere at once, but I will say that we have made I think a pretty smart decision as a company by hiring Philip Tappan to head our financial services division. Philip will be over our investments, insurance, and trust, and will develop our private banking business. So we are optimistic that over the next three years or so that we will be able to have these products and services pretty much readily available throughout our footprint, but very little of that is in our numbers today.

Thanks for taking all my questions.

Peyton Green, Sterne Agee.

I was wondering if you could tell me a little bit about the timing of the conversions on the pending acquisitions. And if you assumed a -- let's just assume a March 31 closing date for the two deals, would you still be able to convert under the same schedule or would you look to alter that?

We think we would be able to, Peyton. We have the first conversion scheduled for April 24 and that will be at Liberty Bank. The second conversion at First State is not until Labor Day weekend. So assuming we can close these transactions 30 days prior to the 24th and we can give the notice required for converting those customers, we are good to go.

Marty, you want to add anything to that?

No, that is correct. We are in the planning stages now. We are not waiting on the formal approval to prepare for the conversion, so we are in the planning stages now. We don't expect any problems as long as we do get that approval.

Okay, great. Then, Bob, just to make sure I am clear on the expense guidance; you would have classified core expenses around $41 million to $42 million? Is that fair?

Yes, yes.

And then for seasonality, the ag loans tend to go down in the fourth quarter if I remember correctly, which means really the loan production you had in the fourth quarter was quite strong. How would you see that rolling into the first quarter?

Peyton, this is David Bartlett. You are exactly right; the seasonality of our ag lending does dip anywhere between $25 million to $40 million in the fourth quarter. So that is kind of a gauge of what paid off through the crop productions.

The second part of the question was --?

What do we expect going into first quarter?

George has already talked about a 7% to 10% budgeted growth in the portfolio and I think we are right on track to be able to hit those goals.

Peyton, when we look at 7% to 10% we are looking at quarter over quarter, not necessarily linked quarter, because of that seasonality.

And, Peyton, I would tell you that we will drop in the agri piece in the first quarter, maybe another $25 million, up to $20 million, $25 million. And then it will turn right around and come back on on the second quarter.

Okay. All right, great. Then is there anything expense-wise, beyond the $41 million to $42 million in core that you anticipate happening in the first quarter that might be one-time in nature that we should just be aware of? Or is it really going to be a pretty stable quarter, ex the Liberty and Community First acquisitions?

We are hoping to have a lot of merger related costs the first quarter. That would nice in core, but --.

Peyton, I can't think of any unusual expense items that we would consider in the first quarter.

On the equity incentive program, I mean the $1.5 million catch-up, over what period of time was that?

Previously we had vested those shares over five years and all that has been accelerated to a one-year vesting, so they willfully vest at (inaudible). So we only had 20% of that accrued during the year and we had to sort of catch up as a result.

Our proxy will present our new planned equity incentive program, but it is going to be a longer-term incentive plan, and those shares would vest at the end of that longer-term plan. So in order to keep from doubling up in the future, we just decided to get consistent right now with what we expect to be our future plans going forward.

Okay, great. Then, George, maybe if you could talk a little bit about the potential for growing the credit card portfolio. I know that has been an area that has been a long-time, very strong capability of the Company and I was just wondering if there is any opportunity to grow it going forward.

Peyton, we think it is. We think that is a high priority for us. I don't know if you know Larry Bates in our organization that has been a long-term executive. Larry is going to oversee the growth in our credit card portfolio; already has some great ideas.

In the past, we have grown based on sort of reputation in the market and Internet searches. We are going to be a little more proactive in our new markets, going out trying to convert existing customers and also attract new customers.

I will also tell you that we have a new business rewards card that is about 18 months old that has a lot of potential when you consider the amount of small business lending that is done throughout particularly the markets served by Liberty and First State. We think the credit card portfolio has tremendous potential going forward.

I will remind you; when we were at about $1.2 billion, our credit card portfolio was $250 million. Today we are $4.6 billion, soon to be $4.8 billion, and that credit card portfolio is $180 million. So we have got, proportionately speaking, a lot of room to grow.

Okay, that is what I was getting at. Great, thank you.

(Operator Instructions) Matt Olney, Stephens.

Just going back to a question on credit. I think you talked about a single credit that was responsible for the higher provision in the quarter. What was that higher provision from that single credit and what was the size of that credit?

The credit was $11.5 million. The provision was $2 million.

Okay. And then on the -- just to clarify the loan growth expectation is 7% to 10%. I guess we talk about it in different terms. I just want to clarify; is that legacy loan growth or is that a net number net of the acquired loan runoff?

That would be a legacy number. Let me talk a little bit about some of the acquired, and it is hard to do this. I am really speaking of the loss share piece.

We have two agreements that are going to expire this year: one in May, one in October. We have two more agreements that will go on for two more years. We are really focused on what is left in the loss share buckets of those first two.

So if we have losses, we want to recognize those while we still have the loss share protection so that is a real priority for us, Matt. Our focus is on loan growth in the legacy portfolio. Where we could see fluctuations is in our acquired portfolios, particularly those covered by a loss share.

And, Matt, one of the things we are looking at and considering for next quarter is on the presentation and the financials on the loans on acquired versus legacy. As we take on these two new banks, the acquired piece is going to come as large or larger than the legacy and it becomes very confusing in there. So what we are going to look at in the first quarter's financials is probably start just talking about the loan portfolio and pull -- and the FDIC covered ones would be the only piece we would pull out separate.

When we talk about the loan portfolio, we will still talk about asset quality; a couple different buckets because you have the allowance related to your true Simmons legacy and the credit mark for the acquired. So as we move into that way we will begin talking about our loan portfolio on an overall basis, excluding the FDIC covered.

And as George has mentioned, that is down to $130 million less a $25-some-million mark. So net of about $100 million and that continues to decline. But we will want to talk about that one separate.

Okay. That makes sense, Bob. Okay, guys. That is all for me. Thanks.

(Operator Instructions) I have no further questions. I would like to turn the conference back to Mr. Makris for any closing comments.

Thanks to all of you for joining us on our conference call today. Obviously, we anxiously await Federal Reserve approval on two deals we think are going to be landmark deals for our company. We will be sure to let you know as soon as we know something in relation to those transactions.

If there is nothing else, you all have a great day and thanks again for joining us.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.