Simmons First National Corporation (SFNC) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Simmons First National Corporation First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Garner. Please go ahead.

Thank you, and good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our first 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. 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 of 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 paragraph of our press release and in our Form 10-K. With that said, I'll turn the call over to Tommy May.

Okay. Thank you, David, and welcome, everyone, to our first quarter conference call. In our press release issued earlier today, Simmons First reported first quarter core earnings of $6.1 million and diluted core EPS of $0.37, which was flat compared to same period last year. Our core earnings exclude $146,000 in after-tax merger-related expenses that were associated with our 2012 FDIC-assisted acquisitions. Including the merger-related expenses, net income for the first quarter of 2013 was $5.9 million or $0.36 diluted earnings per share. On March 31, total assets were $3.5 billion. The combined loan portfolio was $1.8 billion and stockholders' equity was $406 million. Our equity to the asset ratio was a strong 11.5% and our tangible common equity ratio was 9.8%. The regulatory Tier 1 risk based capital ratio was 19.6% and the total risk based capital ratio was 20.9%. Both of these regulatory ratios remained significantly above the well-capitalized levels of 6% and 10%, respectively, and rank in the 80th percentile of our peer group based on December 31 peer versus our March 31 actual. During the first quarter of 2013, we increased our quarterly dividend from $0.20 to $0.21 per share. On an annual basis, this $0.84 per share dividend results in a 3.4% return based on our recent stock price. Over the last 2 years, we have increased our annual dividend by total of $0.08 or 10.5%. As we have previously reported, based on our high capital level, we continue to allocate our earnings less dividends to our stock repurchase program. During Q1 2013, we repurchased $2.4 billion or approximately 94,000 shares at an average price of $25.59 per share. We believe our stock at its current price continues to be an excellent investment. Net interest income for Q1 2013 was $30.1 million, an increase of $2.4 million or 8.5% compared to Q1 2012. This increase was driven by growth in our legacy loan portfolio and earning assets acquired through FDIC-assisted transactions. Net interest margin for the quarter was 4.01%, an increase of 8 basis points from the same period last year. As discussed in previous conference calls, interest income on acquired loans includes additional yield accretion recognized as a result of updated estimates of the fair value of loan tools acquired in our FDIC acquisitions. In Q1, the actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded a $2.9 million increase to interest income. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss-sharing agreements with the FDIC, which are recorded as indemnification assets. The impact to noninterest income for Q1 2013 was a $2.8 million reduction. Thus, the net pretax benefit of these adjustments was only $119,000. Noninterest income for Q1 2013 was $11.3 million, an increase of $590,000 or 5.5% compared to the same period last year. So let me take a minute to discuss some of the noninterest income changes with the most significant items being as follows: number one is the net gain from covered assets increased by $523,000 due to increases in the indemnification assets related to our 2012 acquisitions; secondly, service charges from deposit accounts increased $376,000 or 9.7%. The increase primarily resulted from accounts added as a part of our 2012 FDIC-assisted acquisitions, recently implemented paper statement fees and an increase in NSF income. The third item is our trust income, which increased about $135,000 or 10.3% due primarily to additional personnel trust cost and investor management fees. The fourth and last item would be the income on investment banking, which decreased by $245,000, primarily due to a sustained low interest rate environment resulting in fewer security calls for our dealer bank customers. As we just discussed, there was a $2.8 million reduction in non-interest income due to amortization of the indemnification assets resulting from the increased cash flows expected to be collected from the FDIC-covered assets. Moving on to the expense category. Noninterest expense for Q1 2013 was $31.9 million, an increase of $3.3 million compared to the same period in 2012. Included in Q1 2013 were $240,000 in merger-related expenses and $2.9 million in normal operating expenses attributable to our 2012 FDIC-assisted acquisitions. On a normalized basis, noninterest expense increased by only $121,000 or 4 basis points on a quarter-over-quarter basis. Obviously, we continue to have excellent expense control, coupled with our ongoing efficiency initiatives. Our comparable [ph] portfolio was $1.8 billion, an increase of $176 million or 10.5% compared to the same period a year ago. On a quarter-over-quarter basis, the loans acquired in FDIC-assisted acquisitions increased $430.6 million net discounts, and legacy loans increased to $45.4 million or approximately 3%. If you exclude the student loan decrease, which is no longer a part of our lending initiative due to, as we had discussed many times before, government legislation, eliminating the private sector from providing student loans, thus, our legacy loan growth was actually over $57 million or what we think is a very good 3.8% increase. Let me spend a minute talking about the progress we are making in our legacy loan portfolio. The 3% organic growth represents a significant improvement over the last 3 years, and Q1 2013 marks the second consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth is driven by the $64.5 million increase in real estate loans and $5.6 million in commercial loans, partially offset by the $12.2 million decrease in student loans that I spoke to a moment ago and an $11.9 million reduction in other consumer loans. We continue to have good asset quality. As a reminder, acquired assets are recorded at their discounted net present value. Additionally, acquired assets covered by the FDIC all sharing agreements are provided 80% protection against possible losses by the FDIC loss share indemnification. Thus, all acquired assets are excluded from the computations of the asset quality ratios for our legacy loan portfolio. The allowance for loan losses equaled 1.75% of total loans and approximately 237% of non-performing loans. Non-performing loans as a percent of our total loans were 74 basis points and were actually unchanged from last quarter. And in March 31, our nonperforming assets were $42.7 million, a decrease of almost $3 million or 6.5% from the prior quarter. Included in this total was $9.5 million net of credit mark of acquired non-covered OREO related to our 2 recent FDIC-assisted transactions. Excluding the aforementioned acquired OREO, the balance of nonperforming assets was $33.2 million. The annualized net charge-off ratio was 27 basis points for Q1. Excluding credit cards, the annualized net charge-off ratio was only 11 basis points for the quarter, which is obviously something that we're very proud of. Our credit card portfolio continues to compare very favorably to the industry. In fact, our annualized net credit card charge-offs to loans was only 1.53% for Q1. Our loss ratio continues to be almost 250 basis points below the most recently published credit card charge-off industry average of 3.93%. We obviously are very conscious of the potential problems that are associated with high levels of unemployment, and we continue to proactively allocate reserves accordingly. Primarily, due to our improving asset quality and low charge-off rates, the provision for loan losses remained lower than our recent historical levels. For Q1, the provision was $919,000, down $376,000 on a linked-quarter basis and $148,000 higher than the same quarter of 2012. Let me give you an update on our 2012 FDIC-assisted acquisitions. During Q1, we fully integrated the acquired locations including system conversions. We named Larry Bates, a long-time Simmons executive, as our Missouri Chairman, and we hired executives to head up our St. Louis and Sedalia regions. The leadership in these new markets will focus on rebuilding our production teams. Out of that, we continued a positive trend in organic loan growth, efficiency-driven improvements in non-interest expense, good asset quality compared to the industry and a strong capital base with a 9.8% tangible common equity ratio and risk based regulatory ratios that rank in the 80th percentile of our peer group. Simmons First is well positioned based on the strength of our capital, asset quality and liquidity to capitalize on the opportunities that will come with increased loan demand, rising interest rates and/or additional acquisition opportunities. And certainly, we are optimistic on those acquisitions especially as we look forward to traditional acquisitions going forward. So in closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and credit card portfolio. Quarterly estimates should always reflect this seasonality. Now, this concludes our prepared comments and we would like to now open the phone lines for questions from our analysts and institutional investors. Let me ask the operator to come back on the line and once again explain how to queue in for questions. Thank you.

[Operator Instructions] Our first question comes from Matt Olney with Stevens.

Hey, I was curious to hear more about the opportunities for loan growth going forward. It seems like Kansas City, St. Louis and Springfield are some of your newer markets that you have the opportunity to grow your market share. Can you guys talk about the opportunities there? Have you hired any recent lenders and how many lenders could you hire at some of those new markets?

Matt, thank you. George Makris is here, and I want to let George deal with that, please. George?

Listen, we -- you were paying attention the other night at the Shareholders' Meeting, I can see. We've sort of given the green light to build our production staff in our new markets. As I explained the other night, when we went in to those markets, we had a good retail staff and most of the markets we had good local leadership, but our production staff was basically nonexistent and I think we mentioned at the last call that we had just hired a new lender, very experienced in the Kansas City market. To date, he put over $18 million on our books. We just hired a new loan officer in our Wichita market with the same kind of experience. We're looking forward to that. We've hired a new community President in Sedalia, who was the community President for U.S. Bank. He has a very strong agri background, and that's a great agri market. So we're looking for great things there. Larry Bates is in the process of moving to St. Louis, where he'll be our Missouri Chairman. And I think I have identified several other potential prospects. But as you can imagine, that's not a process that happens overnight. And quite honestly, we have talked to several lenders that either decided that maybe we didn't have the culture that they were used to or we decided that they didn't have the culture that we were looking for. So we're being very selective, but our guys know they have a green light when they find good production people, we want them on our team. So we think that will continue to go in the right direction.

Okay. That's a great color. And then as far as M&A, any update there as far as discussions you're having with potential sellers and how are you feeling as far as the overall expectations of the sellers' price.

Matt, I think on the M&A side as we've mentioned other night, obviously, we're still prepared on any of the FDIC-assisted transactions and certainly wouldn't be totally surprised if we're able to fund one of those opportunities this year. But as mentioned, a big part of our focus, probably 70% to 80% of that focus, is now on the traditional side. And both David and George are not only going through the identification and quantification stage of that, but starting to have some contacts in that area. I think just from the standpoint of what we believe we have seen and what we're actually anecdotally hearing from others is that we are starting to see some movement relative to some of those institutions, not just the ones we're talking to. But things in our sweet spot of $250 million to $700 million range -- that they're beginning to move away from the high multiples of the past and beginning to start moving much closer to reality of what we're seeing today and maybe moving away from 2x book plus to things that are below 1.5x book and obviously, depending on the level of profitability of those institutions. But I think all of that is positive. And again, it's going to be a big part of our focus. As you know, we have been an acquirer, traditional acquirer for years and we did a good job of integrating those and we believe we are positioned very well to continue that process.

Matt, I'd also add to that on the credit mark side, I think some of the sellers understand it a little bit better than they did a few years ago. I don't think they fully understand, but they're coming around on that. Also I would think based on what we've seen out there that the credit mark is probably a little bit lower, which helps you -- helps some of these deals come to fruition. And part of that is this time has passed since 2008 when the crisis started. And so some of those losses have already been taken. So by surviving through this period of time, that credit mark helps you make some of these deals work that they wouldn't have worked back in 2008 and 2009. So we hope to see some of the near future as we move forward.

So Matt, I mean just summarizing it up. I have a simple mind so I'm trying to boil it down to something pretty simple and that is 3 years ago, buyers and sellers were way apart. The sellers' expectations were too high and the buyers were padding the mark because they were unsure about what loan portfolio looks like. The sellers are getting a little more realistic about the value of their entity, and the buyers are getting a little more comfortable with the credit mark and that's moving those 2 groups closer together. So we think that, that is why that traditional acquisition keeps moving.

Okay. That's helpful. And then as far as the net interest margin, Bob, lots of moving parts there, can you give us any kind of outlook as to what we should expect in the margin going forward?

Yes. First, Matt, we were pretty pleased with the first quarter at 401. You know our first quarter is going to be our lowest quarter because of our seasonality in our agri portfolio. We did add about $170 million net of the credit mark from the 2 acquisitions. Those loans are yielding about 8%. So that significantly helps margins. As we've also been accreting the excess credit mark we had on previous ones, that's been going on for over a year. So it didn't benefit an increase in margin, but it gives us at that level over the 4%. Looking forward, we would say it's going to be north of the 4% for the balance of the year. We should be up in the second quarter as we start funding the agri loans and moving money from fed funds up into agri loans. So I would say on the balance of the year, we'll be north of 4%, maybe up to 4.10% as we move forward. Again, any other deals that we have in here, if we happen to get another FDIC deal, that's going to help us be accretive to the margin also. So pretty pleased with where the margin is given what you see pretty much out in the market and the compression that we've seen.

[Operator Instructions] Our next question will come from Enrique Asedo from Raymond James.

Just a question on loan growth. The legacy growth that you're seeing, is it coming from market share takeaway or are you seeing actual economic growth?

George?

Actually a little bit of both. About a year ago, we put some write promotions in place for new loans. And in that year, we funded a little over $200 million in new loans, both consumer agri and commercial loans. We didn't sacrifice terms so they're still very short terms and we were willing to give a little bit on wrote. Being able to add these new loan officers in our new markets has helped quite a bit. We anticipate that will continue. So I would tell you that we have moved a little bit of business away from competition, but particularly in the Kansas City market and in our Northwest Arkansas market where that economy has been beaten up so badly in the last 4 or 5 years, we're starting to see some real economic improvements and some of these people that have been sitting on the sidelines with undeveloped property have started to get back in the ball game. And that's helping us both in the Northwest Arkansas and in our new markets particularly up in the Kansas City and Wichita areas.

All right, that's helpful. And just one more question on capital. You guys mentioned that you're allocating capital to your share repurchase program, and I think you guys have about 26,000 shares left under the current authorization. Should we expect another program soon or if you can share any color, it would be helpful.

There's more than 26,000 remaining of it, they're pulling that number right now. What we look at right now is I think we have enough to get us to the third quarter of this year. And at that point, we'll just -- we would definitely have another repurchase instituted at that time. But as you said, we have allocated -- we've got some $75 million to $80 million in excess capital on our regulatory ratios and if we have the right deals and we use that capital, we'd slow down the stock repurchase. But at this point, we say we have plenty of capital, we decided what we'd do is take our earnings, less dividends and we continue to buyback that stock on a systematic basis throughout the year. So that's what we've been doing and we would keep doing this. As soon as we run out, we'll just start another plan.

[Operator Instructions] And it appears that we do not have any additional questions at this time. Gentlemen, I'll turn the conference back over to you for additional and closing remarks.

Okay. Well, we thank all of you. We had our shareholders meeting last night. We fed them and we had 525 people there, and George did a great job in his presentations. And we're excited about our transition of management that you're all aware of, and everything is exactly on target with that. And so, we appreciate you being here today and look forward in visiting again in our next quarter end. Thank you, and have a great day.

And that will conclude today's program. Thank you, all, for joining today.