Simmons First National Corp (SFNC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation third-quarter earnings call and webcast.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over Mr. Burt Hicks. Please go ahead.

Good afternoon. My name is Burt Hicks and I serve as Investor Relations Officer of Simmons First National Corporation. We welcome you to our third-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 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 yesterday, 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've invited institutional investors and analysts from the equity 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 new website, simmonsbank.com, 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'll 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 than our current expectations, performance or estimates.

For a list of certain risks associated with our business, please refer to the forward-looking information section 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. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company undertakes no obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise.

Lastly, in this presentation we will discuss certain GAAP and non-GAAP financial metrics. Please note that the reconciliation of those metrics is contained in our current report filed with the US Securities and Exchange Commission yesterday on Form 8-K. Any references to non-GAAP core financial measures are intended to provide meaningful insight. 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 third-quarter earnings conference call. First, I would like to welcome our newest associates from Citizens National Bank to the Simmons team. We closed that transaction on September 9 and will convert systems over this weekend. We look forward to continued growth in the east Tennessee markets.

In our press release issued yesterday, we reported net income of $23.4 million for the third quarter of 2016, an increase of $1.8 million or 8.5% compared to the same quarter last year. Diluted earnings per share were $0.76, an increase of $0.04 or 5.6%.

Included in the third-quarter earnings were $953,000 in net after-tax merger-related and branch right-sizing costs. Excluding the impact of these items, the Company's core earnings were $24.4 million for the third quarter of 2016. Diluted core earnings per share were $0.79.

We continued to be very pleased with our operating performance. For the quarter our efficiency ratio was 53.8%. Return on assets, 1.21%, Return on equity, 8.4%. And return on tangible common equity, 13.3%.

Our loan balance at the end of the third quarter was $5.4 billion. The addition of the Citizens portfolio added $341 million to the total. The legacy portfolio grew by $219 million, of which approximately $68 million migrated from acquired to legacy. And $104 million of acquired loans paid off during the quarter.

We're optimistic about future loan growth as our pipeline, which we define as loans approved and ready to close, has increased from $156 million as reported at the end of the second quarter to $374 million at the end of the third quarter. 42% of the pipeline loans come from our Arkansas region, 45% from our Missouri-Kansas region and 13% from our Tennessee region.

Our bank subsidiary's combined capital concentrations on current portfolio balances for construction and development loans and CRE loans are 47% and 201%, respectively. The concentrations based on committed balances, that is the total amount of every approved loan, for C&D is 84% and for CRE is 242%.

The Company's net interest income for the third quarter of 2016 was $68.1 million. Accretion income from acquired loans during the quarter was $4.9 million, a decrease of $10 million from the same quarter last year. Based on our cash flow projections, we expect total accretion for 2016 to be $22 million to $23 million compared to $46.1 million in 2015.

Our net interest margin for the quarter was 4.09% which was down from 4.82% in the same period last year. The decline in net interest margin was greatly impacted by the decrease in accretion income. The Company's core net interest margin, which excludes the accretion, was 3.81% for the third quarter compared to 3.93% in the same quarter of 2015. Because of the competitive rate environment and our loan mix, we expect our margin to remain in the 3.8% to 3.85% range.

Our non-interest income for the quarter was $36.9 million. We had nice increases in mortgage lending, trust income, debit and credit card income and a $2 million recovery on an acquired charged-off loan. Non-interest expense for the quarter was $62.4 million while core non-interest expense for the quarter was $60.7 million. We continue to be very pleased with our expense control initiatives. It's also important to note that both the revenue and expense numbers include the Citizens Bank operation for 21 days.

At September 30, 2016 the allowance for loan losses for legacy loans was $34.1 million, with an additional $1 million allowance for acquired loans. The Company's allowance for loan losses on legacy loans was 0.86% of total loans. The loan discount credit mark was $42.9 million for a total of $78 million of coverage. This equates to a total coverage ratio of 1.43% of gross loans.

During the third quarter our annualized net charge-offs total loans were 0.82%, including credit card charge-offs and one single charge-off of $5.4 million. The large charge-off was related to the water bottling plant loan acquired from Metropolitan National Bank that we have discussed on two previous occasions.

In late 2014 we made a new loan to a startup group for the purchase of assets in connection with the workout of this troubled loan. At the time, accounting rules required that we recognize income from the elimination of the credit mark on the problem loan. The amount of income recognized was approximately $4.2 million. At the same time we set up a specific reserve against the new loan of $2 million based on our valuation of that loan.

Earlier this year the new operating Company lost its largest customer contract which represented a majority of its revenue. At that time, we classified the loan as non-accrual and added to the specific reserve because the reduced cash flow from operations would not service the debt.

Attempts to sell the business as a going concern have been unsuccessful. The plants have closed and are in receivership. We have charged loan down to the appraised liquidation value of the collateral. We added the charged-off amount back to our allowance for loan losses which explains the spike in our provision for the quarter.

I would like to comment on the effect of the remaining FDIC and Metropolitan problem assets on Simmons Bank. The total amount of loans related to the four FDIC purchases and Metropolitan represent only 6% of the bank's loan portfolio. However, approximately 31% of its total classified loans and 32% of its total non-performing loans are related to that portion of its total loan portfolio.

In addition, we have reduced the Bank's OREO balance by over $58 million, or 68%, since it's high in 2013. Of the remaining OREO balance, over 70% is related to the FDIC and Metropolitan acquisitions.

During the quarter consolidated non-performing loans to total loans decreased from 1.17% to 0.95%. Our non-performing assets to total assets decreased from 0.99% to 0.83%. Our asset quality continues to be very good and we continue to make good progress managing the problem assets remaining from the FDIC and Metropolitan portfolios.

Our capital position continues to remain very strong. At quarter end, common stockholders' equity was $1.1 billion and our book value per share was $36.69, an increase of 8.3% from the same period last year.

On May 18 we announced the acquisition of Citizens National Bank of Athens, Tennessee. We received regulatory approval in July and, as mentioned earlier, we closed the transaction on September 9. We're very proud of our ability to close the transaction in such an expeditious manner. Our team, along with the Citizens management team, worked very efficiently in their efforts to complete the merger.

We continue to have productive discussions with potential merger partners, both in our current footprint and in new markets. We feel we are well prepared to grow past $10 billion in assets. We have strengthened our audit and compliance groups and fully integrated all previous acquisitions and have established best practices from all merged Banks as our basis for growth. We've also begun our preparation for DFAST. Our collective team has achieved excellent results in a very short time and we are very proud of that effort and the results.

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 will ask the operator to come back on the line and once again explain how to queue in for questions.

(Operator Instructions)

David Feaster, Raymond James

Hey, good afternoon, guys.

Hey, David, how are you?

Doing very well. Could you talk a little bit about pro forma for the CNB deal? Do you have any expectations for -- I know you only got 21 days in this quarter of contribution. What would be a good baseline run rate of fee income and expenses pro forma for the deal?

This is Bob. We will have, in the fourth quarter -- conversion is happening actually this weekend, so it will take the balance of the fourth quarter to get through our cost saves and figure out where we will be. We are projecting on a run rate of close to $2.8 million to $3 million a quarter of non-interest expense. The income side, on the non-interest income side, would probably be somewhere in the $1 million to $1.2 million per quarter.

Okay. Can you talk a little bit, too, about the core NIM. I get the competitive environment and I know CNB has a lower NIM than you all do. But could you talk about what is pressuring that? Typically the third quarter is seasonally stronger with the agri lending business. Could you talk a little bit about what is going on? Is that 3.8% to 3.85% good for 2017 too?

We think we will start 2017 in that range. I'll tell you, most of it today is dependent on our mix. While we do have higher yields in our agri portfolio and our credit card portfolio, David, as our total portfolio grows, those amounts become less significant.

So we've got $150 million, $160 million of agri loans; about $175 million, $180 million of credit card loans, two of our highest-yielding portfolios. But on a portfolio balance of $5.4 billion, they don't move the needle very much.

Most of the new loans we're seeing out in the market today are very competitively priced, usually in the 3.75% to 4% range for the A-quality loans, which is what we chase here at Simmons Bank. Until we see movement in rates and the whole market moves up, we think we'll be fighting those competitive rates for the growth in our portfolio.

And David, this is Bob. I would remind you in the first quarter we'll be down maybe 5 or 10 basis points because of seasonality. That'll be our lowest point when our credit cards pay down some, our ag loans pay down. So just do expect in the first quarter to see a little bit of a drop there. But as George said, we would expect on a go-forward basis, that 3.8% to 3.85%.

Let me mention one of the think that is a positive with regard to that. We have a lot of cash on our balance sheet today. We will invest most of that in higher-earning investment vehicles. So we will pick up a little bit of margin as we improve our cash-to-investment ratio.

Okay. And does that include any rate hikes, your expectations for the 3.8% to 3.85%? Or is that --?

No, we quit worrying about that a long time ago (laughter).

Okay.

We've been waiting for rates to go up since 2010.

Okay, good. And one more macro question. With all this Wells Fargo stuff is going on, what is your expectations on your -- did you expect any fallout from this? Or have you done any investigation into your own lines of business and done any prep for any potential regulatory scrutiny?

We have. All incentive plans ought to have the appropriate level of risk management associated with it. We believe all of ours do. We are prepared for more questions from the regulators going forward, not only on our incentive plans, but all our compensation plans, to make sure that they feel we have the appropriate risk management in place to avoid those kinds of situations.

Okay. One last quick one from me. What do you expect the pace of your acquired book to run off going forward?

Well, as we projected for this year, we will probably be another $3.5 million to $4 million for the balance of the year. That would put us in, I think it's about $22 million or so for the year. Next year we're projecting in the $13 million to $14 million. I'm sorry, I talked about the accretable yield, but about $13 million to $14 million next year in the accretable yield. On the acquired book it's about $100 million a quarter.

Okay, great. Thank you.

Peter [Ruiz], Sandler O'Neill.

Hey, Pete.

Hey, sorry about that.

No problem.

If you could guys talk about the moving parts in loan growth, that was great color on the pipeline and what came from migration. But an you talk about what has caused the slowdown here in the last couple quarters? Is it more pay-downs or is it any other macro events going on?

We've added a lot of new loans to our portfolio but the pay-downs are what is really driving that lower-than-expected net loan growth. For instance, this quarter we had over $100 million of pay-downs during the quarter. We expect that will slow down. But we have a lot of loans on the books that churn really quickly. So we will always be fighting that pay-down number because that's just part of our portfolio.

Okay, that's great. And also you gave a little bit of color on that other fee income line item which was good. But can you also talk -- is something that level, around the $2 million, is that safe to assume -- I know it could be lumpy, but could we assume something at least some sort of recoveries in every quarter?

Yes. We do have recoveries ever quarter. That $2 million was on a single loan so we thought it was significant enough that we needed to mention that as an extraordinary item. We have about $1 million each quarter of recoveries. We expect that to continue.

Let me mention a couple other things about our non-interest income. We've had a really good year from a mortgage lending standpoint. Of course a lot of that is depending on rates.

If we do see rate hikes, we can expect the refinance business to slow down a little bit. Currently it's about 40% of our mortgage mix. But if rates stay where they are, we think we are well-positioned to continue good mortgage lending revenue.

The rest of our pieces continue to just do better as we get them rolled out across our entire footprint. So we've got a new manager of our credit card portfolio with some growth initiatives in place. We're pretty optimistic about that. We've got really good retail investment advisors. That part of our business is picking up. Our trust business is doing really well, especially after the addition of the Trust Company of the Ozarks last year. It's in one of our largest markets up in Springfield, so it's doing really well. And as we continue to roll those out, we will look for continued growth in that area.

Okay, that's great. Thanks, guys.

You're welcome. Thank you.

(Operator Instructions)

Matt Olney, Stephens.

Hey, thanks, guys. How are you?

Hey, Matt, how are you?

Doing great, thanks. Want to go back to the loan pipeline the George mentioned a few minutes ago. Sounds like there's some improvements there. Anything can point to as far as the pipeline number now versus previously?

Well, a couple of things that I'll mention and Barry may want to come in. One is, Matt, I believe we're learning how to use our new size and scale in some of our markets. We're going to take a look at some loans that we probably would not have had a chance to look at previously, just because we were too small to accommodate the borrowers. That somewhat explains the pressure on the net interest margin. These are really good borrowers and they demand really good pricing in the market.

But we have also had some pretty key hires that we've talked about before. We've hired a new community President in the Kansas City market. He's done a great job. Our St. Louis market is up $100 million this year alone in their loan portfolio balance. Northwest Arkansas Fort Smith are doing really, really well. And as usual, our Central Arkansas team continues to do really well in the Little Rock, MSA area.

So I would say it's across-the-board. New opportunities that we're getting because of our size but also some talent that we've been able to attract to our Company that is really paying dividends. Barry, I don't know if you have anything else that to that.

I think you covered it well. One thing I may add that even in the past our pipeline before, I think, was at 156 in the last quarter. And several of our larger loans were funding, or lines of credit that will fund over a 12- to 24-moth period of time. So I think you'll continue to see increases in our portfolio from the previous loans we made. I think George has covered the markets and we're doing well into the reasons for that.

Okay, that's helpful. I appreciate that. And then on the fee income side, George, you answered a few of my questions. But I also want to address the service charges were up strongly in the quarter. I want to understand how sustainable service charges are here.

And then, investment banking was also up year over year quite a bit. Trying to get a better idea of what to expect on those two lines the next few quarters.

Matt, this is Marty. On our service charges some of that is seasonal. Some of it has to do with -- some are NSL fees that at this time of the year we see more of those. More customers adding new balances to our mix. So it's really not any one thing but we do think it's sustainable. Some of it's a little seasonal but we expect to see a continuation in those service fees. Your other question had to do with mortgages?

Investors.

I believe you guys called it investment banking income was up strong year over year.

Our institutional investments were up a little this quarter. And our retail investments has picked up some, so we're seeing, I think, some lift in our scale with our retail investments. And our institutional investments had a decent quarter; we saw more revenue this quarter than we had out of that.

But you also may know that we have decided to get out of the institutional business. We're doing that because of long-term profitability of that business has not been there for us. We are deleveraging the risk on our books. It's been a business that's really moved away from us and it's not core to our central banking areas. We're just leaving that business. The net result will be negligible. You will not see much in the way of going to the bottom line one way or the other.

Matt, it will probably be about $300,000 a quarter on the revenue side, likewise about $300,000.

Yes, it's been breaking the --.

Per quarter. I'm sorry, that's per month.

Okay. And on the loan-loss provision expense, obviously there's been some volatility this year on credit. That's a difficult one for us to forecast. What kind of guidance can you give us as far as the best way to look at the loan-loss provision quarter to quarter?

Matt, I'll tell you the way that we will budget that will be $3 million to $4 million a quarter. We have a process to determine an appropriate range in our loan-loss provision. We are very disciplined in that regard. So barring significant events like the single charge-off we had this month, that will be a good number going forward.

Every year we sit down and we challenge ourselves on that loan-loss provision methodology. It's the time of year where we sit down to do that again as we get ready to budget for 2017. You'll notice that the 0.86% on legacy loans is fairly thin, but I think it's very reflective of our credit quality and our portfolio.

So, once again, the $3 million to $4 million is what we expect to budget each quarter next year. If we have significant charge-offs to get us below the appropriate range for our allowance we'll add back to the allowance. We hope that those events are behind us.

Okay, that's very helpful, George, thank you. And then last question for me. In the past you guys have targeted the core efficiency ratio getting below 55% and I think we achieved that this quarter. I'm trying to get a better idea of how sustainable you think it is here below 55% on the core efficiency ratio.

Well, I'm not totally optimistic that it's going to be below 55% in 2017. I believe it can be 55% and we may hit quarters a little above or little below. We have quite a bit of expense already in those numbers in preparation for the $10 billion mark.

We mentioned that we've already started the DFAST preparation. We've already done the GAAP analysis. We will be spending a little money on IT and other systems to get ready for that. We've beefed up our audit and our compliance group in preparation for moving past $10 billion. We don't want any surprises after we get there, so we are extending on the front end.

We're pretty pleased with where we are today. We closed 10 branches recently so we've gotten some benefit there. Our headcount is down from 2,000 at the beginning of the year to just over 1,850 today. That's been a 7% reduction in our headcount, which is good. We continue to be very disciplined in our staffing models. I think I've mentioned before that we've had third parties come in and help us understand some metrics to use in our staffing models and we've done a really good job of meeting those.

But we are retail bank and a community bank. And there are some expenses that we will always have in our system related to product delivery. We think that based on our current mix of products, our current mix of revenue, that a 55% efficiency ratio today is still a good target.

Okay, great. That's great color. And good luck this weekend on the conversion.

Thanks very much. If we turn on the machines and we're business on Monday morning, that's a good conversion weekend. So that's our goal.

Good luck. Thanks.

Thanks.

Peyton Green, Piper Jaffray.

Yes, thank you for taking my questions. George, if we can step back and take a little broader view of what the outlook would be over the next 12 to 24 months, what would you be more optimistic about today relative to where you were earlier this year? And then what kind of clouds do see on the horizon that might not have been there six to nine months ago?

Well, first of all, I think we're starting to get some pretty good traction with regard to loan growth, Peyton. We've said all along that our goal is to get our loan-to-deposit ratio up to the 90% range. It's a little over 80% today. If we keep feeding the pipeline like we did over the last quarter, we'll get a lot closer to 90% over the next year. Even though the yields on those loans are pretty low, they're better than any other alternative we have today. So we're very optimistic about that.

We're also very optimistic about some of the new initiatives we have in our non-interest income lines of business, particularly credit card. We have a new leader in that group who has 40 years of payments experience. We've been through some pretty significant studies on ways to enhance that program. I think we'll see significant progress in 2017 in our credit card portfolio.

I would tell you that the regulatory scrutiny has not let up. And as we get bigger, we will expect more of that. That's one of the reasons that we have beefed up audit and compliance, because for Simmons Bank safety and soundness has always been a cornerstone. But there is, as you know, a lot of emphasis today on consumer compliance, and we're in tune with that.

So we would expect that our internal language will shift a little bit just from growth to growth and compliance. Our business unit managers have done a very good job of establishing their risk metrics within their units. But that's a new wrinkle in our operation; it's taken a much higher level of interest today than it ever has been and I really don't see that decreasing.

As far as headwinds go, our ability to attract the talent that we need in markets, our ability to grow in some of the key markets, may be a little slower than we would like. We're not going to rush and make a bad decision; we're looking for the right people. And I think our track record has proven that our patience pays off.

The team we have in St. Louis and the team we now have in Northwest Arkansas and in Kansas City, are just exceptional. And for the long haul, that is in the best interest of the Bank.

So, we will continue to look for excellent talent in all of our markets and quite honestly, we've had pretty good success in attracting what we consider to be the best of the best in those markets. We'll continue that track. I don't know if you have any specific questions about any other headwinds that the industry may face. Be glad to address that if you do.

Okay. And then as a follow-up to the loan-to-deposit question, getting from 80% to 90%. Is that the time frame that you would expect to utilize the excess liquidity on the balance sheet? Or is that a longer-term prospect?

No, we think we can get there and 12 to 24 months. That would certainly be our goal. As you can probably tell, our cost of funds has come down, so we're not being really aggressive out in the market today as far as trying to gather high-priced deposits. So we've got plenty of liquidity to work with on our balance sheet today to grow those loans to a 90% loan-to-deposit ratio.

Okay, great. Thank you for taking my questions.

Sure. Thank you.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back over to Mr. George Makris for closing remarks.

Thank you very much and thanks to all of you for joining us on our conference call today. We appreciate your support and we will look forward to visiting at the end of the next quarter. Thanks and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.