Simmons First National Corporation (SFNC) Q3 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Simmons First National Corporation third quarter’s earnings conference call. Today’s conference is being recorded. At this time, I’d 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 third 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 on this conference call are in a listen-only mode. I would remind you of the special cautionary notice regarding forward-looking statements and then 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 George Makris.

Thank you, David, and welcome everyone to our third quarter conference call. In our press release issued earlier today, Simmons First reported third quarter core earnings of $7.4 million, an increase of $796,000, or 12.1%, compared to the same quarter last year. Diluted core EPS was $0.45 per share, a $0.05 increase, or 12.5% increase over the previous year. During the quarter, we had noncore after-tax noninterest expense of $439,000 in merger related and branch right sizing costs. In September, we announced the execution of an agreement to purchase Metropolitan National Bank. As a result of this agreement, we recognized $116,000 in after-tax merger related legal and advisory fees. Additionally, during the quarter, we closed 5 underperforming branches and recorded $323,000 in after-tax nonrecurring expenses related to those closures. Including these noncore expenses, net income for the quarter was $6.9 million, or $0.43 diluted EPS, an increase of $0.03, or 4.9% compared to the same quarter last year. On the year-to-date basis, net income was $19.4 million, or $1.19 per share, an increase of $0.03 over last year. On September 30, total assets were $3.4 billion, the combined loan portfolio was $2 billion and stockholders’ equity was $420 million. During the first quarter of 2013, we increased our quarterly dividend from $0.20 to $0.21 per share. On annual basis, the $0.84 per share dividend results in return in excess of 10.5% even after the recent market increase in our stock value. Over the last 2 years, we’ve increased our annual dividend by a total of $0.08, or 10.5%. During 2013, we have repurchased approximately 420,000 shares at an average price of $25.89. During the third quarter as a result of the Metropolitan acquisition, we suspended the stock repurchase program. Net interest income for Q3 2013 was $31.6 million, an increase…

[Operator Instructions] And we’ll take our first question from Matt Olney from Stephens.

Hey, it looks like there is some good positive movements in the balance sheet during the quarter, deployed some of the excess liquidity in securities and loans. Can you just kind of walk us through the strategy during the quarter of deploying the liquidity?

Matt, the first item is we are in our seasonal period that we’ve got the agri loans and the credit cards, so they’re at the highest point this time. So that would be a portion of it. But if you remember back from the last conference call, we talked about moving about $70 million in liquidity into some of our investment portfolio and what we chose to do with that is going to some Arkansas munis. We finished that project, it was about $70 million that we moved. And that's -- after -- the tax equivalent yield on that is about $575 million, $580 million in that range. What we moved the rest of our portfolio, if you remember on that is, there is probably another $600 million or so that we’ve shortened the duration on that and our maturities on that we’re moving -- targeting less than 18 months. So we’re trying to pick up a little bit of yield without putting up too much interest rate risk on the portfolio in that area, and what we’ve picked up this year is a pretty significant yield in that area. Now the rest of the movement there would be more on a seasonality. We’re at a high point for the agri loans and some of those.

Matt, I will point out though that we’ve had really good legacy loan growth throughout the corporation. We mentioned earlier that we had hired 7 new commercial lenders. We expect to be able to put back $50 million on the books by year end, they’re already at over $40 million. So we expect that number to be a good number, a conservative number. But I’ll tell you all of our banks have done a great job and I will mention specifically, our South Arkansas Bank at Lake Village and our Northeast Arkansas bank at Jonesboro has experienced really good loan growth this year. So I would just tell you that we’re seeing that throughout the corporation.

And within the branch closings that you mentioned in the prepared remarks George, can you indicate if, did the third quarter get the full quarter benefit of those branch closings or in other words when did those occur?

They occurred towards the end of the quarter. We had originally thought that might be closed by July 1, but that didn’t happen, 5 of them got closed in the month of September. The last one is being closed this month, this Friday actually. So we got very little if any benefit in the third quarter from expense savings. We’ll get a little bit in the fourth quarter from those 5 branches and we’ve recalculated and we think the full year benefit is going to be a little north of $1 million after they are all closed.

And my last question is on the capital. Can you remind me what the expected capital levels are in the fourth quarter with the addition of Metropolitan Bank and then what type of capital build should we be thinking about beyond the fourth quarter?

Matt, this is Bob. Based on what our projections are right now, we’re estimating a TCE of approximately about 7.10% to 7.20%. We think the rebuild on that will be relatively quick. We’ll be back up to 7.5%, I would say probably within the 12 months or 18 months after that period and continuing to grow. As we said also, we’ve suspended the stock buyback program, which will help us build additional capital in that process. Our leverage ratio will be north of 8.10% somewhere in that percent and all of our other capital ratios, the risk weighted ones will be significantly above the levels -- the required levels there.

The next question comes from Brian Zabora from KBW.

A question for -- so looking at the production, could you give a sense on what the yield was on the loan production maybe an average for the quarter. I know it’s tough given as probably across multiple categories?

Well, it is -- Brian, this is David. It is across multiple variance of our bank. And let me walk us through the seasonality for it first. We peak out in September with about $160 million of agri crop loans. And those are nice yielding assets for us, that $160 million is spread among 3 different affiliate banks, and so it peaks out with the growing season and we start seeing a fairly quick reduction of those agriculture crop loans starting in about October. So there is some seasonality pick-up there as we start getting our harvest in on the different crops. And I’m going to bore you, if I could with the crops that we’re starting to see already come in, because it does go down very, very quickly. But I think it’s an important piece of your question. Our farms are starting -- corn’s about 95% harvested in and the prices on corn are down about a $1.50 a bushel from last year and they’re running anywhere between $4.00 to $4.50 a bushel this year. And the rice is about 60% now harvested and prices are stable to last year at about $7 a bushel. Cotton is about 70% complete in the harvest. Yields are good and the price is stable from last year at about $0.72 a pound. Soybeans had 2 types of beans to get planted, one is called a early soybean harvest and it’s 100% harvested now. There is a full season soybean that’s about 25% harvested. So -- and the prices on those commodities are about equal to where they were last year at $13 a bushel. So you can see how it takes awhile for its peak up in September and then its harvested curve, it starts paying down very quickly. Credit card portfolio is another piece that Bob has already mentioned that we’ll see some strong seasonality and it will peak out in the fourth quarter of this year and the first quarter of next year because of the holiday seasons at the end of the year and that will start replacing some of the run-off we see from the agriculture loan supplying that. As far as our new markets, now it’s competitive out there. We’re trying to stay fairly short-term on investments, but I mean on the length of the loans, but I’d say on average we’re seeing somewhere around a 4% to 4.5% yield on those new loans.

Okay. And then are you -- I’m sorry.

Let me just say that year-over-year, the total yield on the loan portfolio is basically flat. So what we’ve been putting on the books is replacing what’s going off at about the same yield. Now I can get skewed a little bit if we have additional yield accretion in following quarters, but I would tell you that the new loans are basically on par with those that are flowing off of the books.

Great. And you talked about the recent hires, will you be able to attract additional lenders this quarter?

Brian, we have not -- quite honestly most of our attention has been spend over Metropolitan Group. I will tell you they have a very talented group of lenders. We’re excited about getting NIM, rolling again with capital behind NIM, so they can grow. So as you remember that bank used to be considerably larger than it is today, and we think we can get the bulk of that business back with the group of lenders they still have in place. So we’ve been pretty excited about what we found over the last 30 days.

Great. And just lastly, when we think about core expenses before the acquisition closures, do you think you still have more room to push those down I guess outside of the branch closings or should we think about maybe flattish expenses. Is there any sense on maybe direction of expenses after you grow the branch savings?

Yes. The only expenses that I expect to go up in normal cost living kind of, that's in sales. We are doing a great job of managing our expenses going forward. We think once we get Metropolitan merged, we will fill up some of the capacity that we’ve had in our bank with the additional volume. So we see that as very positive and I do not see our legacy expenses growing at all to be honest with you.

[Operator Instructions] And we’ll move to Kyle Oliver with Raymond James.

I guess on the acquired credit card portfolio, you mentioned you would be willing to do additional deals there. Is there a maximum amount you feel comfortable getting that portfolio to?

Well, I have mentioned before that several years ago we were about a $1.3 billion, our credit card portfolio was north of $200 million. So I would tell you that I’m personally comfortable with $250 million range, and we would evaluate it at that point in time best how, how we’d be willing to get it. But since it’s only a $180 million now, I think we’ve got a little worrying for growth, that's why we’re interested in acquiring more credit card portfolios. Our credit quality is not changed. We still have the high standards that we’ve always had reflected by a 1.2% charge-off rate. So as those banks decide that those smaller credit card portfolios are not something they want to maintain, we try to make sure they understand we’re going to acquire those assets. We’ve been targeting in the banks, credit unions, other areas, the $5 million to $20 million portfolio size and those smaller portfolios, we think we have a little bit better opportunity to acquire the bigger companies aren’t is interested in those small portfolio. So that gives us a little bit of opportunity there.

And then just switching to asset quality, non-performing loans were down about 30% over the quarter, was that -- was there anything there larger just a combination of things?

Yes, there was one piece of property in Northwest Arkansas that probably made up the bulk of that. They transferred from non-performing assets -- non-performing loans into OREO, and that's probably the biggest piece of the change in the asset quality number. We still own it, it weren’t a cleanup, we were just moving it from one non-performing category to another.

Okay, great. And just trends in asset quality, do you still see it going positive from here?

I expected to be at least as good as this today. We’ve not changed any of our underwriting standards. So we’re just getting more loops today. David you may want to roll in on this.

Well, obviously with the merger we’ve got a few more assets that are going to be special mentioned type assets. And so we’ll be managing through those after the merger, but as far as the legacy portfolio we have now, I think we’re going to be very consistent with the asset quality you see.

[Operator Instructions] And we have no further question. So I would like to turn the call back over to our speakers for any additional or closing remarks.

Okay, thank you. And before we close, I want to give you a little more information on the Metropolitan transaction. We have done a lot of work and I’d like to recognize Lunsford Bridges and Susan Smith particularly for helping us understand all the issues that we have in this merger going forward. They’ve been wonderful to work with along with the rest of the associates at Metropolitan. We put a lot of numbers in front of you when we announced this merger, and we’ve been testing those numbers. We believe they are all still very accurate, very conservative. So we feel comfortable there. We expect the closing to be late November, early December, which is our original timeline. We have no indication from any regulator that there are any issues with the applications. We expect to have our branch consolidation plan completed and consolidated by the end of March next year. So we’re still on the same timeline that we outlined you in our announcement, all the numbers still look very good and very conservative. So we appreciate your support, we appreciate you calling in today. I will remind you that, as Bob just told me, that we will have significant merger related cost in the fourth quarter. I think our original projection was little over $8 million. We are hopeful that that number can be a little less than that, but there are some negotiations that are ongoing that will determine whether that number stays at $8 million or little less. Thanks for calling in today, and have a great day.

Once again ladies and gentlemen, that does conclude today’s conference. Thank you for your participation.