Simmons First National Corp (SFNC) 2015 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. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's call is being recorded.

I would now like to turn the conference over to David Garner. Sir, you may begin.

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; Bob Fehlman, Chief Financial Officer; and Marty Casteel, CEO of our lead bank.

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 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 will 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, we reported record core earnings of $15.7 million, an increase of $8.2 million or 110% compared to the same quarter last year and record diluted core earnings per share $0.70, a $0.24 or 52% increase over last year.

As a result of acquisitions and efficiency initiatives reported in the last several periods, we have and will continue to recognize one-time revenue and expense items which may skew our short-term financial results but provide long-term performance benefits.

Our focus continues to be improvement in core operating income. Core earnings for the first quarter of 2015 exclude $7 million in after-tax merger-related expenses from our most recent acquisitions. During the same period last year, we recorded $3.1 million in after tax merger related and branch rightsizing costs.

Including these non-core merger items, net income for the first quarter was $8.7 million, a $4.4 million increase or 100% over Q1 of 2014 and diluted EPS was $0.39, a 44% increase over the $0.27 reported at the same period last year.

On February 27, 2015, we completed the acquisition of Community First Bancshares headquartered in Union City, Tennessee and Liberty Bancshares headquartered in Springfield, Missouri. The acquisitions added approximately $1.9 billion in loans, $2.4 billion in deposits and $3 billion in total assets to our balance sheet during the quarter.

As of March 31, Simmons First total assets were $7.8 billion, the combined loan portfolio was $4.6 billion and stockholders' equity was $1 billion.

Net interest income for Q1 2015 was $53 million, an increase of $11.4 million or 27.5% compared to Q1 of 2014. This increase was driven by growth in our legacy loan portfolio and earning assets acquired through the Delta Trust, Community First and Liberty transactions.

Net interest margin for the quarter was 4.34%. Normalized for accretable yield adjustment impact, net interest margin was 3.86% compared to 3.87% in Q4 of 2014. Interest income on acquired loans includes additional yield accretion recognized as a result of updated estimates of the fair value of acquired loans. In Q1, we recorded a $6.1 million credit mark accretion to interest income. Total accretable yield recognized during the first quarter was $10 million.

Non-interest income for Q1 2015 was $18.5 million, an increase of $9.3 million compared to the same period last year. The increase in non-interest income was primarily due to the following significant items; losses on FDIC covered assets decreased $4.7 million primarily from lower indemnification asset amortization and we continue to see significant increases in trust income, service charge and fee income, mortgage lending and investment banking income primarily from the acquisitions.

Non-interest expense for Q1 2015 was $57.4 million, an increase of $12.8 million compared to the same period in 2014. Included in Q1 2015 non-interest expense were the following merger items. Pre-tax merger-related expenses increased by $9.1 million from last year due to the Q1 2015 acquisitions of Community First and Liberty. In addition, pre-tax branch rightsizing expense associated with closing and maintenance of closed branches decreased by $3.8 million from last year.

In Q1 2014, we closed several legacy locations as part of our branch consolidation plan related to our in-market acquisition of Metropolitan National Bank, and the remainder of the increase in non-interest expense is primarily due to incremental operating expenses of the acquired Delta, Community First and Liberty franchises.

Our combined loan portfolio was $4.6 billion, an increase of $2.3 billion or 96% compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans increased by $1.9 billion net of discounts while our legacy loans increased $336 million of 18.9%. The legacy loan growth was driven by $187 million increase in real estate loans and $172 million increase in commercial loans, partially offset by $22 million decrease in consumer and other loans from the sale of our student loan portfolio earlier last year.

When we make a credit decision on an acquired non-covered loan, the outstanding balance migrates from acquired loans to legacy loans. Our Q1 quarter-over-quarter legacy loan growth included $115 million in balances migrated over the past year. Excluding the acquired loan migration, legacy loans increased by $220 million or 12.6% from the same period last year. We remain encouraged by the continued growth trend in our loan portfolio.

In March 31, 2015 the allowance for loan losses on legacy loans was $29.2 million and the loan credit mark and allowance on acquired loans was $97 million with a total of $126.2 million of coverage. This equates to a total coverage ratio of 2.7% of gross loans. The allowance for loan losses on legacy loans equaled 1.38% of total loans and approximately 194% of non-performing loans. Non-performing loans as a percent of total loans were 71 basis points.

In March 31 non-performing assets were $66.2 million, an increase of $8.3 million from the prior quarter. During the quarter we reclassified $6.1 million of previously closed branch buildings and land and premises held for sale to OREO. There was no deterioration or further write-down of these properties. This reclassification was entirely due to accounting rules which allow real estate to remain categorized as premises held for sale for no more than one year.

First quarter net charge-off ratio was 20 basis points. Excluding credit cards the net charge-off ratio was 9 basis points. Our year-to-date net credit card charge-offs to loans was only 1.32%. We continue to make good progress with our efficiency initiatives both in revenue enhancement and in expense control. Our core efficiency ratio for Q1 2015 was 62.2% compared to 72.6% in Q1 of 2014. The integration of Community First and Liberty is going well. The holding companies were merged in Simmons First National Corporation with First State Bank and Liberty Bank continuing to operate. The systems conversion and merger of Liberty Bank into Simmons Bank is scheduled for tomorrow April 24.

First State Bank's conversion and merger into Simmons Bank is schedule for Q3 of this year.

This concludes our prepared comments and we'd like to now open the phone line for questions from the 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) Brian Zabora, KBW.

Just a question on the expense side, are you starting to see expenses from the two recently closed deals or were there any realized in the first quarter?

Yes, Brian, as you probably know, we've been planning with both Liberty and First State for several months for the integration. They have done an excellent job in identifying cost save opportunities, and I would tell you that they both had great first quarters and particularly on the expense side. So, I would say that we're probably a little ahead of the game with regard to realization of those cost saves. We still think that our original projections (inaudible) come out but they were just a little earlier than we had projected them to happen. So we were the beneficiary of a little bit from a timing standpoint in the first quarter. But remember, they are only in our financials for one month and one day in the first quarter.

That's helpful. And then second on your balance sheet, you've got a lot more cash, let's say, with the acquisitions, you've a good amount of liquidity. Tell us your thoughts about kind of loan deposit ratios at a good spot, are you maybe deploying that through securities or loans or how do are you thinking about that excess liquidity?

I will just touch on that briefly and I'll let Bob Fehlman to talk a little bit more about that. Our cash position is good. We are restructuring our investment portfolios. So all three banks sold some securities during the first quarter. We're holding that cash because we didn't want to go back in all at one time and invest it in the securities portfolio. But I'll let Bob give you a few more details on our cash position.

Yes, Brian, as you know on the purchase accounting of a mark-to-market on investment security portfolio and as we mark those securities, we looked at what would fit into our portfolio. So we have a couple of hundred extra million in liquidity right now that we will layer back into the investment portfolio over the next couple of months. We don't want to put it all in one time, we want to layer it in and obviously the rates are on the lower end right now. So we'll look for opportunistic times to put that in.

We would like it obviously to go into the loan portfolio. You mentioned on the loan to deposit ratio, we're in the low 70% range. Our target over a period of time would be north of the 80% range, is where we would like to be. But as we merge the companies together and put new programs in place, that would be our target over that period of time.

And just lastly on the FDIC covered loans, some banks have exited their [loss share] agreements, have you looked into that?

Brian, we have. We will take a look at it now. I am going to let Bob talk a little bit about the excess mark we have on our books, what that means to us long term and surely give you an idea of what the financial yield that FDIC would have to look like for us to be willing to exit that loss share [please].

Yes, Brian, we're looking at the possibilities of exiting the market or the FDIC loss share agreement. One of the things to remember for our company is the excess mark that we have related to the [Kansas loans], related to that we have the FDIC indemnification asset. Those assets -- that is being expensed over the life of the loan or the agreement period whichever shorter. We have a negative amount in the non-interest income. So it could be when we analyze this that there is a one-time hit. All that would be a timing difference of when that expense hits whether it's on the day we sign the agreement or we expense it over the next period of time. But we continue to evaluate the financial trade on this if it's worth exiting or not. The FDIC is looking at it more today than they have in the past. So we're hopeful at some point we will exit.

David Feaster, Raymond James.

Organic loan growth continues to be quite strong. Could you maybe talk about your thoughts on your organic growth this year, where you're seeing the strength? Commercial and CRE have clearly been the workhorses for you guys. Maybe if you could mention what kind of run-off you're looking for on your acquired book this year with the inclusion of the new deals?

David, I'll talk a little bit about our modeling run-off on loans. And we never model keeping 100% of the loans. We usually build in about a 10% run-off. We're very hopeful and optimistic that that's not going to happen and we don't believe it's going to happen because the same staff that made those loans at both Missouri and Tennessee are still in place taking care of those customers. So we're hopeful that our run-off will be less than our model of 10%. I am going to let David Bartlett talk a little bit about where we're experiencing this organic growth.

Hi, David. This is David Bartlett. Most of our loan growth is coming out of some of our metropolitan markets. Wichita has been a great loan growth market for us, so is St. Louis, Little Rock has contributed some good growth. As in just our legacy footprint in Arkansas from Jonesboro, that's always a good loan growth market for us. Little Rock has shown some relevant growth this past quarter as has South Arkansas. As you remember, we're in the ag business and the ag business cycle is just starting to pick up and some of the agricultural lenders in our footprint are starting to see some benefit at the end of the first quarter, most of that's going to be coming in the second quarter. So that's the history of where we're seeing most of our pick-up in our core loan growth.

Okay, great. And organic growth, do you guys -- last quarter we talked about 7% to 10%, is that kind of still a target?

Well, it will be if we lose 10% of the acquired loans in our model. If we don't, then we expect it to be double digits as we've experienced over the last several quarters.

Okay. Perfect. Maybe if we could switch gears to the NIM. Obviously this is lumpy from quarter to quarter, but maybe could we talk about your expectations for your net interest margin and accretion income in 2015 and 2016?

First on the reported NIM with the increased accounting interest, it's going to be bumpy just like it has. It will be anywhere from [4.10 to 4.50]. On the core side, we're very pleased with this staying pretty consistent at the [3.85, 3.86] level. We see the core side span [3.85 to 3.90] in the next couple of months. We will have a pick-up in the second quarter as we fund those agri loans. But probably not as much as we've seen in the past based on the size of the balance sheet. But I would say a pretty stable core NIM in the foreseeable future in that [3.85 to 3.90] range.

Okay, great. Last question from me, could we maybe talk about your thoughts on fee income? Mortgage and investment banking were clearly the stand-outs in the quarter, but overall fee income was maybe a bit softer than I had thought. Could you give us a sense of the trends you're seeing and kind of your expectations for fee income going forward?

Sure, David. I am going to let Marty Casteel field that question if you don't mind.

Well, David, as you noted our trust and our mortgage income and investment banking income are all pretty solid. Our deposit fee income was soft and that's really a reflection of frankly NSF fees. This quarter is typically historically a low point for NSF fees. That's not surprising, tax free funds, honestly probably the lower price of gasoline has helped consumers a lot. That's all good news in many respects. It does show up in NSF fee income. We would expect that historical trend to continue and we'd see some rising of those deposit fees over the coming months.

David, this is George Makris again. We've talked a lot about our non-interest income lines of business and the real opportunity we have long term from the revenue enhancement standpoint. We've just hired Philip Tappan in the last quarter to head our financial services division. Phil looks over our trust, our investments, our insurance and our new private bank operation.

Some of the increases you've seen is because of our increased emphasis on those product lines. And quite honestly, they are very limited in their offering throughout our footprint. So our priority over the next two to three years is to make sure we have those products and services available in all our markets. So Philip has done a great job and I certainly expect those areas of our business to continue to increase our revenue opportunities.

(Operator Instructions) Matt Olney, Stephens.

Hey, I am trying to get a better idea of 1Q results from the legacy bank without the impact of the acquisitions. Do you have any data there in front you that can kind of point to what similar larger items were, whether it's expenses or fee income or anything just from the legacy Simmons Bank in the first quarter?

Matt that's a good question. When you put -- in the last 12, 18 months when you put four banks together it's hard to figure out what the legacy is and what was Bank yesterday, but I can just tell you, as you can see we've had good legacy growth. The fee income, as we said, we've had a little bit of challenges on the end of sales with some of those service charges in the credit card area. On the expense side, we've seen good cost saves as we look across our efficiency initiatives. So I don't know if David, he has got a page with him, respond to that.

Hi Matt. David here. We have seen some organic improvement in Simmons First National Bank. We are up significantly in the legacy assets being compared to where we were in the first quarter of last year. And those are trends that we expect to see going forward. So we've got the legacy improvement of SFNB and then we are just layering on these acquisitions to help accelerate that improvement and growth.

Matt, we've talked a little bit about our legacy loan growth and that continues to be strong. So that would be in those numbers. And I think we've talked before about exceeding our expectations on the cost save model on Metropolitan and certainly I would tell you that Delta Trust acquisition, we've exceeded that cost saving estimate as well. Our merger-related costs, particularly on these two latest transactions were below our model, which is one of the things that has contributed to our stronger equity position on our balance sheet. So I would tell you that both on the revenue side and the cost save side, we're doing a little better than we anticipated if you'd asked six months ago.

Okay. That's a great commentary. And as far as the outlook for expenses in the second quarter, if you can layer all that together, get the full impact of the acquisitions is there a range or can you kind of narrow down what we should be expecting for 2Q expenses?

Another good question and it is the big challenge trying to get our hands around that too. I going to give you some numbers, but it's like you said a range of where we will be. Again we're putting these companies together. We've got cost saves we're putting in from past acquisitions and cost saves from future ones. But I'd tell you without the cost saves going forward we're looking at a run rate on a quarterly basis of about $62 million would be a good number and that number will be reducing with the cost saves as we go forward. That's what our modeling is showing right now as we look to the next couple quarters.

And you mentioned that will be reducing, remind me the timing of the conversions you have coming up?

Yes, as we said Liberty converts tomorrow. It's generally about 30 days before some of those cost savings start hitting. Community First will be September 4 and it will be 30 days. So we think fourth quarter of this year will be a good run rate going forward with all the cost -- most of the cost saves in.

Okay. All very helpful and I don't want to get ahead of myself as far as the future M&A, these deals are now closed, any updated thoughts as far as the timing of additional M&A from here?

Matt, for fear of being strangled by some of these guys sitting around me, we're continuing to be very active in talking to prospective merger partners. We're seeing a lot of activity in the market. I will tell you that we had originally several years ago established sort of a 350-mile radius around Central Arkansas as our target territory. That's probably expanded a little bit since our territory now includes the entire state of Tennessee. I would tell you we're looking at more of an inside out growth strategy. We said we'd like to go west, the multiples going west are a little high now. So we might have some opportunities in some contiguous territory to Tennessee for instance. So we continue to work first for an organization whose culture is very similar to ours. If we go into a new territory, we will make sure that we have a good strong management team in an organization that is well respected, a long history, excellent service in the markets. And quite honestly, we're having discussions with several of those institutions that meet those characteristics right now.

I really can't give you much of a timeline. We're very comfortable with our ability to integrate these two deals as we've mentioned earlier. So I would expect that if we're successful with any of these discussions, we will slot closings and conversions similarly to what we've done with these two deals.

Okay. George, thank you. And then last question, more of a modeling question. I think George you mentioned the accretable income was about $10 million in the first quarter. I now it's tough to predict the accretable income going forward, but how should we be thinking about the accretable income going forward and what's the remaining accretable discount that could potentially flow into income in the future?

I would tell you, again that's a bumpy number as we go forward. While that is $10 million in the first quarter, remember there is also some indemnification asset that goes against that number as we go forward. I think David was saying --

For the second quarter for Liberty and First State, we're going to add about $3.5 million in accretion, just for those two new portfolios.

And that's just the income that you expect to come in or just the discount that could come in in the future?

That is the expected credit mark accretion in the second quarter for those two deals.

And, Matt, remember those numbers are in -- those are at our expectation levels of the numbers we gave last year when we projected the earnings going forward for those entities.

Sure. You're right, that's a moving target and hard to predict. I just kind of want to get a ballpark range on that. Okay. Guys, those are all my questions. Thanks for your time.

Thank you, Matt.

Brian Zabora, KBW.

Just a question on capital, the TCE ratio improved actually with the deals. I just want to get your sense on what capital ratios you might be targeting and maybe what your thoughts are as far as distribution or you kind of holding capital for the potential deals that you may be exploring?

Brian, we've set as our target based on our current risk profile a range of operating capital TCE of 7.5% to 8.5%. So we're well within those guidelines. It's quite honestly, probably 30 basis points higher than we thought it was going to be, primarily because of the delay in the closing. So we got the benefit of earnings of Liberty and First State during the first three months of the year, actually for three months because we expected to close last November. They rolled into capital instead of earnings. So we're pleased about that.

We're going to sit on this capital and try to utilize it in future acquisitions. If we get above 8.5% then we've got some deployment issues that we'll start talking about internally. Either larger cash pieces of acquisitions or potential stock buyback. So I would tell you that over 8.5% based on the current risk profile, we will consider that to be excess capital.

(Operator Instructions) David Hutter, Pine Bluff.

I just want to know were you anticipating Simmons First National Corporation having record core earnings of $15.7 million for the first quarter of 2015?

Well, I'm going to answer it this way, I'm looking at our Lead Director at the end of the table and he was expecting me to expect us to have record core earnings. So, yes, that's the result of our acquisitions. They've all been very strategic and all been very good financially for our company. So I would say, yes we expected to have record core earnings.

Thank you. I'm showing no further questions at this time, I would like to turn the call back over to Dave and Makris for closing remarks.

Well, thank you very much for joining us today. Many of you we will see between now and the end of the second quarter, but we'll look forward to doing this again the end of June. Thanks a lot and have a good day.

Ladies and gentlemen this concludes today's conference. Thanks for your participation and have a wonderful day.