Simmons First National Corporation (SFNC) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation First Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to David Garner. Sir, you may begin.

Good afternoon. I’m 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 George Makris, Chief Executive Officer; David Bartlett, Chief Banking Officer; and Bob Fehlman, Chief Financial Officer; and Marty Casteel, CEO of our lead bank. 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 paragraphs 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 first quarter conference call. In our press release issued earlier today, we reported record core earnings of $15.7 million an increase of $8.2 million or 110% compared to the same quarter last year and record diluted core earnings per share of $0.70 or $0.24 or 52% increase over the last year. As a result of acquisitions and efficiency initiatives reported in the last several periods, we have and more continue to recognize one-time revenue in expense items, which may skew our short-term financial results but provide long-term performance benefits. Our focus continues to be improvement in core operating income. Core earnings for the first quarter of 2015 exclude $7 million in after tax merger related expenses from our most recent acquisitions. During the same period last year, we recorded $3.1 million in after tax merger related and branch right sizing costs including these non-core merger items net income for the first quarter was $8.7 million or $4.4 million increase or 100% over Q1 of 2014 and diluted EPS was $0.39 or 44% increase over the $0.27 reported the same period last year. On February 27, 2015, we completed acquisition of Community First Bancshares headquartered in Union City, Tennessee and Liberty Bancshares headquartered in Springfield, Missouri. The acquisitions added approximately $1.9 billion in loans, $2.4 billion in deposits and $3 billion in total assets to our balance sheet during the quarter. As of March 31, Simmons First total assets were $7.8 billion, the combined loan portfolio was $4.6 billion and stock holders equity was $1 billion. Net interest income for Q1 2015 was $53 million, an increase of $11.4 million or 27.5% compared to Q1 of 2014. This increase was driven by growth in our legacy loan portfolio and earning assets acquired through the Delta Trust, Community First, and Liberty transactions. Net interest margin for the quarter was 4.34%. Normalized for the accretable yield adjustment impact, net interest margin was 3.86% compared to 3.87% in Q4 of 2014. Interest income on acquired loans includes additional yield accretion recognized as a result of updated estimates of the fair value of acquired loans. In Q1, we recorded a $6.1 million credit mark accretion to interest income. Total accretable yield recognized during the first quarter was $10 million. Non-interest income for Q1 2015 was $18.5 million an increase of $9.3 million compared to the same period last year. The increase in non-interest income was primarily due to the following significant items. Losses on FDIC covered assets decreased $4.7 million primarily from lower indemnification asset amortization. And we continue to see significant increases in trust income, service charge in fee income, mortgage lending and investing banking income, primarily from the acquisitions. Non-interest expense for Q1 2015 was $57.4 million an increase of $12.8 million compared to the same period in 2014. Included in Q1 2015 non-interest expense were the following merger items. Pre-tax, merger related expenses increased by $9.1 million from last year due to the Q1 2015 acquisitions of Community First and Liberty. In addition, pre-tax branch right sizing expense associated with closing and maintenance of closed branches decreased by $3.8 million from last year. In Q1 2014 we closed several legacy locations as part of our branch consolidation plan, related to our end-market acquisition of Metropolitan National Bank. And the remainder of the increase in non-interest expense is primarily due to incremental operating expenses of the acquired Delta, Community First and Liberty franchises. Our combined loan portfolio was $4.6 billion an increase of $2.3 billion or 96% compared to the same period a year ago. On a quarter-over-quarter basis acquired loans increased by $1.9 billion, net of discounts. While our legacy loans increased $336 million or 18.9%. The legacy loan growth was driven by $187 million increase in real estate loans and a $172 million in commercial loans, partially offset by a $22 million decrease in consumer and other loans from the sale of our student loan portfolio earlier last year. When we make a credit decision on an acquired non-covered loan, the outstanding balance migrates from acquired loans to legacy loans. Our Q1, quarter-over-quarter legacy loan growth included $115 million in balances migrated over the past year. Excluding the acquired loan migration, legacy loans increased by $220 million or 12.6% from the same period last year. We remain encouraged by the continued growth trend in our loan portfolio. At march 31, 2015 the allowance for loan losses on legacy loans was $29.2 million and the loan credit mark and allowance on acquired loans was $97 million for a total of $126.2 million of coverage. This equates to total coverage ratio of 2.7% of gross loans. The allowance for loan losses on legacy loans equaled 1.38% of total loans and approximately 194% of non-performing loans. Non-performing loans as a percent of total loans were 71 basis points. At March 31, non-performing assets were $66.2 million, an increase of $8.3 million from the prior quarter. During the quarter, we reclassified $6.1 million of previously closed branch buildings and land from premises held for sale to [indiscernible]. There was no deterioration we further write-down these properties. This reclassification was entirely due do to accounting rules, which allow we will stay to remain categorized as premises held for sale for no more than one year. First quarter net charge-off ratio was 20 basis points. Excluding credit cards, the net charge-off ratio was 9 basis points. Our year-to-date net credit card charge-offs to loans was only 1.32%. We continue to make good progress with our efficiency initiatives both in revenue enhancement and in expense control. Our core efficiency ratio for Q1 2015 was 62.2% compared to 72.6% in Q1 of 2014. The integration of Community First and Liberty is going well. The holding companies were merged into Simmons First National Corporation with First State Bank and Liberty Bank continuing to operate. The systems conversion in merger of Liberty Bank into Simmons Bank is the scheduled for tomorrow April 24. First State Bank’s conversion in merger into Simmons Bank is scheduled for Q3 of this year. This concludes our prepared comments and we would like to now open the phone line for questions from analysts and institutional investors. Let me ask the operator to came back on the line and once again explain how to queue in for questions.

Thank you. [Operator Instructions] Our first question comes from Brian Zabora of KBW. You may begin.

Thanks, good morning guys.

Hi, Brian.

Hi Brian, how are you?

Good, how are you?

We are great.

Just a question on the expense side, are you starting to see expenses from the two recently closed deals or the – is there any realized in the first quarter?

Yes, Brian, as you probably know, we have been planning with both Liberty and First State for several months for the integration. They have done an excellent job in identifying cost save opportunities, and I would tell you that they both had great first quarters, they particularly on the expense side. So I’m would say that we are probably on little ahead of the game with regard to the realizations of those cost saves. We still think that our original projections are going to be – we would come out, if I would just little earlier then we are projected them to happen. So we were the beneficiary of a little bit from the timing standpoint, first quarter but remember they are only in our financials for one month and one day in the first quarter.

That’s helpful. And then second on your balance sheet, you have got a lot more cash, it looks like with the acquisitions, you have a good amount of liquidity, tell us your thoughts about your kind of loan-to-deposit ratios at a good spot, are you maybe deploying that through securities or loans or how you thinking about that excess liquidity?

I will just touch on that briefly, and I’ll let Bob Fehlman talk a little bit more about that. Our cash position is good, we are restructuring our investment portfolio, so all three banks sold some securities during the first quarter, we were holding that cash, because we didn’t want to go back in all-in one time invested in the securities portfolio. But I’ll let Bob, give you a few more details on our cash position.

Yes, Brian we, as you know, on the purchase count, we have a mark-to-market on the investment security portfolio and as we marked those securities we’ve looked at what would fill into our portfolio. So we have a couple of hundred extra million in liquidity right now that we will layer back into the investment portfolio over the next couple of months. We don’t want to put it all in one-time, we want to layered in and obviously the rates are on the lower end right now. So we will look for opportunistic times to put that in. We would like it obviously to go into the loan portfolio. You mentioned on the loan-to-deposit ratio were in the low 70% range, you know our target over a period of time would be north of the 80% range as where we would like it to be. But as we merge the companies together and put new programs in place that would be our target over that period of time.

Okay, great. And just lastly on the FDIC covered loans, some banks have exit their loss share agreements, have you looked into that?

Brian, we have – we’re taking to look at it now, I’m going to let Bob talk a little bit about the excess mark we have on our books and what that means to us long-term and sort of give you an idea of what the financial deal with FDIC would have to look like for us to be willing to exit that loss share pretty soon.

Yes, Brian you know, we are looking at the possibilities of exiting the market or the FDIC loss share agreements. One of the things to remember for our company is the excess mark that we have related to the Kansas loans, related to that, we have the FDIC indemnification asset, those asset that has been expensed over the life of the loan or the agreement period whichever shorter. We have a negative amount in the non-interest income. So it could be when we analyze this that there is a one time hit, all that would be a timing difference of one that expenses whether its on the day we sign the agreement or we expensed over the next period of time. While we continue to evaluate the financial trade on this, if its worth existing or not, the FDIC is looking at more today than they have in the past. So we’re hopeful at some point we will exit.

Great, thanks for taking my questions.

Thank you.

Thank you. Our next question is from David Feaster of Raymond James. You may begin.

Hi, good afternoon, guys.

Good afternoon.

Good afternoon, David. How are you?

Organic loan growth continues to be quite strong. Could you maybe talk about your thoughts on your organic growth this year, where you’re seeing the strength commercial and CRE have clearly been the workforce as for you guys. And maybe if you could mention what kind of runoff you looking for on your acquired book this year with the inclusion of the other new deals.

David, I’ll talk a little bit about our modeling runoff and loans and we never model keeping the 100% of the loans. We usually building about 10% runoff. We’re very hopeful and optimistic that, that’s not going to happen and we don’t believe its going to happen because the same staff that made those loans in both Missouri and Tennessee, you are still in place taken care of those customers. So we are hopeful that our runoff will be less than our model of 10%. I’m let David Bartlett talk a little bit about where we’re experiencing in this organic growth.

Hi David, this is David Bartlett. Most of our loan growth is coming out of some of our metropolitan markets Wichita has been a great loan growth market for us. So in St. Louis, Little Rock is contributed the good growth. And then just our legacy footprint in Arkansas from Jonesboro its always a good growth loan growth market for us. Little Rock has shown some relevant growth this past quarter as South Arkansas. Did you remember we are in the ag business and the ag business cycle is just starting to pick up and some of the agricultural blenders in our footprint are starting to see some benefit at end of the third quarter most of its – I’m sorry, the end of the first quarter, most of this going to be coming in the second quarter. So that’s the history of what we’re saying most of our pickup in our core loan growth.

Okay, great. In the organic growth, do you guys have your last quarter we talk about 7% to 10% is that kind of still a target.

It will be if we lose 10% of the acquired loans in our model, if we don’t then we expected to be double-digit. So as we’ve experienced over the last several quarters.

Okay. Perfect. Maybe if we could switch gears to the NIM, obviously this is lumpy from quarter-to-quarter, but maybe could we talk about your expectations for your net interest margin and accretion income in 2015 and 2016.

Bob, you…

David, first on the reported names with the accretion the accounting entries is going to be bumping last like it has it will be anywhere from 14 to 450 on the core side we’re pleased with the spend pretty consistent that the 385, 386 level. We see the core side spend 385 to 390 in the next couple of months. We will have a pick up in the second quarter as we fund those acquired loans but right now there is as much as we’ve seen in the past based on the size of the balance sheet. But I would say a pretty stable core name in the foreseeable future in that 385 to 390 range.

Okay, great. Last question from me could we may be talk about your thoughts on fee income, mortgage and investment banking we’re clearly the standout in the quarter. But overall fee income was may be a bits softer than I’ve thought could you give us a sense of the trends you’re seeing and kind of you’re expectations for fee income going forward?

Sure David, I’m going to let Marty Casteel feel that question if you don’t mind.

Well David as you noted, our trust in our mortgage income investment banking income all pretty solid our depository income was soft and that’s really reflection of frankly NFS fees and this quarter is typically, historically a lowpointfor NFS fees that’s not surprising tax refunds. Honestly, probably the lower price of gasoline has help consumers a lot. That’s all good news in many respects. It does show up in its NSF fee income. We would expect that historical trend to continue and we’d see some rising of those deposit fees over the coming months though.

David this is George Makris again, you know we’ve talked a lot about our non-interest income lines of business and real opportunity we have long-term from revenue enhancement standpoint we just hired Philip Tappan in the last quarter the head of financial services division, Philips,over our trust, our investments, our insurance and our new private bank operation. Some of the increase you’ve seen this cost buyer increased emphasize on those product lines. And quite honestly they are very limited and they are offering to run our footprint. So our probability over the next two to three years is to make sure we have gross products and services available in all our markets. So Philips done a great job and I certainly expect those areas of our business to continue to increase our revenue opportunities.

Okay, great. Thanks again.

Sure thank you.

Thank you. [Operator Instructions] Our next question comes from Matt Olney of Stephens. You may begin.

Hey guys how are you doing?

Hi Matt.

Hi Matt, how are you?

Hey, I’m doing well, thank you. Hey, I’m trying to get a better idea of 1Q results from the legacy bank. What that the impact of the acquisitions, do you have any data there in front of you there kind of point to what similar larger item where whether its expenses or fee income or anything, just from the legacy Simmons bank in the first quarter?

Matt, that’s a good question. When you first in the last 12 months to 18 months, you put four banks together, it’s hard to figure out what the legacy is and what those bank is today. But I can just tell you, as you can see, we’ve had good legacy growth. The fee income as we said, we’ve had a little bit of challenges on the NSF and some of those service charges in the credit card area. On the expense side, we’ve seen good cost saves and as we work across our efficiency initiatives. So David, he is got the page, turning to respond to that.

Yes, hi Matt, David here.

Hi, David.

We have seen some organic improvement in Simmons First National Bank. We’re up significantly in the legacy SF and being compared to where we were in the first quarter of last year. And our trends that we expect to see going forward. So we’ve got the legacy improvement of SFNB and then, we’re just layering on these acquisitions to help accelerate that improvement in growth.

Sure.

We talked a little bit about our legacy loan growth and that continues to be strong. So that would be in those numbers. And I think we talked before about exceeding our expectations on the cost save model on metropolitan and certainly I would tell you in the Delta Trust acquisition, we’ve exceeded that our cost saving estimate is well. Our merger related cost particularly on these two latest transactions were below our model, which is one of the things that is contributed to our stronger equity position on our balance sheet. So I would tell you that both on the revenue side and cost save side, we’re doing a little better than we anticipated a few days to six months ago.

Okay, that’s a great commentary. And as far as the outlook for expenses ins this second quarter, as you can layer back together get the full impact of the acquisitions, is there a range can you can narrow down what we still expecting for 2Q expenses?

Matt, another good question and it is a big challenge trying to get our hands around that. So I’m going to give you some numbers, but its like you said a range of where we will be again, we’re putting these companies together. We’ve got cost saves, we’re putting in from past acquisition and cost saves from future one. But I would tell you without the cost saves going forward, we’re looking at run rate on a quarterly basis of about $62 million, would be a good number and that number will be reducing with the cost saves as we go forward. That’s what our modeling is showing right now as we look to the next couple of quarters.

And you mentioned, that would be reducing remind me the timing of the conversions you have coming up.

Yes, as we said Liberty converge tomorrow, its generally about a 30 days before some of those cost saves – savings start hitting Community First will be September 4, and it will be 30 days. So we think fourth quarter of this year will be a good run rate going forward in all the cost – most of the cost saves in.

Okay, all very helpful. And I don’t want to ahead of myself as far as future M&A, these deals are now close any updated thoughts as far as the timing of additional M&A from here.

Matt, fear of being strong robust some of these guys sitting around me, we will continue to be very active and talking to perspective merger partners. We’re seeing a lot of activity in the market. I’ll tell you that we’re originally several years ago, we establish sort of a 350 mile radius around central Arkansas as our target territory that’s probably expanded little bit since our territory now includes the entire state of Tennessee. I would tell you we’re looking at more of an inside out growth strategy. We said we’d like to go West the multiples going West or little high now. So we may have some opportunities in some contiguous territory in Tennessee for instance. So we continue to look first for an organization whose culture is very similar to ours. If we go into the new territory we want to make sure that we have a good strong management team in an organization that is well respective a long history excellent service in your markets. And quite honestly we’re having discussions with several of those institutions that make those characteristics right now. I really can’t give you much of the timeline. We’re very comfortable with our ability to integrate these two deals as we mentioned earlier. So I would expect that if we are successful with any of these discussions, we will slight closings and conversions similarly to what we’ve done with these two deals.

Okay, George. Thank you. And then last question more of a modeling question. I think George you’ve mentioned the accretable income was about $10 million in the first quarter. I know such predict day being accretable income going forward, but how should we be thinking about that accretable income going forward and what’s the remaining accretable discount that could potentially flow into income in the future?

Yes, I would tell you again that’s a bumpy numbers we go forward. While that is $10 million in the first quarter remember there is also some of the indemnification asset that goes against that number and as we go forward. I think David we’re saying…

Yeah.

Looking back in that now.

For the second quarter for Liberty and First State, we’re going to have about $3.5 million in accretion. Just for those two new portfolios.

Yes.

And that’s just the income that you expect to come in or just the discount that could come in the future?

That is the expected credit mark accretion in the second quarter for those two deals.

Got it.

And Matt, remember those numbers are in – those are at our expectation levels of the number we gave last year when we projected the earnings going forward for those entities.

Sure yeah that’s a moving target and hard to predict, I just kind of want to have a ballpark range on that. Okay guys those are all my questions. Thanks for your time.

Thanks, Matt.

Thank you, Matt.

Thank you. Our next question is a follow-up from Brian Zabora of KBW. You may begin.

Hi, this is question on capitals, TCE ratio improved actually with the deals I just wanted to get your thoughts and sense on in capital ratios you might be targeting and if may be what your thoughts as far as distribution or you kind of holding capital for the potential deals that you may be exploring?

Brian, we’ve said is our target based on our current risk profile from range of operating capital TCE 7.5% to 8.5%. So we’re well within those guidelines. It’s quite honestly probably 30 basis points prior than we thought it was going to be primarily because of the delay in the closing. So we got the benefit of earnings of Liberty and First State during the first three months of the year. Actually for three months because we expected to close last November that rolled into capital instead earnings so we’re pleased about that. We’re going to sit on this capital and try to utilize it in future acquisitions. If we get above 8.5% then we’ve got some deployment issues that we will start talking about internally either larger cash pieces of acquisitions or potential stock buyback. So I would tell you that over 8.5% based on the current risk profile, we consider that to be excess capital.

Very helpful. Thanks for taking my question.

Thank you.

[Operator Instructions] I’m showing no further questions – sorry. I’m shown we have a question from David Hutter with Pine Bluff. You may begin.

Yes, thank you. Hi, Mr. George Makris, I just want to know are you anticipating Simmons First National Corporation having a record core earnings of the $15.7 million for the first quarter of 2015.

Well, I’m going to answer at this way. I’m looking at our lead director at the end of the table and he was expecting, me to expect us to have record core earnings. So yes, that’s the result of our acquisitions. They’ve all been very strategic and all been very good financially for our company. So I would say, yes, we expected to have record core earnings.

Thank you very much.

Thank you.

Yes, sir.

Thank you. I’m showing no further questions at this time. I would like to turn the call back over to David or Makris for closing remarks.

Well, thank you very much for joining us today. Many of you will see between now and the end of the second quarter. But we look forward to doing this again. Thanks a lot. Have a good day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.