Simmons First National Corporation (SFNC) Q4 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Simmons First National Corporation Fourth Quarter Earnings Conference Call. This conference is being recorded. I would now like to turn the conference over to David Garner. You may begin.

Good afternoon. I'm David Garner, Investor Relations Officer for Simmons First National Corporation. We want to welcome you to our fourth quarter earnings teleconference and webcast. Joining me today are Tommy May, Chief Executive Officer; George Makris, CEO-elect; David Bartlett, Chief Banking Officer; and Bob Fehlman, Chief Financial Officer. We want to welcome Mr. Makris to his first earnings conference call with us today. The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued this morning. We will begin our discussion with prepared comments and then we will entertain questions. We have invited institutional investors and analysts from the investment firms that provide research on our company to participate in the question-and-answer session. All other guests in this conference call are in a listen-only mode. I would remind you that 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 Tommy May.

Thank you, David. And welcome, everyone, to our Fourth Quarter Conference Call and a special welcome to George Makris, CEO-elect. In our press release issued earlier today, Simmons first reported excellent fourth quarter earnings of $8 million compared to $6.3 million for the same quarter last year, an increase of 27.4%. On a per-share basis, diluted EPS increased $0.11 to $0.48 per share or an increase of 29.8%. The results of the quarter just ended include the impact of the FDIC-assisted acquisition of Excel Bank, which closed on October 19, 2012. This acquisition resulted in a bargain purchase gain of $2.3 million and merger-related costs of $1.4 million, a net benefit of $735,000 after tax to the fourth quarter 2012, or $0.04 to diluted earnings per common share. For the year ended December 31 2012, net income was $27.7 million or $1.64 diluted EPS, an increase of $0.17 or 11.6% from last year's EPS. Let me take a moment to update you on our most recent FDIC acquisition. On October 19, we announced the FDIC-assisted acquisition of Excel Bank of Sedalia, Missouri. As a part of this acquisition, we acquired $180 million in total assets at a discount of $21 million, with $169 million in deposits and $108 million in loans and other real estate owned. Additionally, of the assets acquired, $81 million were covered under a loss share agreement with the FDIC. This acquisition was the fourth of several that we anticipate making over the next several years, which is the reason we raised the $71 million in additional capital in November of 2009. Obviously, our continued expansion into the Missouri market complements our existing presence in Springfield, St. Louis and Kansas City. In addition to our strategy of organic growth in these markets, we fully expect to pursue…

[Operator Instructions] And first, we'll go to Matt Olney with Stephens.

Tommy, encouraging to see the core loan growth in the fourth quarter. It definitely sounds like you're getting more traction each quarter. Can you give us any more commentary about the pipeline today and how you feel about loan growth, organic loan growth in -- for 2013?

Well, I agree with your first assessment. It's great to have a organic growth positive number. As I mentioned, the first time that we've had 2 consecutive reporting of quarters to have that for some time. I think on a go-forward basis, as we look at our 8 banks and we look at the pipeline right now, we would expect that remembering our seasonality, we would see the same trend in Q1 that would be a seasonal downturn and then would expect it to go up in Q2 and Q3, and with a slight increase in Q4. Probably, to the best that we can see right now, at levels either equal to or maybe even slightly above the numbers that we have reported this year. So then all of that would be more organic. Now needless to say, we could have 1 credit that would leave on a temporary basis that might distort a reporting period. But overall, I think we're optimistic that we would see numbers at least at the same level, if not slightly above it.

Okay. That's helpful.

And that would be obviously -- we showed 3.1%. You take out student loans, that puts it at 4%. So anywhere between those same numbers in 5% or so.

Yes. And Matt, don't forget the seasonality, especially in the first quarter in credit card and agri. You see each of those buckets go down probably about $15 million, $16-some million. The rest of it will relatively be the slight increase in those. And obviously, again on the student loans we'd been running off, those have been paying off at about $2 million to $3 million a quarter.

Okay, that's helpful. And then shifting over on the fee income side. I know we've talked about fee income and the opportunity there at the bank in the past. And if I remember correctly, it seems like that most of this fee income today is generated by the lead bank, in Pine Bluff, and the affiliate banks haven't really got the traction they need too. Can you just remind us kind of what the opportunity there is and how you think about cross-selling those with your current customer base?

Well, I think that our greatest opportunity right now -- I mean, credit cards continues to be an area that we're very positive about. Even though it's going to be a challenging year to grow the portfolio, we just believe that the opportunities there long term are very good. Likewise, we believe in the trust area. And at both with the credit card and the trust, we can grow them organically, or we can acquire assets. So in both of those scenarios, they have the potentials of enhancing our noninterest income. Another area that I think that is very positive is our acquired -- newly acquired markets in both the Kansas and the Missouri areas. We know that we start with a relatively low base of relationships and we are investing some pretty significant manpower and other dollars in those markets to hopefully be able to grow over those relationships, which will create noninterest income opportunities.

[Operator Instructions] We'll move on to David Bishop with Stifel, Nicolaus.

As it relates to the Kansas City and the Missouri markets there, in terms of developing relationships there, any sense in terms of the added foot power you need there in terms of your bench strength there related to your commercial bankers? So sort of what the hiring outlook was in those markets?

Let me say a word and then I'll let Marty Casteel, who is the new Chairman and CEO of the lead bank, who is the bank that houses those markets, speak to that. But as I said, we acquired each one of these markets with the objective of growing them. In fact, that's our most important mission, to expand our footprint in the markets that have maybe greater growth potential, and we know that just our arriving and putting our signs up is not the answer. So Marty, you want to say a word?

Yes, Dave. I'll start out with St. Louis. That's obviously where we are newest. We have relocated an executive level banker there that's been with us for many years, very seasoned, very experienced, and his primary focus is on hiring the right people to help us grow. He has had some success in that and he continues to look for people that can bring us good solid commercial loan relationships and that is the process that we're committed to and expect to fully realize in the St. Louis market. Kansas City market, where we've been for 2 years now, we have had some success in hiring and attracting some commercial lenders that we are seeing some volume generated by and we're happy with their success and are looking for others. It is a slow process, as you would imagine, in finding the right people, hiring the right people who have the same asset quality culture that we have. But as I mentioned earlier, we have seen that happening in Kansas City. We're confident it's also going to happen in St. Louis.

Dave, I think that your point is well taken in your question about making the right hires and we realize that we do have a very talented executive that's going into that market that his role and scope is: #1, he's very familiar, obviously, with our culture; #2, he understands the mission; and #3, he's finding those people that Marty has talked about. And my responsibility is to allocate the resources to make that happen. And we're committed to do that. These are good markets and good opportunities, and some of the markets, we're entering them at the right time.

Great. And then as a follow-up, we've had a number of our management teams discuss that fourth quarter growth could have been impacted somewhat by the change in administration, change in tax loss, anything lumpy in terms of loan volume, loan demand or even the pay-offs related to sales of underlying businesses underneath some of these commercial loans? Any of that crop up during the quarter?

No, we're really not seeing any of that at all that would have any kind of material impact on anything that we reported.

[Operator Instructions] Next we'll go to Derek Hewett with KBW.

Maybe a question for Mr. May first. What is your outlook on M&A going forward? I mean, you did a couple of FDIC deals at the end of last year. Are you looking more for FDIC deals at this point or are you a little bit more interested in returning to -- back to traditional M&A?

Well, I tell you what, I'm looking for some real excitement. But Mr. Bartlett is the one that has to execute it, so -- and he did a pretty good job with his team this last year, so I'm going to let him say a word about it, but...

Derek, thank you. This is David Bartlett. Crystal balling, and that's exactly what I'm trying to do, we're still focused on FDIC opportunities, but recognize we might be at the downturn on those opportunities. We still have our excess capital recognized that we can use that in traditional M&A. Those seeds are being planted. I've mentioned that in previous quarters. I would tell you, if you just wanted a gut feel on how we're trying to allocate resources between the 2, it's probably 50-50 right now, knowing that we're close. We're reaching maybe the end of -- the start of the end of FDIC and as sellers become regulatory fatigued and ready to be realistic about what their price -- their values were, we're ready to start moving in on those.

I think David got it right, both with our capital deployment and also our energy that maybe our energy over the last 2 years was 90% FDIC. But not just because it's changing, as David says. Obviously, there is some change there, but we're also seeing maybe the opportunities on the traditional side began to step up. And I would just add this, that one of the good things about us as a traditional acquirer is that we're not looking to buy $1 billion or $2 billion banks. We are looking for opportunities, of good community banks that are in our sweet spot of that $200 million, $300 million, $350 million level. And those institutions, in different parts of the 3 or 4 state geographic region, are going to be interested in finding partners like us with the strategic initiatives that we have where they continue to have some autonomy and say. And so we think that our time for structure becomes more and more appealing as we move further and further into this timeframe of regulatory report. So we're going to accelerate that pace because we do believe that the traditional acquisitions are hugely important to our growth initiatives.

Okay, great. And then maybe a question for Bob is -- the margin was up maybe 5 bps or so. Typically, the fourth quarter is a historically weak margin, but I'm assuming you have some accretion come in from the last 2 FDIC deals. As we look to the first quarter, which is another typically a weaker quarter for the margin, do you think the margin can be relatively flat or are we going to see some downward pressure?

Well, you're correct. In the first quarter, we're definitely going to see a little bit of tick down because of seasonality from both credit card and the agri portfolio. But we did have the accretion come on from these acquisitions and actually putting some of the earning assets to work in these deals. I mean, our projections right now going forward into '13 is for the year to maintain at about that 4% level. That would be based on the acquisitions we currently have plus the loan growth we have. And then -- but again, you're going to see first and second quarter maybe a couple bps below that and then a little bit up higher in the latter part of the year.

Okay, great. And then maybe a technical question on the tax rate. The effective tax rate was up a little bit on if you look at it fourth quarter versus third quarter. Was there anything...

Yes, that -- yes, it would be the amount of gain that was in the quarter that kind of distorted it. On the annual basis, it wouldn't be but for the quarter you put more tax in. When you have more taxable income in that piece versus the rest of the year when it's nontaxable mix in there, so I would say your normal range that you use.

We'll move on to Matt Olney with Stephens.

Just a follow-up, Bob, probably more focused in -- on the expense side. You've had that efficiency initiative in place for a while but of course, it's tough for us to see from our end kind of the results of that initiative due to all of the acquisitions. Can you give us an update or at least some commentary on your core expenses, where you're at today, if this is where you want to be or is there more opportunity in the next few years?

Well, first off, we always think there's more opportunities and efficiency to get better, so we'll continue to work on that. The initiative project you're talking about, we're substantially complete on that. And during the third '12, we've achieved most of those. And you're correct, it's hard to see those numbers when you look at the acquisitions. When we put our numbers together and kind of normalize it, we've had expenses that have been down to flat for about 4 years now. And when you're running about $100 million expense base and you still have salary increases of 3% to 4%, 5% range for your associates and you're maintaining at that level, that's where the expense savings is coming in. So I would tell you, in '12, most of those savings has hit. But let me give you a little bit of help going forward on the noninterest expense with these acquisitions. We had about $2.4 million of noninterest expense related to the 2 acquisitions in Missouri. I would say, going into '13, on a quarterly basis, first quarter is going to be higher because both systems will be converted. They'll be fully integrated, both systems, by the end of this quarter. One of them converted this last weekend in St. Louis and so we're through that process. So expenses will be higher as in this first quarter. So I would, in the modeling, I would put $2.5 million or so as run rate for these 2 acquisitions in Q1 and maybe $1.9 million to $2 million as a run rate for the balance of the year in those 3 quarters. That kind of -- and then based on that plus where our expenses were last year would be on a pretty level basis, maybe 1% up. So when you -- again, when you're sitting there with $100 million expense base staying flat to 1%, you can see, over the last couple of years, it's -- we've achieved that $5 million in expense savings. Also, like you said, we do have other initiatives that we're beginning to put on the table. We're trying to absorb these other cost savings, let those take place, but we believe in the latter part of '13 and into '14, we'll have some more initiatives that we will be implementing.

And those initiatives, Bob, would be focused on the expense side, is that fair?

Yes. Well, yes, both sides, but the expense side for the efficiency, which would be -- we continue to always look at our branch rightsizing. We have a lot of branches and we've always looked at that, which one -- which markets do we need to be in and if we don't need to be in and if we need to move to another location. So we'll continue to look at those at the balance of this year and into the next year. That will be on efficiencies. We always are looking on our fee-based -- are we at competitive levels, do we have opportunities to change those or add new lines? But as of right now, those are all in our plan for '13 and into '14.

One thing that I have to say, maybe big picture wise, in complement to what Bob has said that we're proud of this 27% increase in our net income. But as I said in the release, we're even more excited about the way we have accomplished it through the execution of our strategic plan that we've kind of laid out to everybody. In other words, we knew we could deploy the capital, but we're not through. But I think we have been very effective in what we've deployed relative to eliminating that portion of the dilution. And I think in addition to that, one of the exciting things, as you've already mentioned this, that we've introduced some initiatives in these banks to grow these loan portfolios and it has worked and again, we're very pleased with that. We've done all that and continued to improve on our asset quality. And as Bob said, we continue to look for efficiencies. And none of that speaks to the potential ALCO impact of a movement in interest rates that's going to happen some day. And we're not willing to sit and wait on the someday to do these other things. We are proactively doing those. And that, to me, is what's very exciting that we sort of put ourselves in a position to be able to do that. And now, we're starting to see the fruits of some of that labor. And I'm very proud of our management team and overall team for a lot of real hard work that's really paying off.

[Operator Instructions] Next question comes from Derek Hewett with KBW.

I have just one really quick follow-up question. Have you guys considered redeeming your trust preferreds?

Yes. Derek, yes, we did redeem the $10 million back in, I believe it was October of last year. That was at a higher interest rate. We currently have about $20 million outstanding interest rates. It's pretty low, very cheap cost of capital, regulatory capital while we have a lot of excess capital right now. But the bottom line pickup is minimal and as long as this considered regulatory capital, we would continue to keep it on the books. You can't put new trust preferred on the books and count it as regulatory capital the same way you can now. So right now, we would keep it on the books as long as we can and there's regulatory changes possibly coming on Basel III that some of that would roll off over a 10-year period. That's all been tabled, so we don't know exactly when that will start or not. And we get to a point that it's no longer counted as regulatory capital or begins in that process or the rates go to different level than we would. But right now, to have a cost of capital and an after-tax basis below 3%, you just -- you can't get capital any cheaper than that.

It's a short-term ticket, but we...

On EPS, but lose regulatory capital.

Yes, we like having it there available for while we're planning going forward.

We'll now go to David Bishop.

Just a quick follow-up related to the NIM here. As you sort of diversified the geographic base, are you noticing any pricing differences within these markets where maybe there could be a funding advantage when loan growth does tick up, there might be some advantage to pick up cheaper funds or move pricing around to just spur growth here at a more profitable way?

Yes, I think that's a great observation and a good opportunity. And I'll let Marty speak to that, please.

Dave, yes, we do notice pricing differences by different markets. I wouldn't say it's sort of a real advantage in any of the markets we're in right now. Funds are pretty well driven down pretty much everywhere as far as related to having to pay on deposits. But I think as that changes, there will be opportunities in markets where we can take advantage of profit -- pricing differentials. Not seeing a lot of opportunities now because -- at the low base we're starting with. But I think that will change as rates start having some movement on deposits.

I think that one of the exciting things of this whole thing, too, is we have lots of liquidity, and we're very excited about the opportunity to put it to work. So we think that we can have some loan initiatives to put to work in some of David's 8 banks. That's some pretty good priced cost to funds. And during this period, again, of waiting for other places to put that lending to work, that's a good opportunity.

As we have no further questions, I will now turn the call back over to Tommy May for any additional or closing remarks.

Well, I want to thank all of you for being with us again. We thank you for your support, your patience. I want to thank Mr. Makris, our CEO-elect, for being here. He has hit the road running since coming on board on January 2. 4 hours after arriving, we were on the road beginning to meet and greet not only associates, but investors and others. So George is -- George, we're glad to have you and look forward to you sitting in this chair in the near future. So thanks all of you again and hope you have a great day.

This does conclude today's conference. We do thank you all for joining.