Simmons First National Corporation (SFNC) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation Second Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference Mr. Burt Hicks, Investor Relations Officer. Sir, you may begin.

Good afternoon. I’m Burt Hicks, 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 George Makris, Chief Executive Officer; David Bartlett, Chief Banking Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, CEO Simmons Bank, our wholly owned bank subsidiary and David Garner, Chief Accounting 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 we will then 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 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.

Thanks, Burt, and welcome, everyone, to our second quarter conference call. In our press release issued earlier today, we reported record core earnings of $22.4 million, an increase of $13.3 million or 145% compared to the same quarter last year and record diluted core earnings per share of $0.76, an increase of $0.20 or 36% compared to the same quarter last year. We continue to make good progress with our efficiency reported both in revenue enhancement and in expense control. Our core efficiency ratio for the second quarter of 2015 was 58.5% compared to 68.2% in the same period last year. During the quarter we closed 12 branches, as part of our branch right-sizing initiative. We also entered into a definitive agreement to sell three branches in Savannah, Kansas, which is expected to close in the third quarter. As a result of acquisitions and efficiency initiatives reported in the last several periods, we have and will continue to recognize one-time revenue and expense items, which may skew our short term financial results that provide long term performance benefits to our company. Our focus continues to be improvement in our core operating income and core efficiency ratio. Core earnings for the second quarter of 2015 excludes $760,000 in after tax merger related expenses from our most recent acquisitions and $1.7 million in after tax branch right sizing cost, which totaled $2.4 million in non-core expense. During the same period last year, we recorded $750,000 in net non-core income. Including these non-core merger items, net income for the second quarter was $20 million, a $10.1 million or 102% increase over Q2 of 2014. Diluted EPS was $0.71, an 18% increase over the $0.60 reported the same period last year. For the quarter we achieved strong long growth totaling $175 million over the first quarter of 2015, and an expanding core net interest margin of 3.87%, up from 3.49% in the same period last year. On a core basis, we increased non-interest income by $13.8 million over the same period last year. This increase is driven primarily by the integration and expansion of our acquired business lines. Total non-interest expense increased by $23.9 million, primarily due to incremental operating expenses of the acquired Delta Trust, Community First and Liberty franchises. At June 30, 2015, the allowance for loan losses on legacy loans was $30.6 million and the loan credit mark and allowance of acquired loans was $83.3 million for a total of $114.8 million of coverage. This equates to a total coverage ratio of 2.3% of gross loans. The allowance for loan losses on legacy loans equaled 1.17% of total loans and approximately 180% of non-performing loans. Non-performing loans as a percent of total loans were 0.65 basis points, which is an improvement from 71 basis points in the first quarter. Through June 30, the year-to-date annualized net charge-off ratio, excluding credit cards, was 0.09%, and the year-to-date annualized credit card charge-off ratio was 1.32%. At June 30, 2015, common stockholders' equity was $1billion, with tangible book value per share of $20.15 and a TCE ratio of 8.7%. On April 27, we completed the conversion and integration of Liberty Banc, headquartered in Springfield, Missouri. As a reminder, we were scheduled to convert and integrate First State Bank headquartered in Union City, Tennessee over Labor Day weekend in September. On April 29, we signed a definitive agreement to purchase trust company of the Ozark’s of Springfield, Missouri. This acquisition will increase our total assets under management by more than $1 billion. We anticipate closing this transaction by the end of the third quarter of this year. As we previously mentioned, we’re in discussions with the FDIC about potential early termination of our loss share agreements. Depending on the timing of the agreement termination, we expect to incur a one-time after tax write off of $5 million to $7 million. This write-down is only timing in nature. Future earnings will be benefited by the elimination of the amortization of the FDIC indemnification asset and related expenses. This concludes our prepared comments; we will now open the phone line for questions from our analysts and institutional investors. I’d ask the operator to come back on the line and once again explain how to queue in for questions.

[Operator Instructions] Our first question comes from Stephen Scouten of Sandler O'Neill. Your line is open.

Hey guys good afternoon, thanks for taking my question here.

Stephen, how are you?

Doing well, doing well. So I wanted to look at fee income here a little bit. It was better I was expecting and I noticed there were some decent expansion on the credit card fees. I'm just curious as to what that looks like from a balanced perspective and if that's all internal growth or if any of that came by the acquisition?

Marty, you want to deal with that?

The fee income was up, that would include the Liberty integration.

And most of that is your credit card and debit card together and as you put Liberty and First say for the full quarter, the normalized growth is probably in the 5% to 6% range.

Okay, that’s helpful. And just on the expense front, I'm curious as to what kind of the scale to savings we should expect maybe through the end of the year it looks like, especially from the branch closures and then the additional First State cost saves that will happen after the conversion on Labor Day. Can you give any kind of – can you frame up at all what the pace of additional benefits will look like through the end of year?

Stephen, I will take a cut at that and then Bob, David may have something to add to that. From the branch closings, we expect roughly $2 million annually in savings, that’s from the 12 branches we closed, plus the Savannah [ph] branch sale, and that should start immediately. With regard to the First State savings, I'll say that John Clark and his team in Tennessee have done a great job since we closed that transaction in anticipating back-office savings and we’ve actually realized some of that savings currently. What we have left is all the post conversion system savings, which are going to be fairly substantial and some savings from position reductions, but many of those have already been roll out. So their efficiency ratio as a standalone bank is down from about 70%, right before closing to the low 60s now, they’ve done a great job of being very efficient in that process. We would expect that that savings would be million dollars a year going forward.

This is Bob. I must tell you too, user is looking for a run rate. I think we gave about $62 million in the last, for this quarter, which is close to that number. Going forward once the cost saves are in we should be between $61 million and $61.5 million somewhere in that range should be a good target level.

Okay, perfect, that’s great. I appreciate that. And then just maybe one last one for me on loan growth; it looks like the loan growth is pretty strong again here this quarter, I’m wondering what you guys are seeing in terms of trends, anything to note in terms of concentrations in this quarter either from geography or loan type and should we expect kind of a similar pace of growth moving forward from here? Thank you, guys.

I will just say high level. We’re seeing good loan growth all across our franchise. And quite honestly even with First State, their loan portfolio is up $30 million since we closed that transaction. Quite honestly we always anticipate a little bit of run-off, but they’ve done a great job of maintaining their portfolio and actually growing it, which is what we really like to see. David Bartlett may have more specifics about concentrations and three or four markets that are doing exceptionally well and I’ll ask him to comment on that.

Thanks George. Stephen, we have seen some pretty substantial growth, part of that is due to our Ag portfolio, which is seasonally impacting this quarter by about $40 million. So you take that out and try to get a run rate of annual growth that still equates to about 3.5% to 3.8% per quarter, or annualized at about $15 million, take out the Ag portion of that, it drops it down to about 12%; that still is a little high. I would probably forecast, because we had a couple of pretty substantial loans funded of pretty high size this quarter. We would probably be looking at the high single-digit loan growth going forward.

Okay, great. That’s really helpful guys. Thanks again for taking my question.

Thank you.

Thanks. Your next question comes from David Feaster of Raymond James. Your line is open.

Hey, good afternoon guys.

Hi David.

Your NIM was pretty impressive this quarter, and your core NIM jumped despite a decline in the accretion income. Could you maybe just give us some thoughts on your reported and core NIM going forward and your expectations for accretion going forward?

You know our GAAP NIM, it kind of goes all over because of the accretion, but target range is somewhere in that 4.20% to 4.50% range, it just depends, what loans move migrate, what loans payoff and so forth. The core is more important, we did have a good quarter, part of that was related to the Agro seasonality, the other was the restructuring of the balance sheet as we go through the acquisition. We had a lot loans moving in and that came out of liquidity and cash, so a lot of it was mixed related going into the loan portfolio and we would see for the balance of the year or for the next third quarter, somewhere between 3.80% and 3.90%, probably maintaining at that 3.87% level on a core basis.

And next on provisioning, that was a bit higher than we were looking for. Could you maybe talk about what drove that and your expectations for provisioning going forward because as you noted, the asset quality actually overall improved?

I’ll touch on a couple of things and then Bob and David can give you a little more specifics. A lot of that provision came through First State. They have done a great job over the last quarter of booking new loans that required provisions against that, and David can you more specifics about that, much more than we anticipated. So that's probably a million dollars of difference there and David if you want to jump in.

David, First State bank moved $186 million from the acquired into their legacy portfolio. And once it moves in that legacy portfolio we have to run provisions and [indiscernible] the allowance for loan losses that way. Additionally, we did have approximately $550,000 to $600,000 in provision for acquired loans. Some areas where our credit mark weren’t sufficient to cover some losses, so that goes into the same provision expense line as you see, the legacy provision. But with the size of the loan growth that we had $176 million in total loan growth for the quarter with significantly more of that being in the legacy portfolio, we just felt it was prudent that we provision at the levels that we did.

Last question from me, can we talk about M&A for a second. You guys have had your plate pretty full for a while now, and now that you guys are starting to work through these deals and integrate them and with the trust, those are exposed in next quarter. Could you maybe talk about your M&A appetite and how you think about approaching that $10 billion of asset threshold?

David, I'll be glad to do that. We certainly have a continued interest in more M&A activity and quite honestly we’ve had a lot of discussions, nothing that we consider to be imminent. And part of the reason is that this $10 billion, this program is fairly substantial. I'm sure you’ve heard that from other banks and opposition that are approaching that threshold. The stress testing issues, making sure that we have all our compliance area fully staffed and trying so that – how to use this term, but it will make sense to you, so that we have a plug and play risk management program going forward, once we past $10 billion. If we wait until we get to the $10 billion to address these issues it will be too late. And quite honestly, without this I’m sure our regulators are going to be really thrilled about giving us regulatory approval. So we’re trying to cross all the Ts and be in a position so that that $10 billion barrier does not show us down. We don't think it will, we think that at the end of the year we will be very well-positioned to move forward during 2016. Now let me mention one other thing that we need to discuss with regard to expenses. Getting ready to pass $10 billion is not inexpensive, so we're seeing some increased staffing, increased investments in systems and applications, particularly in the stress testing area that are driving those short term expenses up so prematurely if you will. There are going to be necessary $10 billion. We think they will be beneficial before then and watching in, we can't wait until we get to the $10 billion before we have these expenses.

Okay, great. Thank you very much.

Thank you. Your next question comes from Matt Olney of Stephens. Your line is open.

Hey, thanks guys. How are you?

Fine Matt. How are you?

Doing well, thank you. George with your commentary just now about increased staffing levels for crossing that $10 billion asset special. I just want to make sure that the commentary about the cost saves and that run rate that Bob gave to Stephen, does that also incorporate increased staffing levels of the next few quarters or is the commentary George more 2016 for increased staffing?

No, the run rate includes that staffing. A lot of that should be considered bringing staff over from First State that may be we didn't originally anticipate, but they’ve got some very well framed compliance people that are going to really help us out going forward. So I guess it’s a little bit of give and take Matt, we probably originally thought we have more cost saves from the human capital side with First State since we’ve evaluated our needs for the $10 billion level. We have some built in talent and we’re actually probably going to retain more people at First State than we had originally anticipated.

Okay. That’s good color. And then as far as the loss share expense that runs through the fee income line, I think there was a loss of $3.1 million this quarter. Do I understand that press release correctly that there is going to be a similar pace there in the back half of the year, but that could fall pretty hard in 2016?

Matt, as we said we’re negotiating with the FDIC to exit loss share. Once we do, we’ll have that one time charge. As soon as we exit where you see that contra and negative amount of $3 million that will go away completely, so we won't have to talk about FDIC loss share and the expenses on a go forward piece, so that will be an immediate savings and I think for the balance of the year there is about $5 million if we exit loss share. Again, we would have an expense on the front-end. I think we said $5 million to $7 million. So $5 million of that would be earned back by the end of this year and then the rest of it would be less than a one year of payback on that.

And agreement is kind of official, but it sounds like it’s – between that directions out there?

That’s fair.

Okay. And then, anything else unusual in the fee income lines this quarter?

Really I would say, the only thing we continue to see pretty good mortgage volume as rates stick down just a little bit again, and we’re seeing that in June and a little bit into July. Obviously when you go through the summer months and get into the school year that will naturally slow down, and when – if the rates do go up as everybody keep saying they will at some point, if they do, end of the year you would expect the volume to drop there.

Matt, I’ll add that that’s not really a surprise to us. We’re a little bit above budget from what we anticipated with regard to mortgage revenue, but we are having a good year. In the past we’ve probably anticipated more mortgage revenue than we actually achieved, so this year is a pleasant surprise for us that we actually were able to do it pretty closely to that we are achieving today. But everything else is the results of the fee income business that’s been acquired coupled with what we already have and I would say we are hitting also on this revenue.

Okay, that’s helpful. And going back to the commentary on the loan loss provision, would you expect that $3 million to moderate somewhat in the third quarter if loan growth does moderate back to that high single-digit pace that David Bartlett mentioned a few minutes ago?

We would anticipate that. You know David Garner mentioned $500,000 to $600,000 provision for acquired loans, we don't expect that continue every now and then, we may have a little bit of a provision for those acquired loans. First State, we think we’ve done a good job of identifying the provision necessary there, so we don't see that at that same level. So I think we’re going to be back closer to expectations in our provision going forward.

Matt, this is Bob. Let me remind you as loans migrate from acquired, if you remember those loans have credit marks and we’re creating that to income over the life of the loan. As those loans migrate over they become part of the legacy and we have to establish an allowance. So that does create some unexpected volatility in those numbers. On the other side, we’ve got the accretion coming in on the income side, so it does fluctuate a little more as some of these loans are repriced and renewed quicker than we might have expected. So don't expect to run out, but there could be some more volatility just like in this quarter.

Okay. Thanks for that Bob. And then last question from me, as far as a good tax rate to use from here Bob, anything different from what we saw in 2Q?

Well the good and bad news is, the tax rate going up is a bad news, the good side is, it’s because the income is going up. When our income was lower, there was a lot more nontaxable income as a component of your overall income, that keeps your rate down at the 29%, 30%, 31% effective tax rate. As the incomes approaching the levels we’re at when you’re making $25 million, $30 million a quarter, your effective tax rate is going to go up. I would say this quarters tax rate is probably a better rate to use on a go forward basis.

Okay that's all for me. Thank you guys.

Thanks Matt.

Thank you. Our next question comes from Brian Zabora of KBW. Your line is open.

Thanks, good afternoon.

Hi Brian.

A question on the legacy loans, loans moving from acquired bucket to the legacy. Do have the total, I think you mentioned First State how much moved, but the other total how much loans moved from acquired to legacy?

Yeah Brian, it’s David. Total for the quarter we had approximately $116 million migrate from acquired to the legacy portfolio.

Alright. And then, as far as your expectation of a high single-digit loan growth, is that inclusive of continued runoff from the acquired or could it be lower if there is additional kind of runoff from the acquired book?

No that includes any anticipated runoff. And we’re trying to be a little conservative there. As I mentioned before Brian, any time we have an acquisition we expect some loan runoff, that’s just natural occurrence. So far it hadn’t happened and that’s why our loan growth is so robust right now. We do have another conversion coming up in September, which is another key date where those customers have one more chance to consider their alternatives. We’re very hopeful that will maintain the loan portfolio as it is today, but we would not anticipate even with the loan runoff dropping below that 7% to 10% range.

On the deposit side, you had some runoff on the CDs, from your higher cost and CDs. Where do you stand as far as deposit retention on the acquired – your portfolios and can we continue to see some runoff, are you still trying to push out some higher cost in deposits?

Let me begin to tackle that, and Marty Casteel may want to talk about the integration, what we would expect maybe at First State. We had [indiscernible] season, so our farmers were using their cash and therefore it’s in our bank. We have a lot of correspond relationships with downstream agro banks who are using that cash to fund loans, that's not in our bank. We did have some acquisition repricing associated with the Liberty acquisitions, so we lost a little bit of half price deposits later and this is traditionally a slower time for State funds as income tax rebates have been sent back, so combination of all that drives our total deposit slower. From a core deposit standpoint I think we’re in really good share. We have been aggressively pursuing that because of our liquidity position. Right now, our loan to deposit ratio is right at 80%, which was our short-term target. We’d like for that loan to deposit ratio to go up even a little more, so more half priced parked deposit runoff would not be an unusual occurrence for us. What we intend to protect is the core deposit relationships with our bank customers.

And then just lastly on borrowings, they were down in the quarter, could you just give us a sense of what you’re doing on the borrowing side there and what the terms are, and I believe you have some, your SBL asset would be priced early next year, is the plan still to pay that when that rate defect is coming in and do you think you can just do that in cash or do you need to refinance any of that?

No Brian, the borrowings you saw there were about $100 million down, most of that was at First State. They had some borrowings that were at a little higher cost than our other borrowing options. So we’ve worked on restructuring some of the some balance sheet there and paid those off. On the SBL, that does change from 9% to 1% in February of next year, so we expect to pay that off in January, we have the cash on hand to pay that off. We’d take it if it was the other way.

Alright, great. Thanks for taking all my questions.

Thank you Brian.

Thank you. [Operator Instructions] Our next question comes from Peyton Green of Piper Jaffray. Your line is open.

Oh yes, good afternoon. George, I was wondering maybe if you could comment kind of on the revenue growth initiatives that you all have reference prior – closing on the Liberty and Community First acquisitions, and maybe talk about any type of timing that you would hope for in terms of paying some benefit?

Peyton, we’d glad to. As you know, we’re going to close down trust company those are – that’s a big deal for us. It adds another $1 billion in assets under management to our trust company, so will be $4.5 billion there, and once again all of that business is in personal trust. We also have employee benefits and corporate trust that we expect to rollout in that market. So we think the future in the Springfield market and really all of Missouri looks real good from a trust standpoint. Philip Tappan who manages our financial services group has been on the road pretty steadily trying to beef up our investment in insurance businesses in markets where we’re – we were not represented or underrepresented. He is making good progress. That will be probably slow go. And Marty may have a little more update on some of those lines of business.

Well, we’ve had some success in finding some very qualified financial advisers for our investment group. I believe [indiscernible] have just started with us, so we’re seeing some growth in that line of business. Certainly trust company Ozark is coming on, is going to be a game changer for us in the Missouri market. First State, as a very strong and dynamic insurance division already, we’re trying to grow from that and have some good opportunities to do that.

Peyton, let me mention a couple of other areas, as you know Liberty and First State were both excellent SBA lenders. We received preferred lender status in Arkansas, so we would expect that particular product to become more prevalent in our loan portfolio going forward. The consumer finance group at First State continues to do well. That’s going to be something that we think we’re going to have to train within and rollout in our company, so that’s going to be a little slower growth than others maybe. So those two areas of specialty are also looking good for the future. Our credit card portfolio, Larry Bates has taken that board by the horns. We really expect robust growth program for our credit cards to be unveiled by the end of the year. So we see a lot of potential in that area for us and as that develops we will be happy to share that with you all.

It’s earlier, but our mortgage applications do remain strong. We had good growth there, sustainable growth and [indiscernible].

Okay, great. And then just a follow-up. How are you seeing loan growth at Liberty, they were a little more liquidity constrained, but what’s your prospect for loan growth from sort of great start at First State, just curious about the Liberty?

We remain very encouraged, you know, Liberty, their real issue, more of the reasons that we were good and merger partner was that their loan to deposit ratio approached 100%. And they had pretty strict restrictions internally on the size of the loans and also the pricing of the loan. So their ability to go out and cultivate new customers with our loan values and to compete the market is sort of new to that lender group. And we’re awfully encouraged about that opportunity and obviously Gary Metzger and Garry Robinson have done a great job leading that group. And we’re looking for great things to come out of a whole new set of customers up in that market.

Okay. Then I mean how long George would you think it would take from the shift of the mindset pre-merger, kind of post merger, what do you think the cycle is on the customer base?

Well I think the mindset has pretty well changed, it’s the cultivation of these new customers that doesn't happen overnight. Their own streets knocking on doors and taking advantage of relationships that maybe they couldn’t say yes to before.

And then Bob, could you remind me what the potential debit card revenue effect is across $10 billion?

Right now we’re projecting that to be in the $3 million to $6 million range on an after-tax basis. That’d be the total cost from going to the $10 billion. Those numbers kind of move as you find out more regulations you’re under, but on the debit card side I would say probably more in that $3 million to $6 million range.

So that’s after tax?

Yes.

Okay. Great. And maybe in terms of the churn of the loan portfolio, as you see the acquired loans move into the legacy portfolio, is there any lumpiness to the renewal cycle that we should be aware of?

Obviously there could be quarters that there is more bumps in the road on that. But generally speaking it’s modeling out to about $50 million or $60 million a quarter. I would tell you, Liberty is spread a little higher on the front-end there is shorter loans; First State be a little bit over a longer period of time. But a good ballpark estimate is in the $50 million, $60 million a quarter.

Okay, great. Thank you for taking my questions.

Thank you.

Thank you. [Operator Instructions] At this time, I see no questions in the queue. I’ll turn the floor back to Mr. Makris for any closing remarks.

Okay. Thank you very much. Well, thanks to all of you for joining us on our conference call today. We appreciate your support and we’ll talk to you next quarter. Have a good day.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.