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Simmons First National Corporation (NASDAQ:SFNC)

Q4 2013 Earnings Conference Call

January 23, 2014 4:00 PM ET

Executives

David W. Garner – Senior Vice President and Investor Relations Officer

George A. Makris Jr. – Chairman and Chief Executive Officer

Robert A. Fehlman – Senior Executive Vice President and Chief Financial Officer

David L. Bartlett – President and Chief Banking Officer

Analysts

Matt Olney – Stephens, Inc.

Brian J. Zabora – Keefe, Bruyette & Woods, Inc.

Operator

Good day everyone and welcome to the Simmons First National Corporation Fourth Quarter Earnings Conference. Today’s conference is being recorded.

At this time for opening remarks, I would like to turn things over to Mr. David Garner. Please go ahead sir.

David W. Garner

Good afternoon. I’m David Garner, Investor Relations Officer for Simmons First National Corporation. We want to welcome you to our fourth 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.

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 could 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.

George A. Makris Jr.

Thank you, David, and welcome everyone to our fourth quarter conference call. In our press release issued earlier today, Simmons First reported fourth quarter core earnings of $7.7 million, an increase of 4.7% compared to the same quarter last year. Diluted core EPS was $0.48, a 9.1% increase quarter-over-quarter. For the year ended December 31, 2013, core earnings were $27.6 million, or $1.69 diluted core EPS, 6.3% increase from 2012.

During the quarter, we had non-core after-tax non-interest expenses of $4 million in merger related and branch right sizing costs. In November, we announced a completion of Metropolitan National Bank purchase. As a result of this acquisition, we recognized $3.9 million in after-tax merger related expenses.

Additionally, during the fourth quarter, we closed one underperforming branch and recorded $66,000 in after-tax nonrecurring expenses related to the closure. Including these non-core expenses, net income for the fourth quarter was $3.8 million, or $0.23 diluted EPS.

On a year-to-date basis, net income was $23.2 million, or $1.42 diluted EPS. On December 31, total assets were $4.4 billion, the combined loan portfolio was $2.4 billion and stockholders’ equity was $404 million.

During 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 of dividend results in return in excess of 3.2% even after the recent market increase in our stock value.

Over the last two years, we’ve increased our annual dividend by a total of $0.08, or 10.5%. During 2013, we repurchased approximately 420,000 shares at an average price of $25.89. As a result of the Metropolitan acquisition, we suspended the stock repurchase program during the third quarter.

Net interest income for Q4 of 2013 was $39.6 million, an increase of $9 million, or 29.5% compared to Q4 of 2012. This increase was driven by growth in our legacy loan portfolio, earning assets acquired through the Metropolitan transaction and an increase in accretable yield on acquired loans. Net interest margin for the quarter was 4.7%, a 71 basis point increase from the same period last year.

As discussed in previous conference calls, the interest income on acquired loans includes additional yield accretion recognized as a result of updated estimates of the fair value of the loan approvals acquired in our FDIC acquisitions.

In Q4, actual cash flows from our acquired loan portfolio exceeded our prior estimates. As a result, we recorded an $8.8 million credit mark accretion to the interest income. This was a $6.2 million of the incremental increase in accretion from the same quarter last year, a 67 basis point positive impact on margin.

Total accretable yield recognized during the fourth quarter was $10.4 million. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. The impact to non-interest income for Q4 2013 was an $8.4 million reduction.

Non-interest income for Q4 2013 was $7.7 million, a decrease of $7 million or 47.7% compared to the same period last year. The decrease was primarily driven by a $5.9 million increase in FDIC indemnification asset amortization. Also, included in last year’s non-interest income was a $2.3 million bargain purchase gain on our Q4 FDIC-assisted acquisition with Excel Bank at Sedalia, Missouri.

Normalizing for the nonrecurring gain and the incremental increase in the indemnification asset and amortization, non-interest income for Q4 of 2013 increased by $1.1 million or 7.5%. The most significant items in non-interest income were the incremental partial quarter impact in Metropolitan of $1.8 million and legacy mortgage lending income decreased by $864,000 compared to last year because of substantially lower refinancing volumes due to a market driven increase in mortgage rates.

Pre-tax non-interest expense for Q4 was $41.7 million, an increase of $9.5 million compared to the same period in 2012. Included in Q4 2013 non-interest expense were the following major items. Merger related costs for our acquisition of Metropolitan totaled $6.4 million during Q4 2013. During the same period last year, we recorded $1.1 million in merger related costs for our FDIC-assisted acquisitions.

As a result, total merger related expenses increased by $5.3 million from last year. We closed one underperforming branch during the quarter, incurring one-time costs of $108,000. Also during the fourth quarter, we had $8.7 million in incremental normal operating expenses attributable to the addition of the Metropolitan operations.

Excluding the nonrecurring merger related costs, branch right sizing expenses and the Metropolitan operating expenses, non-interest expense increased by $332,000, or 1.1% on a quarter-over-quarter basis. Expense control remains good and we continue to search for additional efficiency opportunities.

Our combined loan portfolio was $2.4 billion, an increase of $484 million or 25.1% compared to the same period a year ago. On a quarter-over-quarter basis, acquired loans increased by $369 million net of discounts, while our legacy loans increased $113 million, or 7%. Excluding a decrease in student loans, which is no longer a part of our lending initiative, our legacy loan growth was $122 million, or 7.7%.

We are encouraged by the continued growth in our legacy loan portfolio during the fourth quarter. The 8% organic growth represents a significant improvement over the last three years and Q4 marks the fifth consecutive quarter with legacy loan growth on a quarter-over-quarter basis. The growth was driven by $102 million increase in real estate loans and a $28 million increase in commercial loans, partially offset by an $8 million decrease in consumer and other loans.

We continue to have good asset quality. As a reminder, acquired assets were recorded at the discounted net present value. Additionally, acquired assets covered by FDIC loss sharing agreements have provided 80% protection against possible losses by the FDIC loss share indemnification.

Therefore, all acquired assets are excluded from the computation of asset quality ratios for our legacy loan portfolio. It is important to remember that the acquired non-covered loans are protected by a credit mark and the acquired covered loans are protected by a credit mark and 80% loss coverage by the FDIC.

At December 31, 2013, the allowance for loan losses was $27.4 million and the loan credit mark was $101.4 million, for a total of $128.8 million of coverage. This equates to total coverage ratio of 5.1% of gross loans. The ratio of credit mark to acquired loans was 13.4%. The allowance for loan losses equaled 1.57% of total loans and approximately 298% of non-performing loans.

Non-performing loans as a percent of total loans were 52 basis points, down 3 basis points from last quarter. At December 31, non-performing assets were $74.1 million, an increase of $38.2 million from the prior quarter. Included in this total was $42.1 million of acquired non-covered OREO, net of the credit mark from the Metropolitan acquisition.

The annualized net charge-off ratio was 22 basis points for the full year of 2013. Excluding credit cards, the annualized net charge-off ratio was only 15 basis points for the full year. Our credit card portfolio continues to compare very favorably to the industry. Our annualized net credit card charge-offs to loans was only 1.31% for Q4 and 1.33% for the entire year.

Our loss ratio continues to be nearly 200 basis points below the federal reserves, most recently published credit card charge-off industry average of 3.24%. For Q4, the provision for loan losses was $1.1 million, flat compared to the previous quarter and $211,000 lower in the same quarter of 2012.

Before I close, let me update you on the Metropolitan acquisition. The loan, OREO and fixed asset mark is $81.5 million, relatively close to our original projection of $84.4 million. While we have not experienced the full impact of cost savings until the third quarter of 2013, we still project savings of 35% on an annual basis. We’ve made substantial progress on our operational integration in our system conversion we scheduled through March 21.

After the survey of our combined pro forma footprint, we identify 27 branch locations that will be operating in close proximity will not meet our performance expectations within the near future. These branches are scheduled to close in consult with our systems conversion.

We are convinced with the resulting branch footprint of 28 Central Arkansas branches and 10 Northwest Arkansas branches were the last provide enhanced quality service to our customers, including additional financial services and an improved branch staffing model, 11 of the closed branches are legacy Simmons First locations and we estimate after-tax branch closure expenses will approximate $3.5 million during Q1 of 2014.

Our shelf offering filed in 2009 recently expired. We intend to file a universal offering in the first quarter to ensure that we are prepared for opportunities that may require additional cash.

In closing, we remind our listeners that Simmons First experiences seasonality in our earnings due to our agricultural lending in 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.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll move first today to Brian Zabora with KBW.

Brian J. Zabora – Keefe, Bruyette & Woods, Inc.

Thanks. Good afternoon.

George A. Makris Jr.

Hello, Brian.

Robert A. Fehlman

Hi, Brian.

Brian J. Zabora – Keefe, Bruyette & Woods, Inc.

Yes, I have a question maybe to start with the margin. We have a full quarter of Metropolitan. Any sense of what that margin could be compared to the fourth quarter?

Robert A. Fehlman

Yes, Brian, this is Bob. I would say, first, we’d obviously had a pretty big pick up from September through December going from $4.27 to $4.70. The biggest piece of that pick up was the accretable yield with the excess credit mark that we had. And I would say that piece with the excess was somewhere between 80 basis points and 100 basis points. Metropolitan will be accretively a concern yet what – the amounts for the excess will be a little bit lower on a quarterly basis going forward. But I would tell you that going forward, we are probably in that $4.60 of the $4.70, $4.75 range on a go forward basis.

Brian J. Zabora – Keefe, Bruyette & Woods, Inc.

Great, that’s very helpful. And then your question, maybe a follow on accretion income. Thank you for putting the 2014 estimates in the press release. When we look out to the 2015 and beyond, it looks like accretion is still pretty sizable above $11.6 million, and what’s left on the FDIC, the indemnification expectations, we’ve been running out, it’s only about $5 million or $5.5 million. And this going to be – your accretion can be over a couple of years or is it going to be, I guess you see a lot more benefit maybe in 2015 that we do in 2014?

Robert A. Fehlman

Yes, and just a reminder how we take care and have to take care of the accretion and the indemnification. The indemnification is we’ll knock over the shorter of the life of the loan or the agreement with the FDIC, so that obviously the expense on that is much higher and quicker on the amortization. On the income side that’s accredited to income, it’s over the life of the loan has no relevance to what the FDIC agreement is.

So we’ll get to the point down in 2015 and 2016, where some of our earlier deals FDIC have gone away with the coverage and so all of that will be going to income. So yes you’ll see them in those later years where the income piece of that will be higher than we’ve seen in these last couple. But as you’ve seen in the press release, we have again $21 million in 2014 kind of the interest income, 20%, 26% and then after that a probably a higher piece would be in income than the experienced piece that we have to write off.

Brian J. Zabora – Keefe, Bruyette & Woods, Inc.

Great. Well, thank you for taking my questions.

Robert A. Fehlman

Sure. Thank you, Brian.

Operator

(Operator Instructions) We’ll go next to Matt Olney with Stephens.

Matt Olney – Stephens, Inc.

Hey, guys. How are you doing?

George A. Makris Jr.

Hi, Matt.

Robert A. Fehlman

Hi, Matt. How are you?

Matt Olney – Stephens, Inc.

Hey, I’m doing well. Hey, I wanted to ask about your overall capital levels. I heard you mentioned the shelf filing that you expect and you deployed a big chunk of the excess capital of Metropolitan. How are you thinking about capital today relative to your overall M&A expectations?

Robert A. Fehlman

Matt, I’ll – to answer that, the Metropolitan deals all cashed, they do take quite a bit of our capital to do that. We got down to 7.2% of TCE and that’s traditionally a little lower than where we like to be, but we would expect to be close to 8% by the end of 2014. We continue to look at opportunities for traditional M&A. Our preference in most of our discussions today had been either all of the majorities, stock, deals.

So we don’t anticipate any deals coming down the pike or might come down the pike, this would require additional capital that you’re familiar with our history, and we really don’t like to cut it close. So, we want to be prepared in case we find an opportunity that has a cash component that would require us to go to the market and raise a little additional capital. But nothing is required at this point.

Matt Olney – Stephens, Inc.

Okay.

Robert A. Fehlman

At this point, I am just going to point out also, as George said on the deals we’ve been able to price at this point anything looking forward, the capital has been either neutral or accretive.

Matt Olney – Stephens, Inc.

Okay.

Robert A. Fehlman

So it will still have capacity in there if you would look forward.

Matt Olney – Stephens, Inc.

And how should we be thinking about the timing of adding potentially another acquisition. Is there anything that prevented an acquisition the first half of the year or how you’re thinking about timing going forward?

Robert A. Fehlman

Well, obviously, we have to talk to the regulators and make sure that they feel the same way we feel. But I would tell you that the Metropolitan transition has gone better than expected. I would tell you that the production folks have done a great job and our leadership in Milwaukee and Northwest Arkansas is really taking the ball in the runway with regard to production. Now we’ve got the conversion which can happen on March 21, that will be the really the last piece of the Metropolitan acquisitions and merger. And I feel very good about how that process is going, and I feel like very shortly after that we would be in a position to tackle another opportunity.

Matt Olney – Stephens, Inc.

Okay, that’s helpful. And then as far as one of your other priorities over last year had been bringing on new lenders. Is that still a big priority of yours today, or has that really slowed down recently with the integration Metropolitan Bank, and what’s the outlook for bringing on new lenders in the future?

Robert A. Fehlman

Matt, we are always interested in good production people. And I would tell you that will probably never go away. We probably don’t have that same sense of urgency today that we had a year ago, because we formally own now FDIC acquisitions we really had no production staff to speak out in Missouri and Kansas. So we hired seven new lenders there. They put on the books more than $70 million by year end. We expect them to continue that kind of production into 2014, because really most of them didn’t start until mid-year. So that $70 million of production was only six months lower sales now you always do in the market.

We’ll continue to look in those markets particularly the new production people was refining it to [indiscernible]. We do have several new lenders through the Metropolitan acquisition in Central Arkansas and Northwest Arkansas. We’ve picked up a wonderful mortgage lending group as we are often thought of in the Central Arkansas market. So while we might not be out actively looking for additional lenders, we picked up several in that acquisition, but we expect growth very strong.

David L. Bartlett

Matt, one other thing. This is Dave Bartlett. One other thing too with the Metropolitan lenders that have come onboard, they’ve been a little [Indiscernible] with the opportunities they could – we have and try to put together because of their agreements with the regulators. And those been out of their way, there is some production opportunity they’re excited about. So I agree with what George has said, I think we’ll see some nice loan production – new loan production out of those offices as well.

Matt Olney – Stephens, Inc.

Sure, that makes sense. Thanks, guys.

George A. Makris Jr.

Thank you.

Operator

(Operator Instructions) And at this time, we don’t have any further questions. Mr. Makris, I’ll turn the conference back to you for closing remarks.

George A. Makris Jr.

Okay. Thanks to everyone that called in and thanks to Brian and Matt for your questions and we look forward to another good quarter, and we will talk to you in about three months. Have a great day.

Operator

And that will conclude today’s conference. Again, we thank you all for joining us.

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