Simmons First National Corp (SFNC) 2015 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 follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. Burt Hicks, Investor Relations Officer. Sir, you may begin.

Good Afternoon, I'm Burt Hicks, 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; Bob Fehlman, Chief Financial Officer; Marty Casteel, CEO, Simmons Bank, our wholly-owned bank subsidiary and; David Garner, Chief Accounting 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, we will then entertain questions. We've 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 remind you 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'll turn the call over to George Makris.

Thanks, Burt. Welcome everyone to our second quarter conference call. In our press release issued earlier today, we reported record core earnings of $22.4 million, an increase of $13.3 million or 145% compared to the same quarter last year and record diluted core earnings per share of $0.76, an increase of $0.20 or 36% compared to the same quarter last year. We continue to make good progress with our efficiency initiatives, both in revenue enhancement and in expense control. Our core efficiency ratio for the second quarter of 2015 was 58.5% compared to 68.2% in the same period last year. During the quarter, we closed 12 branches as part of our branch right-sizing initiative. We also entered into a definitive agreement to sell three branches in Salina, Kansas which is expected to close in the third quarter.

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

Our focus continues to be improvement in our core operating income and core efficiency ratio. Core earnings for the second quarter of 2015 exclude $760,000 in after-tax merger related expenses from our most recent acquisitions and $1.7 million in after-tax branch right-sizing costs, which totaled $2.4 million in non-core expense.

During the same period last year, we recorded $750,000 in net non-core income. Including these non-core merger items, net income for the second quarter was $20 million, $10.1 million or 102% increase over Q2 of 2014 and diluted EPS was $0.71 an 18% increase over the $0.60 reported the same period last year.

For the quarter, we achieved strong loan growth totaling $175 million over the first quarter of 2015 and an expanding core net interest margin of 3.87%, up from 3.49% in the same period last year. On a core basis, we increased non-interest income by $13.8 million over the same period last year. This increase is driven primarily by the integration and expansion of our acquired business loans. Core non-interest expense increased by $23.9 million primarily due to incremental operating expenses of the acquired Delta Trust, Community First and Liberty Franchises.

At June 30, 2015, the allowance for loan losses on legacy loans was $30.6 million and the loan credit mark and allowance on acquired loans was $83.3 million for a total of $114.8 million of coverage. This equates to a total coverage ratio of 2.3% for gross loans. The allowance for loan losses on legacy loans equaled 1.17% of total loans and approximately 180% of non-performing loans.

Non-performing loans as a percent of total loans were 65 basis points, which is an improvement from 71 basis points in the first quarter. Through June 30, the year-to-date annualized net charge-off ratio excluding credit cards was 0.09% and year-to-date annualized credit card charge-off ratio was 1.32%. At June 30, 2015, common stockholders equity was $1 billion with tangible book value per share of $20.15 and a TCE ratio of 8.7%.

On April 27, we completed the conversion and integration of Liberty Bank headquartered in Springfield, Missouri. As a reminder, we were scheduled to convert and integrate First State Bank headquartered in Union City, Tennessee over Labor Day weekend in September. On April 29, we signed a definitive agreement to purchase Trust Company of the Ozarks of Springfield, Missouri. This acquisition will increase our total assets under management by more than $1 billion. We anticipate closing this transaction by the end of the third quarter of this year.

As we previously mentioned, we're in discussions with the FDIC about the potential early termination of a loss share agreements. Depending on the timing of the agreement termination, we expect to incur a one-time after tax write off of $5 million to $7 million. This write-down is only timing in nature. Future earnings will be benefited by the elimination of the amortization of the FDIC indemnification asset and related expenses.

This concludes our prepared comments, we will now open the phone line for questions from our analysts and institutional investors. I'll ask the operator to come back on the line and once again explain how to queue in for questions.

(Operator Instructions) Stephen Scouten, Sandler O'Neill.

Hey guys, good afternoon. Thanks for taking my question, here.

Hi Stephen, how are you?

Doing well. So wanting to look at the fee income here a little bit, it was better than I was expecting, and I noticed there were some decent expansion in the credit card fees. I'm just curious as to what that looks like from a balance perspective and if that's all internal growth or if any of that came by the acquisitions?

Marty, you want to deal with that? The fee income is that would include the Liberty integration of non-interest income fee.

Yes, and most of that is you're putting the credit card and debit card together. And as you put Liberty and First State in for the full quarter, That's most it -- the normalized growth is probably in the 5% or 6% range.

Okay, that's helpful. And just on the expense front, I'm curious as to what kind of the scale of the savings we should expect maybe through the end of the year looks like, especially from the branch closures and then kind of the additional First State cost saves that will happen after the conversion on Labor Day. Can you give any kind of -- can you frame up all what the pace of additional benefits will look like through end of the year?

Steven, I'll take a cut at that and then Bob, David may have something to add to that. From the branch closings, we expect roughly $2 million annually in savings, that's from the 12 branches we closed, plus the Salina branch sale and that should start immediately. With regards to the First State savings, I will say that John Clark and his team in Tennessee, they've done a great job since we closed that transaction and anticipating a back office savings, and we've actually realized some of that savings currently. What we have left is all the post conversion system savings which are going to be fairly substantial. And some savings from position reductions, but many of those have already been realized. So their efficiency ratio as a standalone bank is down from about 70% right before closing to below 60%s now, they've done a great job of being very efficient in that process. We would expect that that savings would be $1 million a year going forward.

This is Bob. I'll tell you too, you guys are usually looking for a run rate, I think we gave you about $62 million last, for this quarter we're almost close to that number. Going forward, once the cost saves are in, we should be between the $61 million, $61.5 million, somewhere in that range, should be a good target level.

Okay. Perfect, that's great. I appreciate that. And then just maybe one last one from me on loan growth. It looks like loan growth is pretty strong again here this quarter. I'm wondering what you guys are seeing in terms of trends, anything to note in terms of concentration in this quarter either from geography or loan type and should we expect kind of a similar pace of growth moving forward from here? Thanks guys.

I'll just hit high level. We're seeing good loan growth all across our franchise and quite honestly, even with First State, their loan portfolio is up $30 million since we closed that transaction. And quite honestly, we always anticipate a little bit of run-off, but they've done a great job maintaining their portfolio and actually growing it, which is what we really like to see. David Bartlett may have more specifics about concentrations in three or four markets that are doing exceptionally well, and I'll ask him to comment on that.

Yes. Thanks, George. Stephen, we have seen some pretty substantial growth, part of that is due to our Ag portfolio, which is seasonally impacting this quarter by about $40 million. So you take that down and try to get a run rate of annual growth that still equates to about 3.5% to 3.8% per quarter or annualized at about $15 million, take out the Ag portion of that, it drops it down to about 12%. Now that still is a little high, I would probably forecast, because we had a couple of pretty substantial loans funded of pretty high size this quarter. We would probably be looking at a high-single digit loan growth going forward.

David Feaster, Raymond James.

Your NIM was pretty impressive this quarter and your core NIM jumped despite a decline in the accretion income, could you maybe just give us some thoughts on your reported and core NIM going forward and your expectations for accretion going forward?

Well, our GAAP NIM, it kind of goes all over because of the accretion, but target range was somewhere in that 4.20% to 4.50% range. It just depends what loans migrate, what loans payoff and so forth. And the core is more important, we did have a good quarter, part of that was related to the agro seasonality. The other was the restructuring of the balance sheet as we go through the acquisitions. We had a lot more loans moving in and that came out of liquidity and cash. So a lot of it was mix related going into the loan portfolio and we would see for the balance of the year, for the next third quarter, somewhere between 3.80% and 3.90%, probably maintaining at that 3.87% level on a core basis.

Okay. And next on provisioning, that was a bit higher than we were looking forward, could you maybe talk about what drove that and your expectations for provisioning going forward? Because as you noted, the asset quality actually overall improved.

Yes, I'll touch on a couple things and then Bob and David can give you little more specifics. A lot of that provision came through First State. They have done a great job over the last quarter of booking new loans that required provisions, David can give you more specifics about that, much more than we anticipated. So that's probably $1 million of the difference there, and David if you want to jump in?

Yes, David, First State Bank moved $186 million from the acquired into their legacy portfolio and once it moved in that legacy portfolio, we have to run provisions and create the allowance for loans losses that way. Additionally, we did have approximately $550,000 to $600,000 in provisions for acquired loans, some areas where our credit mark wasn't sufficient to cover some losses. So that goes into the same provision expense line as you see the legacy provision. But with the sizes of the loan growth that we had, $176 million in total loan growth for the quarter, with significantly more of that being in the legacy portfolio, we just felt it was prudent that we provision at the levels that we did.

Okay. Last question from me. Can we talk about M&A for a second? You guys have had your plate pretty full for a while now and now that you guys are starting to work through these deals and integrate them and with the Trust Company of the Ozarks closing next quarter, could you maybe talk about your M&A appetite and how you think about approaching that $10 billion of asset threshold?

David, I'll be glad to do that. We certainly have a continued interest in more M&A activity. And quite honestly, we've had a lot of discussions. Nothing that we consider to be imminent and part of the reason is that this $10 billion readiness program is fairly substantial. And I'm sure you've heard that from other banks in our position, they're approaching that threshold. The stress testing issues, making sure that we have all our compliance area fully staffed and trained so that - and I hate to use this term, but it will make sense to you, so that we have a plug and play risk management program going forward once we pass $10 billion.

If we wait until we get to the $10 billion to address these issues, it will be too late. And quite honestly, without this, I'm not sure our regulators are going to be really thrilled about giving us regulatory approval. So we're trying to dot all the i's, cross all the t's and be in a position so that that, that $10 billion barrier does not slow us down. We don't think it will, we think at the end of the year we will be very well positioned to move forward during 2016.

Now let me just mention one other thing that we need to discuss with regard to expenses. Getting ready to pass $10 billion is not inexpensive. So we're seeing some increased staffing, increased investments in systems and applications, particularly in the stress testing area that are driving those short-term expenses up sort of prematurely, if you will. They are going to be necessary at $10 billion, we think they will be beneficial before then and once again, we can't wait until we get to be $10 billion before we have these expenses.

Matt Olney, Stephens.

George, with your commentary just now about the increased staffing levels for crossing that $10 billion asset threshold, I just want to make sure that the commentary about the cost saves and that run rate that Bob gave to Stephen Scouten, does that also incorporate increased staffing levels of the next few quarters or is your commentary, George, more 2016 (inaudible) staffing?

No, the run rate includes that staffing. A lot of that should be considered bringing staff over from First State that maybe we didn't originally anticipate, but they've got some very well trained compliance people that are going to really help us out going forward. So I guess it's a little bit of give and take, Matt. We probably originally thought we'd have more cost saves from the human capital side with First State, since we've evaluated our needs for the $10 billion level. We had some built-in talent and we're actually probably going to retain more people at First State than we had originally anticipated.

Okay. That's good color. And then as far as the loss share expense that runs through the fee income line, I think there was a loss of $3.1 million this quarter. Do I understand that press release correctly that there's going to be a similar pace there in the back half of the year, but that could fall pretty hard in 2016?

Well Matt, as we said, we're negotiating with the FDIC to exit loss share. Once we do, we'll have that one-time charge. As soon as we exit, where you see that contro, the negative amount of $3 million, that will go away completely. So we won't have to talk about FDIC loss share and the expenses on a go forward piece. So that will be an immediate savings and I think for the balance of the year, there's about $5 million if we exit loss share. Again, we would have an expense on the front-end. I think we said $5 million to $7 million. So $5 million of that would be earned back by the end of this year and then we would -- the rest of it would be less than a one-year payback on that.

And that agreement is not official but it sounds like it's leaned in that direction. Is that fair?

That's fair.

Okay. And then anything else unusual in the fee income line this quarter?

Really I'd say, the only thing we continue to see pretty good mortgage value as rates stick down just a little bit again, and we're seeing that in June and little bit into July. Obviously, when you get through the summer months and get into the school year, that will naturally slowdown. And when -- if the rates do go up as everybody keeps saying, they will at some point. If they do towards the end of the year, you would expect the volume to drop there.

But Matt, I'll add that that's not really a surprise to us, we're a little bit above budget on what we anticipated with regard to mortgage revenue, but we are having a good year. In the past we've probably anticipated more mortgage revenue than we actually achieved. So this year is a pleasant surprise for us that we actually were able to do pretty closely to what we are achieving today. But everything else is the result of the fee income business, it's been acquired coupled with what we already have and I would say, we re hitting on all cylinders right now.

Okay. That's helpful. And then going back to the commentary on the loan loss provision, would you expect that $3 million to moderate somewhat in the third quarter, if loan growth does moderate back to that high single-digit pace that David Bartlett mentioned few minutes ago?

We would anticipate that, David [Garner] mentioned $500,000 to $600,000 provision for acquired loans. We don't expect that to continue. Every now and then we may have a little bit of a provision for those acquired loans. First State, we think we've done a good job of identifying provision necessary there. So we don't see that at that same level. So I think we're going to be back closer to expectations in our provision going forward.

Matt, this is Bob. Let me remind you, as loans migrate from acquired, if you remember those loans have credit marks and were accreting that to income over the life of the loan. As those loans migrate over, they become part of the legacy and we have to establish that allowance. So that does create some unexpected volatility in those numbers and on the other side, we've got the accretion (inaudible) on the income side, so it does fluctuate a little more as some of these loans are repriced and renewed quicker than we might have expected. So we don't expect to [run out], but there could be some more volatility just like in this quarter.

And then last question from me. As far as a good tax rate to use from here Bob, anything different from what we saw in 2Q?

Well, it's good and bad news, the tax rate is going up, it's a bad news. The good side is that it's because the income is going up. When our income was lower, there was a lot more non-taxable income as a component of your overall income. That keeps your rate down at the 29%, 30%, 31% to effective tax rate. As the income is approaching levels we're at when you're making the $25 million, $30 million a quarter, your effective tax rate is going to go up. I would say this quarter's tax rate is probably a better rate to use on the go forward basis.

Brian Zabora, KBW.

A question, just follow-up on the legacy loans moving from the acquired bucket to the legacy. Do you have a total -- I think you mentioned First State, how much moved, but do you have the total how much loans moved from acquired to legacy?

Yes, Brian, this is David. Total for the quarter, we had approximately $116 million migrate from acquired to the legacy portfolio.

All right. And then as far as your expectations of high single-digit loan growth, is that inclusive of continued run-off from the acquired or could it be lower if there is additional kind of run-off from the acquired book?

No, that includes any anticipated run-off and we're trying to be a little conservative there. As I mentioned before, Brian, any time we have an acquisition, we expect some loan run-off and that's just a natural occurrence. So far it hadn't happened, and that's why our loan growth is so robust right now. We do have another conversion coming up in September, which is another key date where those customers have one more chance to consider their alternatives, we're very hopeful that we'll maintain the loan portfolio as it is today, but we would not anticipate even with the loan run-off dropping below that 7% to 10% range.

That's very helpful, great. And then on the deposit side, you had some run-off on the CDs, some of the higher cost in CDs. Where do you stand as far as deposit retention on the acquired portfolios and could we continue to see some run-off or you're still trying to push out some higher cost in deposits?

Let me begin to tackle that and Marty Casteel may want to talk about the integration and what we'd expect, maybe at First State. We had, of course this is agro season. So our farmers are using their cash and therefore it's not in our bank. We have a lot of correspondent relationships with downstream agro banks who are using that cash to fund loans, that's not in our bank. We did have some acquisition re-pricing associated with the Liberty acquisition. So we lost a little bit of high-priced deposits there. And this is traditionally a slower time for state funds as income tax rebates have been sent back. So combination of all that drives our total deposits lower. From a core deposit standpoint, I think we're in really good shape. We have been aggressively pursuing that because of our liquidity position. Right now, our loan to deposit ratio is right at 80%, which was our short-term target. We'd like for that loan deposit ratio to go up even a little more, so more higher priced part deposit run-off would not be an unusual occurrence for us. What we intend to protect is core deposit relationships with our bank customers.

Then just lastly on borrowings, they are down in the quarter, in case you just -- give us a sense of what you're doing on the borrowing side there and kind of what the terms are and I believe you have some SPLF that would be priced early next year. Is the plan still to repay that when that rate (inaudible) is coming in and do you think you can just do that in cash or do you need to refinance any of that?

Brian, the borrowings you saw there were about $100 million down, most of that was at First State. They had some borrowings that were at a little higher cost than our other borrowing options. So we worked on restructuring some of the balance sheet there and paid those off. On the SPLF, that does change from 9% to 1% in February of next year. So we expect to pay that off in January, we have the cash on hand to pay that off, from 1% to 9%.

Peyton Green, Piper Jaffray.

Hi, guys. Good afternoon. George, I was wondering, maybe if you could comment kind of on the revenue growth initiatives that you all have referenced prior to closing on the Liberty and Community First acquisitions and maybe talk about any type of timing that you would hope for in terms of seeing some benefit?

Peyton, I'd be glad to. As you know, we're going to close on Trust Company of the Ozarks, such a big deal for us adds another $1 billion in assets under management to our Trust Company. So we'll be at $4.5 billion there and once again, all of that business is in personal trust. We also have employee benefits and corporate trust that we expect to roll out in that market. So we think the future in the Springfield market and really all of Missouri, it looks real good from the trust standpoint. Philip Tappan who manages our Financial Services Group has been on the road pretty steadily trying to beef up our investment in insurance businesses in markets where we're either not represented or underrepresented. He's making good progress, that will be probably slow go and Marty may have little more update on some those lines of business.

Well they have had some success in finding some very qualified financial advisors for Investment Group. I believe they've hired four right now that have just started with this. So we're seeing some growth in that line of business. Certainly Trust Company of the Ozarks coming on, it's going to be a game changer for us in the Missouri market, Liberty Bank footprint. And First State has a very strong and dynamic insurance division already, we're trying to grow from that and have some good opportunities, we think to do that.

Peyton, let me mention a couple of other areas. As you know, Liberty and First State were both excellent SBI lenders. We've received preferred lender status in Arkansas. So we would expect that particular product to become more prevalent in our loan portfolio going forward. The Consumer Finance Group at First State continues to do well, that's going to be something that we think we're going to have to train within and rollout in our Company. So that's going to be little slower growth than others maybe. So those two areas and specialty, are also looking good for the future. Our credit card portfolio, Larry Bates has taken that bull by the horns, we really expect robust growth program for our credit cards to be unveiled by the end of year. So we see a lot of potential in that area for us and as that develops, we'll be happy to share that with you all.

It's earlier, but our mortgage applications do remain strong, we have good growth there, sustainable growth and we're very happy with our mortgage lending.

And then just a follow-up, I mean, how are you seeing loan growth at Liberty, I know they were a little more liquidity constrained, what' your prospect for loan growth from the, great start of First State, I'm just curious about Liberty.

We were very encouraged. At Liberty, their real issue -- one of reasons that we were a good merger partner was that their loan deposit ratio approached 100% and they had pretty strict restrictions internally on the size of the loans and also the pricing of the loan. So their ability to go out and cultivate new customers with higher loan values and to compete in a market is sort of new to that lender group up there. We're awfully encouraged about that opportunity and obviously Gary Metzger and Gerry Robinson have done a great job leading that group and we're looking for great things to come out of the whole new set of customers up in that market.

Okay. And I mean how long George would you think it would take for them to shift the mindset pre-merger to kind of post merger, and what do you think the [cycle] was on the customer base?

Well, I think their mindset's pretty well changed, it's the cultivation of these new customers that doesn't happen overnight. They are on the streets knocking on doors and taking advantage of relationships that maybe they couldn't say yes to before.

Okay. And then Bob, could you remind me what the potential debit card revenue effect is when you cross $10 billion?

Right now we're projecting that to be in the $3 million to $6 million range on an after-tax basis. The debit that's -- that being the total cost from going to $10 billion. And those numbers kind of move as you find out more regulations you are under, but on the debit card side, I'd say probably more in that $3 million to $6 million range.

So that's after-tax?

Yes.

Okay, great. And maybe in terms of the churn in the loan portfolio, as you see the acquired loans move into the legacy portfolio, is there any lumpiness to the renewals cycle that we should be aware of?

Obviously there could be quarters that there's more bumps in the road on that but generally speaking, it's modeling out to about $50 million or $60 million a quarter. I would tell you Liberty is probably a little higher on the front end, there's a (inaudible) shorter loans. First State will be a little bit over a longer period of time, but a good ballpark estimate is in the $50 million, $60 million a quarter.

Okay, great. Thank you for taking my questions.

Thank you.

Thank you. (Operator Instructions) At this time I see no questions in queue. I'll turn the floor back to Mr. Makris for any closing remarks.

Okay, thank you very much. Thanks to all of you for joining us on our conference call today. We appreciate your support and we'll talk to you next quarter. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.