Simmons First National Corp (SFNC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Simmons First National Corporation first-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 David Garner, Chief Accounting Officer. Sir, you may begin.

Good afternoon. My name is David Garner, and I serve as Chief Accounting Officer of Simmons First National Corporation. We welcome you to our first-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; Barry Ledbetter, Chief Banking Officer; and Burt Hicks, Investor Relations 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 investment firms that provide research on our Company to participate in the Q&A session. All of the 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 may make certain forward-looking statements about our plans, goals, expectations, estimates, and outlook.

I 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 as 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, David, and welcome to our first-quarter earnings conference call. In our press release issued earlier today, we reported core earnings of $23.2 million, an increase of $7.5 million or 48% compared to the same quarter last year. And diluted core earnings per share of $0.76, an increase of $0.06 or 8.6% compared to the same quarter last year.

Our core efficiency ratio for the quarter was 58.7% compared to 62.1% in the same period last year. Our core return on assets for the quarter was 1.24%, and our core return on tangible common equity for the quarter was 14.13%.

Core earnings for the first quarter of 2016 exclude the following non-core items: $56,000 in after-tax merger-related expenses, and $361,000 in an after-tax benefit related to the retirement of certain corporate debt.

Including these non-core items, net income was $23.5 million in the first quarter, an increase of $14.8 million or 170% compared to the same quarter last year. Diluted earnings per share was $0.77, an increase of $0.38 or 97%.

On a linked quarter basis, total loan growth was $10.7 million. During the quarter, our credit card portfolio declined by $9.5 million and our agri portfolio declined by $11.2 million. Adjusting for this seasonality, loans grew by $31.4 million for the quarter.

During the quarter, our legacy portfolio grew by $226 million. $36 million migrated from the acquired portfolio, and $190 million or 5.9% was a result of organic growth. As a result of this increase in our legacy portfolio, we added approximately $1.3 million to our reserve.

The Company's net interest income for the first quarter of 2016 was $70.2 million, an increase of $17.3 million or 33% in the same period in 2015. This increase was driven by the growth in the legacy loan portfolio and earning assets acquired through the Community First and Liberty transactions, including interest income was the yield accretion recognized on acquired loans of $8.1 million for the first quarter of 2016. The Company's core net interest margin, excluding the accretion, was 3.92% for the first quarter of 2016, a 37 basis point increase from the same quarter of 2015.

On a [core] basis, we increased non-interest income by $10.6 million or 58% over the same period last year. The increase in non-interest income was primarily due to additional service charge and fee income, mortgage lending, trust income, and gains on sale of other real estate and investment securities. Core non-interest expense was $61.7 million, a decrease of $2.6 million or 4% from the fourth quarter of 2015.

At March 31, 2016, the allowance for loan losses for legacy loans was $32.7 million with $1 million allowance for acquired loans. The loan discount credit mark was $45.1 million for a total of $78.8 million of coverage. This equates to total coverage ratio of 1.6% of gross loans.

The ratio of credit mark and related allowance to acquired loans was 3.1%. In our legacy loan portfolio, non-performing loans as a percent of total loans were 1.01%. The increase in the non-performing ratio from the fourth quarter is primarily the result of a single credit totaling $13.5 million.

We feel we are adequately reserved with the potential exposure related to this credit. Excluding this credit, the non-performing ratio was relatively unchanged from the previous quarter at 0.62% versus 0.58%. The 2016 year-to-date net charge-off ratio, excluding credit cards, was 11 basis points, and the year-to-date credit card charge-off ratio was 1.46%.

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 9.7%. Before opening the line to questions, I'd like to spend a few minutes discussing a few specific items that were announced or completed during the first quarter.

Effective April 1, Simmons First National Bank converted from a national banking association to an Arkansas state-chartered bank. The bank's name changed to Simmons Bank. Simmons Bank is a member of the Federal Reserve System through the Federal Reserve Bank of St. Louis.

The charter conversion was a strategic undertaking that we believe will enhance our operations in the long term. We're strongly committed to operating our organization with a focus on community banking. As such, we believe it will be advantageous for our shareholders, customers, and associates to work with regulators who are accustomed to community banks and the challenges they face.

On February 19, we merged Simmons First Trust Company and Trust Company of the Ozarks with and into Simmons Bank. We believe this will allow us to offer our trust services in an efficient and consistent matter throughout our footprint.

During the first quarter, we announced the closure of 10 branch locations effective June 30, 2016. We're closing three locations in our Arkansas region, four locations in our Missouri/Kansas region and three locations in our Tennessee region. We continuously evaluate our branch network to determine which locations meet the greatest needs of our customers.

We evaluate many factors in this process including analyzing market trends, branch performance, and coverage area. Branch locations will continue to serve a customer need but our customers are transitioning to non-traditional channels to conduct their banking business.

Like other banks across the country, we must adapt to these changes. We will continue to look for and invest in new and innovative channels to meet the ever-changing needs of our customers.

This concludes our prepared comments. We will now open the phone line for questions from our research analysts and institutional investors. At this time, 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.

Hello, guys. How are you doing this afternoon?

Good. How are you?

Doing well, thanks.

I wanted to talk a little bit about the loan growth. I know you mentioned kind of some of the numbers ex the seasonal effect but it looked like basically with the gross loan balances were basically flat quarter over quarter. What are you seeing in terms of trend and what you think the growth can be for the rest of the year?

I will touch that on a high level. I am going to ask Barry Ledbetter, our Chief Banking Officer, to talk about that a little bit. Stephen, what I would tell you is we probably saw more loan payoffs in the first quarter than we had anticipated. Some of them were well-timed, and Barry can go into that detail a little more.

I will say this, that January was probably a slow month with regard to new loan generation. The end of the quarter picked up very well. We had a really nice March as far as loan generation goes, but I am going to let Barry talk about his expectations for the rest of the year and a little bit of pipeline information for you.

On the loans again, we saw a decrease in the credit cards about $10 million, agri loans about $11 million. We also had probably about $25 million in loans that we would say have a higher risk rating that paid off the last quarter, so that was probably long term to our benefit with that. Again as George mentioned, we did have really good loan growth towards the end of March and we expect that to continue.

Right now, we have got about $161 million in the pipeline. About 35% of that is in Arkansas, mainly in northeast Arkansas and northwest Arkansas and central Arkansas. About 42% of that is in Missouri/Kansas region mainly in St. Louis and Wichita and the remainder of that about 22% in Tennessee.

It appears our pipeline is fairly consistent in what we're seeing as far as new opportunities when we would expect that to continue through the remainder of the year.

Stephen, let me clarify one thing. When we say in the pipeline, those are approved and ready to fund.

That was going to be my next question. Okay. The pace of payoffs, if your pipeline is that today if you could see $200 million or $300 million in new production close this quarter, what degree of that do you think can translate into net growth?

We're still expecting our annual year-over-year growth so by the end of the year, we expect our loan balances to be about 7% higher than they were last year. As you can tell by the accretion that we had in the first quarter, some of our acquired loans paid off a little earlier than we had anticipated, so there's a trade-off there between the little additional accretion income and loan payoff. So we still expect our loan growth to hit the 7% range year over year.

The first quarter is always an unpredictable quarter for us because with our seasonality with credit cards and agri portfolio and then the unusual paydowns this quarter exacerbated that. The second, third, and fourth quarter will be a little more normal, and we expect to have good loan growth during that period time.

One of the positive things we did see in this quarter was the loan growth that came in, in March was pretty significant compared to January and February, so we saw a lot of growth at the end of the quarter.

Okay, great. And maybe shifting gears. One more for me on the expense front.

Obviously, you had some nice improvement there in quarter-over-quarter expense reductions as you guys had suggested last quarter. But what do you think -- is this current level fairly sustainable or is there anything that's being built in that's going to take costs materially higher from here?

We think that this level is fairly sustainable so we still think $62 million, $63 million is a good number. We had good cost controls in the first quarter. Now, I will say this.

Our intention is to maintain our efficiency ratio below 60%, so this quarter is 58% and change. We'd like for it to ultimately get to 55% and below but as long as we're below 60%, we will invest in building out some of our lines of services in other areas. In the first quarter actually, we hired some new investment folks in some markets where we did not have that presence, and I consider that an investment because they didn't bring any income with them when they came over.

We do have some pretty aggressive pro formas for those folks. I will also tell you that we have engaged a partner for our DFAS preparation. That expense over the next 18 to 24 months is going to be about $2 million.

We expect about $150,000 to $200,000 to be in this year. So much of it will be deferred into 2017 and 2018 as that process develops. So we'll have some investment to make, Stephen, but it's going to be made as we continue to drive our efficiency down.

Okay, great. I appreciate the color.

Brady Gailey, KBW.

Good afternoon, guys. So the 10 branches that you'll be closing, can you just expand on that?

Have those already been closed or what's the timing there? Any idea what the cost savings are going to be realized from those 10 branch closures?

We've sent the notices out on that. They should close at the end of June, and we're expecting about $1.6 million in annualized savings on those 10 branches.

Brady, about $400,000 of that ought to accrue in the second half of this year.

And that is pre-tax on the number.

Okay. Great. And then as far as the loan loss reserve, looking at it I realize the effective reserve is $160 million but optically the reserve is 94 basis points. It's keep trending down. Do you think that 94 basis point reserve will continue to head lower or will it stabilize here?

Well, you know the percentage of allowance compared to loans used to be a good measurement for us before all the new accounting rules came into place and we started having all these acquisitions so here's the math behind our allowance. As our loans migrate from the acquired portfolio to the legacy portfolio, and therefore require an allowance, the only ones that are migrating are those past credits. So if we have impaired loans, they are going to stay in the acquired bucket forever.

So we don't have a good blend of past, watch, and criticize credits moving into that legacy portfolio. Therefore, it's not requiring those higher levels of reserves that a blended portfolio would have. So as long as we keep moving past credits into our legacy portfolio, the math behind the percentage continues to have downward pressure.

So we have really had to quit looking internally at what that percentage is and actually we have to take a look at a range based on the quality of that portfolio to determine what's adequate. I would say that because we still have a fairly substantial acquired portfolio with some good past credits in there, as they migrate over there will continue to be a little bit of downward pressure on that percentage of our allowance compared to our legacy loans, or total loans for that matter.

Okay. And then finally just an update on M&A. I know you guys would like to buy some other banks or just what the latest is on that effort.

We continue to be very active in discussions with several potential merger partners. I will tell you this, we expect to be successful in 2016 with additional acquisitions. I would not expect those acquisitions to close in 2016 -- with additional assets, it would take us past $10 billion.

So we would expect to move past $10 billion in 2017, but we do expect to have some acquisitions later this year. We're really focused on filling in some of our footprint in our current four state area. I think I mentioned several times before that we have some real key markets that we need a larger presence in order to be able to provide all our products and services.

So, I'll mention several. St. Louis is a priority market for us. We have a team in St. Louis that's doing an excellent job.

They're probably the one market that's really driving our new loan production more than any other. We need to expand our presence in the St. Louis market from a retail perspective. We have East Tennessee, which is a market we really like, and we acquired First State Bank.

That was a new market for them, so we're committed to build out the East Tennessee market. There is several others that we have our eye on, but I would tell you that our first priority is some in-market acquisitions.

Okay, great. Thanks.

David Feaster, Raymond James.

Good afternoon, guys.

Hi, David.

I want to talk a little bit about fee income. Your trust business, real nice quarter and mortgages was up real nice, and we're heading into the seasonally strong quarter, but overall the income was a little bit disappointing primarily due to that other income line. Could you just give us your thoughts first on Trust in the mortgage segment and maybe highlight a little bit of what's going on in the other income line?

David, on Trust, this is the first quarter that you've seen all the numbers in from our integration of Trust Company of the Ozarks. So we had a nice lift on a linked quarter basis based upon the Trust Company of the Ozarks, that $1 billion in trust business rolling in. So, that comparatively was one of the offsets there.

As far as the mortgage business, we've had good production. We still see good applications. We are running about 78% purchase -- 72% purchase, 28% refi.

We had a little hiccup at the end of the year in fundings from investors through the TRID process. I think that was an industry-wide experience. We're catching up on some of the funding so that also helped the quarter.

But we expect the production to remain strong barring any increase in interest rates on the mortgage. It is going into the right season and our production numbers at this point look good.

Okay.

The other income piece was at fourth quarter, we had a gain on a sale of OREO. That was the largest piece of it. We also had about $400,000 on other rental income that was a timing difference, so it's really fourth quarter was a higher number than first quarter.

Okay, this is a better run rate for that other income line?

I'd say it's pretty close, yes.

Okay. I would like to talk about your margin. Your expectations for your core NIM and your expectations for accretion.

Has it changed at all? And I think you said last quarter you were expecting a $15 million decline in your accretion income in 2016?

First on the accretion income, we had about $8 million in accretion income for the month. It was about -- I'm sorry, for the quarter, it was about $2.5 million over what our expectations were. Most of that was the early accretion on some loans that paid off.

Looking forward, our expectation, again these numbers are very lumpy through the year. It's hard to project what payoffs will happen. Based on our cash flow models right now, we're at about $5 million to $5.5 million a quarter is our expectations.

We gave guidance that we would be in the $22 million to $25 million for the year. We'll probably be a little north of that number based on this first quarter being over $2 million so maybe $25 million, $27 million.

On our core margin, we were 3.92%. It's probably one of the best first quarters we've had. We're usually lower in the first quarter.

Part of that was related to the mix in the portfolio. The investment portfolio had a better yield, but our expectations for the balance of this year is to be in that 3.9% to 4% range. We would hope in the third quarter when we're at our highest point with our ag and seasonal portfolio, that we'd be closer to the 4% level at that point.

David, this is George. Let me say one thing. One of the numbers I was most pleased with was our core margin for the first quarter. As Bob has mentioned, it's traditionally one of our lowest ones because of the payoff in our credit card and agri portfolios whose yield is quite honestly much higher than our average yield.

We were a little concerned going into this year with all the number of renewing loans that we had that we may actually feel some downward pressure on that margin, but so far that hasn't happened. So the 3.92% for the first quarter are actually up from the fourth quarter in my mind is a very positive statement. And I think our guys in the field were doing it was a very good job.

So we look for that to continue and if it does that will be a good thing.

That's terrific. That's all I got. Thank you.

Thank you.

Matt Olney, Stephens.

Thanks. Good afternoon, guys. I want to go back to the M&A discussion and George, in the past I think you've talked about opportunities in M&A in both fee income and traditional bank, but it sounds like it's traditional bank M&A that's top of mind right now.

Is that fair? And if so, remind me of the parameters in terms of ideal size of assets and preferred earn back to tangible book value dilution?

Okay. I would tell you, Matt, whole bank acquisitions are a priority now because they're what's available right now. Not that we wouldn't be interested saying another trust company or an investment group or an insurance company, we just don't have as many of those teed up right now as we do some whole bank acquisitions. So ideally for us, assuming that it's not a specialty bank like a agri lending bank, if we are in market, we would like to have $500 million in assets.

We think that's a good size, a good production group, and one that can make the transition to resources from a larger bank. And let me tell you what I mean by that. So you've got loan production guys who have been willing to go out and call on customers with a borrowing base much smaller than what they are going to have once they merge with us.

And they have to be willing to go find some new customers and talk to some of their existing customers about additional business that maybe another bank has. So those folks sort of get it, and that's good scale for us in existing markets. If we were to go to a new market, say Texas or Oklahoma, we would be looking for $1 billion or more in assets there.

We just think that's important as we regionalize our Company that we have that kind of scale in a new region. It wouldn't necessarily have to happen in-market because of our obvious presence there but in new markets that's the case.

Now, our parameters are this. Deals, we do have to be accretive to earnings right off the bat. So we're not looking for any dilutive earnings.

If we dilute tangible book value, we want to earn that back in three years or less. And because today of our, I hate to term it excess capital, but as we've stated before, we'd like to manage our TCE at the 9% or below level. It's at 9.7% today.

We're looking for opportunities for acquisitions where we can use a fairly substantial amount of cash in the transaction, too. So from an earnings accretion standpoint, we would expect that to be enhanced. So are there any other parameters that you had in mind that you want us to address?

No. I think you hit all of them, George. Thank you for that.

Okay, sure.

And then I also want to switch topics and go to credit quality. I think you said the increase of the non-performers was from pretty much one credit. Any other color you can give us on this credit as far as why it migrated in 1Q?

I can. Matt, that was a large manufacturing facility loan that we acquired when we bought Metropolitan Bank. It was impaired at the time. We had a large credit mark against it.

We had a private equity group come see us about buying that credit from us, and we worked out a deal and we actually financed that, and we set aside a pretty good specific reserve against that credit when we put it on the books. Well, this particular manufacturing company had a large contract with a mass merchandiser that they lost during the first quarter.

So when we take a look at their cash flow going forward, it doesn't support the credit, so it went on non-accrual. We think we have an adequate specific reserve against this credit, and we're currently working with the borrower for a resolution to that. So it really was driven by that one credit.

It's actually better today than it was when we bought it through Metropolitan. It is still a going concern so we're optimistic that sometime in the near future, we're able to have a resolution to that.

Thanks for the color, George, and that example, does the private equity firm have a guarantee on that loan?

Yes, they do.

Great. Thank you.

Thank you.

Thanks, Matt.

(Operator Instructions)

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

Okay. Well thank you all for joining us this afternoon. If you have any questions in the meantime, please call Bob Fehlman. You all have a great day.

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