Simmons First National Corporation (SFNC) Q2 2013 Earnings Report, Transcript and Summary

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

Thank you. Good afternoon. I'm David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our second 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 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 will turn the call over to George Makris.

Thank you, David, and welcome, everyone, to our second quarter conference call. In our press release issued earlier today, Simmons First reported second quarter earnings of $6.6 million or $0.40 diluted earnings per share, an increase of $0.02 or 5.3% compared to the same quarter last year. On a year-to-date basis, net income was $12.5 million or $0.76 per diluted EPS, an increase of $0.01 over last year. On June 30, total assets were $3.4 billion, the combined loan portfolio was $1.9 billion and stockholders' equity was $402 million. Our equity-to-assets ratio was a strong 11.7%, and our tangible common equity ratio was 10.1%. The regulatory Tier 1 risk-based capital ratio was 19% and the total risk-based capital ratio was 20.2%. Both of these regulatory ratios remained significantly above the well capitalized levels of 6% and 10%, respectively, and rank in the 90th percentile of our peer group based on March 31 peer versus June 30 actuals. In the first quarter of 2013, we increased our quarterly dividend from $0.20 to $0.21 per share. On an annual basis, the $0.84 per share dividend results in a return in excess of 3% [ph] based on our recent stock price. Over the last 2 years, we have increased our annual dividend by a total of $0.08 or 10.5%. As we have previously reported, based on our capital level, we continue to allocate our earnings less dividends to our stock repurchase program. This year, through June 30, we have repurchased $8.3 million or approximately 327,000 shares at an average price of $25.50. We believe our stock, at its current price, continues to be an excellent investment. Net interest income for Q2 2013 was $30 million, an increase of $2.3 million or 8.6% compared to Q2 of 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 3.96%, an increase of 9 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 the loan pools acquired in our FDIC acquisitions. In Q2, actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded a $3.2 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 all recorded as indemnification assets. The impact of non-interest income from Q2 2013 was a $3.1 million reduction. The net pre-tax benefit of these adjustments was $88,000. Non-interest income for Q2 2013 was $11.3 million, an increase of $180,000 or 1.6% compared to the same period last year. Let me take a minute to discuss some of the non-interest income changes. The most significant increases in non-interest income were: number one, service charges on deposit accounts increased $544,000 or 13.8%. The increase primarily resulted from accounts added as part of our 2012 FDIC-assisted acquisitions, recently implemented paper statement fees and an increase in NSF income. Number two, trust income increased by $102,000 or 8.2%, due primarily to additional personal trust and investor management fees. Number three, income on investment banking increased by $254,000, primarily due to market value increases in trading securities. Also included for the quarter were a couple of items reducing non-interest income. Number one, we recorded a nonrecurring $193,000 loss from the sale of securities, as we liquidated the investment portfolios remaining from our 2012 FDIC-assisted acquisitions. Selling the securities was part of our initial acquisition plan, as portfolios were mostly mortgage-backed securities that did not fit in our corporate investment strategy. And number two, the net loss on covered assets increased by $462,000. This was primarily related to reduced gains on sale of FDIC, OREO in Q2 2013 compared to gains recognized in Q2 of 2012. Moving on to the expense category, non-interest expense for Q2 2013 was $30.3 million, an increase of $2.1 million compared to the same period in 2012. Included in Q2 2013 were $1.9 million in normal operating expenses attributable to our 2012 FDIC-assisted acquisitions. Excluding those acquisition-related expenses, non-interest expense increased by only $222,000 or 0.8% on a quarter-over-quarter basis. Obviously, we continue to have excellent expense control, coupled with our ongoing efficiency initiatives. During Q2, we reversed $467,000 in merger-related expenses that were accrued for system-related conversions for our 2012 FDIC-assisted acquisitions. Much of these savings were the direct result of our experience in integrating and converting acquisitions. Our combined loan portfolio was $1.9 billion, an increase of $148.7 million or 8.6% compared to the same period a year ago. On a quarter-over-quarter basis, loans acquired in FDIC-assisted acquisitions increased $113 million net of discounts, and legacy loans increased $35.7 million or 2.2%. If you exclude the student loan decrease, which is no longer a part of our lending initiative due to government legislation eliminating the private sector from providing student loans, our legacy loan growth was over $45 million or 2.9%. Let me spend a minute talking about the progress we're making on our legacy loan portfolio. The 3% organic growth represents a significant improvement over the last 3 years, and Q2 2013 marks the third consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth is driven by a $55.6 million increase in real estate loans and an $11.3 million increase in commercial loans, partially offset by a $6.3 million decrease in consumer loans and a $15.1 million decrease in agri loans due to slower loan fundings because of weather-related delays in the planting season. We expect 2013 total agri fundings to peak at levels comparable to last year. 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 FDIC loss sharing agreements are provided 80% protection against possible losses by the FDIC loss share indemnification. Thus, all acquired assets are excluded from the computation of the asset quality ratios for our legacy loan portfolio. The allowance for loan losses equaled 1.66% of total loans and approximately 292% of non-performing loans. Non-performing loans, as a percent of total loans, was 57 basis points, down 17 basis points from last quarter. At June 30, non-performing assets were $39.8 million, a decrease of $2.8 million or 6.6% from the prior quarter. Included in this total was $8.6 million net of the credit mark of acquired non-covered OREO related to our 2012 FDIC-assisted transactions. Excluding the acquired OREO, the balance of non-performing assets was $31.2 million. The annualized net charge-off ratio was 34 basis points for Q2. Excluding credit cards, the annualized net charge-off ratio was only 23 basis points for the quarter. Our Credit Card portfolio continues to compare very favorably with the industry. In fact, our annualized net credit card charge-offs to loans is only 1.25% for Q2. Our loss ratio continues to be nearly 250 basis points below the most recently published credit card charge-off industry average of 3.72%. We are very conscious of the potential problems associated with high levels of unemployment, and we continue to allocate reserves accordingly. Primarily due to our improving asset quality and loan charge-off rates, the provision for loan losses remained lower than our recent historical levels. For Q2, the provision was $1 million, up $115,000 on a linked quarter basis and $259,000 higher than the same quarter of 2012. Bottom line, we continue a positive trend in organic loan growth, good non-interest expense control, favorable asset quality compared to the industry and a strong capital base with a 10.1% tangible common equity ratio, and risk-based regulatory ratios that rank in the 90th percentile of our peer group. Simmons First is well positioned based on the strength of our capital, asset quality and liquidity to capitalize on opportunities that will come with increased loan demand, rising interest rates, and/or additional acquisition opportunities. In closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agri lending and Credit Card portfolio. Quarterly estimates should always reflect this seasonality. 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.

[Operator Instructions] We'll take our first question from Matt Olney with Stephens.

George, I know that hiring new lenders has been a big priority for you guys in recent months. Can you give us some kind of update on the progress of this initiative, and how many you've hired and in what markets?

I sure can. I'm going to let David Bartlett give you the details. I'll just tell you real quickly, we've hired 8 new commercial lenders and 4 new mortgage loan lenders, most of them have started in the last 3 to 4 months. We're really excited about it. I'm going to let David tell you where they are and what our expectations are for the rest of the year.

Matt, we've got 3 commercial lenders out of the Kansas City market and we've added 1 in Central Arkansas, that one came on within the last 30 days. One out of the St. Louis market, we have 1 out of Springfield, Sedalia and Wichita. So George is right, we've got a total of 8 new commercial loan officers. And as far as our mortgage lending staff, we've complemented -- we got a couple of people out of the Kansas City market, 1 out of Salina and then 1 out of Springfield. We're pleased with them, we've got some expectations of loan productions somewhere in the $50 million range for the remaining part of 2013.

Okay, that's great, David. And how should we think about this initiative going forward? Would you consider hiring additional lenders for the rest of the year? Or is it more of a "let's wait and see how these guys do" for the next few months?

Matt, these guys have hit the ground running. We've had some real good success, even since the end of the quarter. I would tell you that, that tap is still open. Particularly in our newer markets in St. Louis, we're really fortunate to hire a gentleman up there that has a pretty good following and a team that is considering coming over with him. So I would tell you that this initiative is going to be ongoing and when we find the right fit, we're going to make that move.

Matt, as you recall -- George is right. As you recall, though, we put 2 of our more seasoned leadership people in -- 1 in St. Louis and 1 in Kansas City, Pat Anderson and Larry Bates, and those guys have been putting out feelers and making those contacts. So first of all, we've got the credit culture knowledge and then we're bringing in people that appear to be very satisfied and very excited about our culture and the type of -- the way we do business.

Okay, that's great detail. And then as a follow-up, George, in your prepared remarks, you made some comments about selling a few securities that didn't really fit the profile anymore you were looking for. And in the press release, it looks like you were also buying some municipal securities. Can you just kind of walk us through kind of what the overall strategy is within the securities book, given the higher rates today compared to a few months ago?

Sure Matt, I'll be glad to. As you know, we had about $0.5 billion in overnight funds. And when we took a look at the maturities on our current investment portfolio, we had about $300 million that was going to mature over the next 12 months. We made a conscious decision to take $70 million out of our overnight funds, invest them in municipal securities in the range of 15- to 30-year maturities. Those tax-equivalent yields are north of 5%. We have funded about half of that $70 million as of today. Unfortunately, all of our municipals had been Arkansas municipals, and you know that, that market is just not readily available. So we've taken a look at some Texas school bonds, and believe it or not, they're rated higher than the Arkansas bonds. And the yield right now, the tax-equivalent yield, is higher than we can get in Arkansas. So we've even plugged into that market a little bit. That is all we're prepared to do at this point, and that's $70 million. We think it's a good strategy because when you look at the historical tax-equivalent yields of municipals, we have very little interest rate risk in that time frame. So that's what you're seeing as the difference between our last call and this call.

And Matt, this is Bob, I would add also that in addition to that, when you take the other $200 million to $300 million that's going to mature or call in the next 12 to 18 months, we've decided to move those to less than 24 months with no calls. So we're going to -- basically, the duration of our portfolio's going to stay the same or shorten over that period of time. Last comment I'd make is that the loss that we did have is we picked up about $12 million of odd-lot [ph] MBS securities that did not fit our portfolio at all. There was a little bit of the timing of when you can sell those with the collateral. So we did sell those in this quarter, there was a loss. And I'd say, a couple of weeks later is when the 10-year went up, and it would have significantly been more of a loss. So that was just kind of cleaning up some, from -- related to our acquisitions.

We'll go next to Brian Zabora with KBW.

A question on the buybacks. You increased it this quarter. Should we think about this pace going forward? Or maybe just your thoughts around what the pace could be?

We made a conscious decision to speed up our buyback during the second quarter. We'll slow it down a little bit, actually, for the rest of the year. We've got about 250,000 shares left in our plan. We will probably use that up by the end of the year and reauthorize another plan in the fourth quarter. Bob, you might want to give a little more detail about that?

Yes, exactly what George said is we're -- we sped up a little bit of earnings from the end of the year and really took advantage of the price when it was at a lower price earlier in the quarter. So we still have the same strategy as of right now, it's to buy back earnings less dividends, but it was a little bit higher in this quarter.

Okay. So do you think, though, at the most that it will still be about 100% payout ratio combined or could it be a little bit higher this year?

Our target is to still be at 100%, could slightly be over. But as of right now, we still have the strategy of trying to find a way to put that excess capital to work on mergers and acquisitions.

And just on mergers and acquisitions, can you talk about conversations you've had recently, if you think the bid-ask spreads are coming in at all and what the opportunities could be?

Brian, we probably -- we're in discussions with about 6 different organizations, some of them further down the road than others. I will tell you that, as we've said before, the ideal size for us is, say, in the $0.5 billion range. And many of those banks are local community banks who still have founders involved, but the hardest thing for us to overcome is the education part of those owners with regard to the value of their company. And we all see what the averages are in the M&A market today. And I will have to tell you, the sellers' expectations are still a little higher than the market will bear right now. So we're trying to educate them, and if they get serious about it, and if they get an advisor, we think that they will find out that we're being very open and fair with them. We have some that would be really good fits for our organization if we can get past that expectation hurdle.

[Operator Instructions] We'll go next to Kyle Oliver with Raymond James.

My question just got answered, but thank you.

And at this time, we have no other questions.

Okay. Well, thank you all for tuning in today and we appreciate your support.

Matt came back on.

We'll go back to Matt Olney with Stephens.

Guys, just a follow-up. On the margin, Bob, obviously lots of moving parts there. What kind of direction should we expect on the margin going forward?

Matt, I'll let Bob speak to you in just a second. We still expect a 4% margin. In the third quarter, we had a little bit shift in our loan mix that caused that yield to go down a little bit. If you recall, we are about $15 million behind in the funding of our agri portfolio due to the late plantings. That yield is usually 5% or north of that. We were also down a little bit in consumer loans, which has from an 11% yield in our Credit Card portfolio to down to a 6% yield in just regular consumer loans. And our growth has come in our real estate and commercial area where those rates were typically 3.5%, 4.5%. So that mix shift caused our margin to fall just south of 4% for the quarter. We expect it to be back up in the 4% range for the third quarter. And then as agri loans pay off in the fourth quarter, we expect it to fall back probably just below 4% again.

Okay. And then, also, I wanted to ask you guys about -- going back to the M&A strategy, you've been talking a lot about live bank M&A and I saw the FDIC release some data a few weeks ago about some failed bank bidding in Tennessee. And I saw that Simmons First was on there for a bid that you guys put in. Can you just remind us what your target markets are for failed bank M&A? And has it changed at all in recent months?

Matt, this is David again. The 1 bank that you saw that recently came up is almost a year old, and that dated back to June 2012. That was First National Bank (sic) [Farmers Bank], I believe, of Lynchburg. It's about $200 million bank not too far outside of Tennessee. We've always, though, had a commitment to look at Tennessee for both a FDIC and a traditional merger and acquisition opportunity. An opportunity came up a little bit farther outside of our normal guidance for FDIC acquisitions in Sevierville, Tennessee, and we did take a look at that and put a bid on it because it complemented what we hope to eventually see out of the Tennessee market from Central Arkansas going east. And that particular bank was just posted, and that particular bid was placed about 60 days ago. It was about a $450 million bank, Mountain National Bank of Sevierville. So those are the 2 that I think you're referring to as far as recent FDIC activities and bids that we put on private institutions.

Matt, I would tell you, we have not changed our strategy. Our bid on Sevierville was non-conforming. It was quite different than what they had put out for us to consider. It doesn't surprise me, really, that we didn't get that one. We prefer to stay within our 350-mile radius. But as you know, those opportunities have not been forthcoming. We saw an opportunity within this bank for Simmons and we structured our bid as such. It just wasn't something that the FDIC was interested in.

[Operator Instructions].

Okay. Well, once again, thank you all very much, and we appreciate your support. Have a great day.

This does conclude today's conference. We thank you for your participation.