Simmons First National Corp (SFNC) 2015 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)

As a reminder, today's call is being recorded. I would now like to turn the conference over to Burt Hicks, Investor Relations Officer. Sir, you may begin.

Good afternoon. I'm Burt Hicks, Investor Relations Officer of Simmons First National Corporation. We welcome you to our fourth-quarter earnings teleconference and webcast.

Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, President and CEO of Simmons Bank, our wholly owned bank subsidiary; Mary Ledbetter, Chief Banking Officer; 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, and to discuss our Company's outlook for the future. We will begin our discussion with prepared comments followed by a question-and-answer session.

We have invited institutional investors and analysts from the investment firms that provide research on our Company to participate in the Q&A session. All other guests in this conference call are in a listen-only mode. A transcript of today's call, including our prepared remarks and the Q&A session, will be posted on our website under the Investor Relations tab.

During today's call, and in other disclosures and presentations made by the Company, we make may make certain forward-looking statements about our plans, goals, expectations, estimates and outlook. I'd remind you of the special cautionary notice regarding forward-looking statements, and that certain matters discussed during this call 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 estimates.

For a list of certain risks associated with our business, please refer to the forward-looking statements caption of our earnings press release and the description of certain risk factors contained in our most recent annual report on Form 10-K, [all is] filed with the SEC.

Lastly, any references to non-GAAP core financial measures are intended to provide meaningful insight and are reconciled with GAAP in our earnings press release. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. With that said, I'll now turn the call over to George Makris.

Thanks, Burt, and welcome to our fourth quarter earnings conference call. In our press release, issued earlier today, we reported record core earnings of $25.9 million, and increase of $14.5 million compared to the same quarter last year, and record diluted core earnings per share of $0.86, and increase of $0.22 compared to the same quarter last year.

Year-to-date core earnings were a record $89.6 million, which is an increase of $50.9 million compared to 2014. Year-to-date diluted core earnings per share were a record $3.18 representing an increase of $0.89 per share compared to last year. Our core efficiency ratio for the quarter 59.4% compared to 64.3% in the same period last year.

Our core return on assets for the quarter was 1.36% compared to 0.96% in the same period last year, and our core return on tangible common equity for the quarter was 15.89% compared to 12.65% in the same period last year. Core earnings for the fourth quarter of 2015 exclude the following non-core items: $752,000 in after-tax merger-related expenses, $36,000 in after-tax branch right-sizing costs, and $1.3 million in after-tax charges related to the accelerated vesting of compensation agreements of several retiring executives and senior managers.

Including these non-core items, net income was $23.8 million for the fourth quarter, an increase of $11.1 million, or 88.2% compared with the same quarter last year. Fourth quarter diluted earnings per share were $0.78, an increase of $0.06. On a year-to-date basis, net income was $74.1 million, an increase of $38.4 million or 108% compared to 2014.

Diluted earnings per share were $2.63, an increase of $0.52 compared to last year. For the quarter, we achieved strong loan growth. On a linked quarter basis, total loan growth was $66 million. During the quarter, our credit card portfolio grew by $6 million, and our AGRA portfolio declined by $35 million. Adjusting for this seasonality, loans grew by $95 million, or 1.95% for the quarter.

During the quarter, our legacy portfolio grew by $407 million, $195 million migrated from the acquired portfolio, and $212 million was the result of organic growth. As a result of the substantial increase in our legacy portfolio, we added approximately $1.5 million to our reserve.

In the fourth quarter, we achieved a solid core net interest margin of 3.88%, which was up from 3.63% in the same period last year. On a core basis, we increased non-interest income by $12 million, or 70.9%, over the same period last year. Core non-interest expense increased by $20.1 million, or 45% over the fourth quarter of 2014.

During the third quarter of 2015, we entered into an agreement with the FDIC to terminate all of remaining loss share agreements. As a result, all FDIC acquired assets are now classified as non-covered. All acquired loans were recorded at their discounted net present value, therefore, they are excluded from the computation of asset quality ratios for the legacy loan portfolio except for their inclusion in total assets.

At December 31, 2015, the allowance for loan losses on legacy loans was $31.4 million with an additional $1 million allowance for acquired loans. The loan discount credit mark was $55.7 million for a total of $88.1 million of coverage for a total of coverage ratio of 1.8% of gross loans. Non-performing loans as a percent of total loans were 58 basis points, which is an improvement from 59 basis points in the third quarter of 2015.

The 2015 year-to-date net charge-off ratio, excluding credit cards, was 16 basis points, and the year-to-date credit card charge-off ratio was 1.28%. Our capital position continues to remain very strong. At year end, common stockholders' equity was $1.1 billion and our tangible common equity ratio was 9.3%.

Before opening the line to questions, I'd like to spend a few minutes discussing our outlook for 2016. We know that in 2016, accretion compression is a challenge we must overcome. We expect our net accretion benefit in 2016 to be approximately $15 million less than 2015.

In addition, we will continue to add to our loan loss provision to account for the migrating loans from the acquired pool to the legacy pool. Several of our newer markets have provided excellent loan growth and we see that same trend continuing in 2016. We still expect 7% to 10% annualized loan growth during the year.

Margins will continue to be influenced by competitive pressures. Non-interest income should continue to increase as we will benefit from a full year of the integration of Trust Company of the Ozarks, and we continue to invest in the expansion of trust, investments, and insurance services throughout our footprint. That increase will be offset somewhat by an expected decline in mortgage revenue from a good year in 2015.

We will continue to manage our expenses through a commitment to improve technology and process improvement. However, we will invest in the build out of several lines of business and that expense may have a short-term negative effect on our efficiency. In 2015, we successfully integrated Liberty Bank, First State Bank, and Trust Company of the Ozarks. We've made excellent progress in implementing best practices learned from each of these institutions.

We feel we are positioned to continue discussions with potential merger partners, not only in our existing footprint, but in new geography, as well. We remain optimistic that we will complete multiple acquisitions within 12 months. Of course, at $7.6 billion in total assets, it won't take too many acquisitions to push us over the $10 billion asset threshold, which will bring increased regulatory scrutiny and compliance expense, as well as decreased interchange revenue.

We have spent much of 2015 preparing our Company for this milestone. We've hired some great folks and implemented a number of systems and processes that have made us a better Company. As such, we believe that we are well positioned to eclipse the $10 billion asset hurdle at some point in the near future.

During the fourth quarter, we had several executives and senior managers retire including David Bartlett, our Chief Banking Officer; James Stovall, our Regional Chairman for Northwest Arkansas; John Clark, our Tennessee Regional Chairman; David Bush, our Bank Card Department Head; and Shirley Crow, our Loan Administration Manager. We would be remiss not to thank each of these individuals for their service and dedication to our Company, and we wish them all well in their future pursuits.

Thankfully, our Company has a deep bench of experienced and talented financial service professionals and these retirements, as well as the continued growth our organization, provide tremendous management opportunities for those individuals and others who want to join our team.

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

(Operator Instructions)

Matt Olney with Stephens.

Hey, Matt?

Matt Olney, your line is open, please check your mute button.

Can you guys hear me?

We can, hey, Matt.

Okay. Hi, how are you guys doing?

Good.

Hey, I want to start on the loan growth. The goal you have talked about before, and again today, is that 7% to 10% range. We didn't see that this quarter or last quarter. Anything you can point to that would suggest you guys will be able to get there in 2016?

Yes, Matt, let me go through that reconciliation again because we're starting to get into our seasonality season, and that skews it a little bit. Our gross loans grew by $66 million on a linked quarter basis, so third quarter to the end of the fourth quarter. During that time, our credit card portfolio went up $6 million, but our AGRA portfolio started paying off. It was actually down $35 million from the third quarter.

So if you adjust that, that's basically a 2% increase in gross loans for the quarter, and annualized it's about an 8% increase. We feel pretty good about that. We did have a substantial movement from the acquired bucket to the legacy bucket of $195 million. We also generated $212 million of organic loan growth during the quarter, and you probably understand this, but we had to make a fairly substantial provision to account for that $400 million increase to our legacy portfolio.

We are still optimistic that 7% to 10% annualized loan growth will be achievable. We did have $82 million pay off in the fourth quarter, $24 million of that was in our impaired loan bucket, so we were glad to see that money actually come in. The other was spread between our acquisitions, First State, Liberty, Delta, Metropolitan, and then $4 million was attributable to the FDIC loans on our books.

The rest of the decrease in the acquired portfolio was just due to regular pay downs on the amortizing loans. So we're still pretty optimistic about 7% to 10% loan growth. And I'm going to let Barry Ledbetter talk a little bit about some of the markets that are driving that growth.

Hey, George. In the fourth quarter, Little Rock, Northwest Arkansas, St. Louis, Wichita, middle Tennessee contributed most of that growth for us. Even had growth in Northeast Arkansas, but we did have some pay downs in the AGRA loans there.

Looking forward to 2016, in the pipeline report, we're showing about $170 million out in the pipeline right now. And, again, most of those markets are the same ones, Northeast Arkansas, Northwest, Central Arkansas, St. Louis, Wichita, and some in middle Tennessee. But we do feel optimistic about our loan growth going forward.

Thanks, Barry, that's helpful. And, Barry, I don't know if you have it, but that loan pipeline of $170 million, how does that compare to previous periods?

I would say it's up significantly over previous periods and even over last year, as well. We have had -- we've been looking at a lot of loans and we feel good about that, and we feel that, again, a lot of these loans you don't know about as far as closing and stuff, but we feel very positive as far as the loans we are looking at and we're going to have to make those loans.

Hey, Matt, let me make one comment just about where we are in the timing of integration with the acquisitions. As you can probably understand, our first priority any time we integrate an acquisition is keeping the current business. So our loan officers are out calling on their customers along with some of us to make sure that they are comfortable still doing business with Simmons. But we're past that point now.

We have done an excellent job in maintaining our business, so you are seeing that pipeline start to grow because those loan officers are now out calling on new customers, and even expanding relationships with existing customers. We think we are past that maintenance point and we are into the growth point with our new acquisitions.

Got it. That's helpful. And then shifting over on the expense side, lots of moving parts in the fourth quarter, and I guess we will get the full impact of the Ozark Trust deal in the first quarter. What is a good run rate on the operating expenses for the first quarter?

We still think $62 million to $63 million is a good run rate for the first couple of quarters of 2016. We had two or three unusual expenses in the fourth quarter.

We did some media buys in the fourth quarter that really won't happen until the first quarter of this year, particularly in some newer markets. I will tell you, advertising in Nashville is just a little more expensive than it is in Pine Bluff, so that was a pretty good chunk of money.

We have also restructured most of our benefit plans and just keeping it really simple. We have combined all our former time off policies into a paid time off policy. And in order to bring all the merged companies together we had an accrual expense of about $0.5 million in the fourth quarter to begin 2016.

We also made a $300,000 contribution to our foundation. You probably know that it is still in its infancy, but they are doing great things, and all that accounts for about $1.5 million of our expenses in the fourth quarter. You can take that away, we are in that $62 million to $63 million run rate range.

Got it. Okay, that's very helpful, George, thank you for that. I will hop off and let somebody else hop on. Thanks.

Okay, thanks.

Stephen Scouten with Sandler O'Neill.

Hey, guys, good afternoon.

Hey, Stephen.

Question, maybe obligatory at this point, but do you guys have any energy exposure to note that I am maybe not aware of, and if so, do you know the reserves on any of that?

We really don't. The only energy exposure that we would really have would be anything related to the [playable] shale and that has been well past us two or three years. We had a couple of strip shopping centers that had some tenants that left, so those loans were stressed a little bit. But we are past that too. We're not making any special provisions for any energy exposure today.

Okay, great. And maybe -- you talked about M&A that could take you across $10 billion. What are you seeing currently in terms of those conversations, and have those shifted at all given the kind of market turmoil we have had even in the last two weeks? Is that going to be a hindrance given people's expectations for take-out prices and what not?

Well, we don't know exactly how they're going to look at it, but we hope that we have been very clear that when we value a potential acquisition it's on a relative basis. So it really boils down to how much of an income stream can their organization provide to the total, and I think most everyone understands that the value of the shares fluctuates, up or down.

I'm not going to say that there's not a little angst out there about the total value of the deal, but we are still optimistic that on a relative basis, we are in pretty good shape. We still have several conversations ongoing.

Marty Casteel gets mad at me when I tell him we took the year off, but we basically did except for Trust Company of the Ozarks from an acquisition standpoint. We have spent a good amount of time this year making sure that we integrated all of our acquisitions into the Company, and I think we are in a great position today to really take up the acquisition trail again.

Okay, great. And any clarity or maybe color you can give in regards to what sort of size acquisition you are optimally targeting at this point in terms of assets?

Yes, and I would tell you that if we go into a new territory that we don't have a presence in today, that number is $1 billion. We are looking at, for a substantial sized company to start in a new territory. We have several markets where we would like to increase our share. In those markets, we are looking at $300 million to $750 million asset size banks that have a very small geography that will help give us scale in certain markets. So it really just depends on whether we have a presence there now, or whether it's a new territory for us.

Okay, and maybe one last one for me. Where would you optimally want to have that loan loss reserve? I know, like you said, some of that build was related to migrations from the acquired into the legacy bucket there, but how do you see that build working itself out maybe on a dollar basis or on a percentage basis, however you all think about it?

Yes, I'll tell you, we used to think about it on a percentage basis, but we really can't do that anymore. The dynamics of purchase accounting has sort of changed the way we look at our reserve. The unusual thing about the migration from our acquired bucket to the legacy bucket is that no impaired loans will ever migrate.

So all the bad stuff stays in the acquired bucket with the loan mark against it. Those loans that we're transferring are only those loans that require the minimal amount of reserve. So just the math behind that alone makes the percentage go down. We have range that we look at each month to make sure that our loan loss reserve is adequate and it's just a changing dynamic.

I can't give you, necessarily, a percentage that would be a target for us. It really just depends on the quality of the portfolio, which today is very, very good. We wouldn't expect any shift in our provision other than increasing it for those acquired loans migrate.

Okay, makes sense. I appreciate that.

Sure.

(Operator Instructions)

Michael Rose with Raymond James.

Hey, good afternoon, guys, how are you?

Fine. How are you, Michael?

Good. Hey, I think I heard George -- George, I think I heard you say that you might expect some upward pressure on the efficiency ratio in 2016. Is that from the fourth quarter core rate or is it from the whole year efficiency rating? And what are the drivers of that?

Yes, Michael, I think my comments related to a target that I may have mentioned, maybe in our last call of 55% efficiency ratio for 2016. We would expect our efficiency to be between $55 million and $60 million for the year. That's going to be negatively impacted a little bit, so we won't get to $55 million probably because we are hiring teams of investment professionals, trust professionals, insurance professionals, who are coming in with basically no portfolio.

So we have some upfront investment that we hope really pays off over the long term. Those folks usually don't come very cheap and we have several markets to build out. That's what I'm referring to when I talk about some negative pressure on our efficiency. We do expect it to stay below 60% for the year of 2016.

Okay, so those people that you're talking about, have you hired them, and if not, is it included in that core $62 million to $63 million run rate build out?

It is included in that core rate. We have hired a couple in the fourth quarter. We have several prospects that could come to pass in the first quarter of 2016. Yes, that is built into our numbers.

Okay, that's helpful. And then, maybe just switching to the outlook for the margin. I think you had mentioned $15 million less accretion benefit. Do you have a sense for what the core margin expectations are as you move through the year? Have you seen any behavior on the deposit side since we have raised rates? Is there opportunity to maybe flag those costs maybe a little bit longer than you might have anticipated? Thanks.

Yes, Michael, this is Bob. First on the cost side of the deposit, we really haven't seen an increase yet, just 25 BPS, hasn't really need a dent yet. If the Fed moves more next year you might see some at that point.

On the NIM for the quarter, we are at 3.83% on a core basis. We would expect -- you're going to see in the first quarter it's going to be lower because of the seasonality. But we are pretty -- we expect that number to be pretty close to 3.85% to 3.90% for the balance of next year.

Again, first quarter will be lower, I would expect in the low 3.80s, possibly dip below that. The accretion that said -- we said that was a net amount. Keep in mind, that takes away the FDIC gain that's in the non-interest piece of it.

Correct.

So while it's $15 million, it's probably $22 million, $23 million decrease in the net interest income component of that. We will have, again, another volatile year on the GAAP NIM as we have accretion coming in, and when you have payoffs that number goes up, goes down, so forth. We are expecting to see a pretty stable NIM in the core side in that 3.80% to 3.90% range.

Okay, that's really helpful. And then just one final one for me. The $170 million pipeline that you mentioned, you said it was up substantially, where was that up, I guess, by product or geography? Is there anything that's specifically driving that?

Probably the biggest driver behind that is our St. Louis and Wichita markets, probably 50% of that is there, 30% is in Arkansas, and another 20% would be in Tennessee.

Okay. That's very helpful. Have you added any lenders there recently that might have driven that strong increase, particularly in St. Louis?

We have added lenders there and I would tell you that we are also looking for additional lenders. We think the Nashville and Knoxville markets are great markets for us, and we're actively looking to add lenders in those markets, as well.

Okay. Well, maybe you could take a couple from Terry and Harold over at Pinnacle. Thanks for taking my questions, guys.

(laughter) Give them our number.

Peyton Green with Piper Jaffray.

Good afternoon. I was just wondering maybe if you could tell me, Bob, what the split was between the scheduled and the accelerated accretion of $11.1 million in the quarter?

Yes, Peyton, about $3.5 million of that was related to just accretion from payoffs, either unimpaired or other loans that came up. The other was the schedule through the year. We would expect next year, somewhere David, in the $6 million, $7 million a quarter is what our expectation is on the accretion. Again, that's normal cash flows.

Okay, so you don't see any change in that $6 million to $7 million per quarter?

There will be change in that. There will be -- any additional payoffs that come, it will be volatile again. Those are so hard to project, but we would expect the cash flows to be somewhere in that $6 million range.

Okay, all right, great. And then, if the Fed does not move over the course of the year, what measures would you anticipate taking to change the balance sheet?

Right now we've structured the balance sheet, we're not waiting on the Fed to go up, or to hold. We are just running the bank like we think it should be run. If the Fed holds where it is, we are well positioned to reinvest, continue to invest in the loan portfolio, and in a shorter duration, continued in that two-and-a-half to three years on the investment portfolio.

So cost of funds are still at their lowest level, we have got lower liquidity than we have had in the past. It's either invested in a security portfolio or the loan portfolio.

We think we are at a neutral point if they continue where they are. We're not going to see ourselves -- change our balance sheet, but we're not going to see our net interest income go up or down by them substantially changing. Unless they obviously, something changed and they did it in a drastic fashion, which nobody expects that at this time.

Okay. With regard to the core expense run rate of $62 million to $63 million, how much more in cost saves are there from the acquisitions in terms of the integration of those acquisitions? Would you expect to see, or will we not really see those because you will basically spend all the savings that you might get going forward? And then maybe the timing of that?

Peyton, this is George. I'm going to take a shot at that and then Bob can correct me later. We continue to take a look at our branching network. You probably know that we have almost 160 branch locations, and with the trend in banking today with fewer and fewer face-to-face opportunities for transactions, we continue to see the transactions all across our branch networks decline.

So we are always taking a look at ways to become more efficient in our delivery to our retail customers. I would expect us to continue to identify low performing, low potential branch locations and we'll get some savings out of that. We have spent a significant amount of money over the last 12 to 18 months upgrading our technology and some of our systems. We have not seen the full benefit of that implementation yet, so as it continues to mature, we will see some efficiencies along the way, not necessarily in expense savings, but in some revenue opportunities down the road.

We think we have got a good foundation on which to build. We think there are some continued opportunities for cost saves, and that will be spread out probably over the next 12 to 18 months as we really examine our branch network.

Okay, so with the retirements that you mentioned in the fourth quarter, will any of that drop to the bottom line or will that be invested in new productive capacity?

No, some of that will drop to the bottom line. A lot of that expense had to do with early vesting of longer-term benefits which would be basically normal for that caliber of executive who retired. We obviously have replaced most of those folks, but because most of that was early vested, we won't have that recurring expense going forward.

Okay, all right, great. Thank you for taking my questions.

Thank you.

(Operator Instructions)

Matt Olney with Stephens.

Hey, guys, just a follow-up on the tax rate in the fourth quarter. The accrual looks a little bit low. What's behind that, and what is the outlook for the tax rate in 2016?

I'm going to let our tax expert, David Garner, answer that question.

Hey, Matt. The biggest impact of the tax rate during the fourth quarter was, if you remember back to the Metropolitan acquisition, Metropolitan National Bank had a significant net operating loss of about $85 million. Section 382(m) of the Code restricts the use of those net operating losses on a go-forward basis.

And at acquisition date, we were very conservative on how much that net operating loss we would be able to recognize. Now that we are two years in, cash flows have been much better from that acquisition than we had at the beginning. So we increased our estimate of how much we're going to be able to use of that net operating loss. That was a little over $2 million benefit to the income tax expense line.

On a go-forward basis, we acquired several subsidiaries through our acquisitions in Tennessee and Missouri. Our REITs, an investment holding company and a captive insurance company, which we're going to maximize our benefit on a go-forward basis. We think right now our projections are about 31.5% to 32% for a full year average tax rate for 2016. There still might be a little lumpiness in there depending on what our balances are in those REITs and that investment holding company, and if we had any additional revaluations of that net operating loss.

Matt, one of the big impacts on it was the losses that we expected on the early side for the Metropolitan acquisition were a lot less, whether it was OREO, whether it was fixed assets or non-performing loans. And as time has matured, it's made it clearer that we were able to achieve that deduction, so that's how we were able to free up the reserve on that piece of it.

Okay, got it. Thank you, guys.

Okay, thank you.

John Helfst with Voya.

Hi, guys, good quarter. Question on the accretable yield. What I am looking at, sort of following on Peyton's question, he asked most of it.

But in the third quarter Q it looks like a balance of accretable yield of, I think it was like $1.4 million, but then in the quarter you noted -- in the fourth quarter you recognized $11 million. So is that coming from non-accretable getting moved into accretable, or am I missing something in the Q? Thanks.

Hey, John, David Garner. Yes, some of that was related to a move from non-accretable to accretable.

Okay.

Also, after the termination of the loss share agreement, there was some reclassification between accretable and non-accretable. That is the biggest impact on that.

Got it. That makes sense. I thought that might have been the case. All right, thank you.

Thank you.

(Operator Instructions)

And I'm showing no further questions at this time. I would like to turn the call back over to George Makris for closing remarks.

Well, thanks to each of you for joining us again for our fourth quarter earnings conference call. If there are no other questions, have a great day, and if we don't talk to you before then, we will talk to you about three months from today. Have a great day.

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