Simmons First National Corporation's (SFNC) CEO George Makris on Agreement to Acquire Citizens National Bank (Transcript)

| About: Simmons First (SFNC)

Simmons First National Corporation (NASDAQ:SFNC)

Agreement to Acquire Citizens National Bank

May 19, 2016 11:00 AM ET

Executives

David Garner - Chief Accounting Officer

George Makris - Chairman and CEO

Bob Fehlman - Chief Financial Officer

Marty Casteel - CEO, Simmons Bank

Barry Ledbetter - Chief Banking Officer

Analysts

Brady Gailey - KBW

Stephen Scouten - Sandler O’Neill

Operator

Good day, ladies and gentlemen, and welcome to Simmons First National Corporation Analyst Call. 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, David Garner. Sir, you may begin.

David Garner

Good morning, I'm David Garner, Chief Accounting Officer of Simmons First National Corporation. We want to welcome you to our teleconference and webcast. Joining me today are George Makris, Chairman and CEO; Bob Fehlman, Chief Financial Officer; Marty Casteel, CEO of Simmons Bank; and Barry Ledbetter, Chief Banking Officer.

The purpose of this call is to discuss the information and data provided by the company in our press release issued yesterday afternoon regarding the Citizens National Bank acquisition. We will begin our discussion with prepared comments, 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 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.

Forward looking statements regarding the Citizens National Bank acquisition are based on currently available information. Actual results could differ materially after the confirmation of this acquisition. Additional information on factors that might affect our financial results is included in our Form 10-K filing.

With that said I will turn the call over to George Makris.

George Makris

Thanks David, good morning and welcome to our conference call related to the acquisition of Citizens National Bank by Simmons First National Corporation. If you've not done so already, you may find our press release and presentation materials on our website www.simmonsfirst.com under the Investor Relations heading.

I'm happy to report that Simmons First has entered into a definitive agreement to acquire Citizens National Bank. Citizens is based in Athens, Tennessee. The transaction details are included in the presentation materials. Completion of the transaction is expected in the fourth quarter and is subject to certain closing conditions including approval by the shareholders of Citizens and customary regulatory approvals.

In our previous communications we expressed our desire to fill our footprint in East Tennessee with acquisitions that allow us to blend our operations. Citizens is located halfway between Knoxville MSA and the Chattanooga MSA, about 45 miles in either direction. Citizens' nine branches will complement our existing three locations in the Knoxville MSA. We will be a top 10 Tennessee deposit franchise.

We want to acknowledge the Citizens' management team for their exceptional co-operation during the due diligence process. We have full access to the loan documentation, OREO inventory and other pertinent information. Our diligence team did a thorough job reviewing the information and I'm confident we have adequately accounted for the risk in the portfolios including loans, OREO, fixed assets and investments. The specific marks for those portfolios are included in the presentation materials.

I'll now open the lines for questions from our analysts and institutional investors. Let me ask the operator to come on the line and explain how to queue in for questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW, your line is now open.

Brady Gailey

Hey good morning guys and congrats on this deal. I guess we can start -- this target did have some nice fee income businesses, trust, wealth management, brokerage and insurance. Are there any other fee based businesses that Simmons has that they're going to overlay on the target or vice versa? Are there any fee income businesses that the target has, that could be overlaid on the rest of Simmons network that could provide potentially some more earnings accretion over time?

George Makris

Well, I'll just touch on that briefly, then I may ask Marty to interject a little bit more. Obviously our mortgage business is pretty substantial period and we think there is an opportunity in the Citizens footprint to expand mortgage operations. Also our credit card operation it is in-house. It is a big piece of our business and we're looking forward to offering our credit card products to the Citizens customer base. So those would be two obvious areas of additional fee income where we see an opportunity. I will say this we're awfully excited about having a base for investments, insurance and trust in East Tennessee. It's going to be much easier to expand that business with the expertise that's already there than to start from scratch and Marty might want to expand a little bit on those comments.

Marty Casteel

Thank you, George. I do think you're exactly on target as far as the mortgage opportunity we can enhance what they already have in place, we’ll be bringing in some additional services that they currently do not offer through the mortgage origination process. I think complementary trust business will be banks with opportunity for us to grow, they have a good base we have a long history and we can add some additional benefit in the employee benefits and services that they are currently having lot of opportunities with. But trust will be a big emphasis for us as well as mortgage.

Brady Gailey

And then when you combine the loan in OREO market, 10.5 million. How much of that do you think will actually go to credit losses versus potentially coming back and through margin through yield accretion?

George Makris

That’s a good question. Our initial estimates would probably be about 30% would be non-accretable and the difference been accretable over the life of those loans.

Brady Gailey

And then just looking back through the historical financials of the target, I mean it looked like a few years ago this was a company that had 13% to 14% NPAs. Could you just comment on -- they’ve made a lot of progress it's now down to I think under 3%, but what happened back then? How were they able to work down the NPAs?

George Makris

Well, let me make comment first and then Barry might want to be a little more specific. One of things that is real important to us is we take a look at potential merger partners, how did everyone do during the credit crisis. And obviously Citizens had some challenges, as did most banks including Simmons in specific markets. And I think there was market related as well. But we’re awfully impressed with is that the current management team successfully navigated through that crisis and in short order got their house in order. And others were not able to do that.

I think the franchise that we’re getting now with the levels of capital that they’ve built during that period of time, the business they've been able to retain, the personnel that they've been able to retain speaks how ready for their ability to navigate through some tough times in the banking industry. Barry might want to bring in a little more specifics about some of the issues that they faced, I'll just tell you they’re right part of a lot of tourism industry and that segment of the economy didn’t do real well in 2008. So, Barry do you have any other comments?

Barry Ledbetter

I think you’ve explained it well. I think they’re like all banks they struggled, they’ve had crisis like lot of people but they’ve consistently made a lot of positive progress on that. They brought in some people to help them with that and again we’re very-very impressed with their asset quality and the improvements they've made on.

Brady Gailey

And then finally from me, George, I know you’ve talked about doing two deals this year, staying under 10 billion in assets, this checks the box on one deal, do you still feel like another deal could potentially be in the mix for later this year?

George Makris

We’re optimistic, we’re not far enough along in any discussions to give to you any odds on that happening, but we continue to have what I consider to be very positive discussions with several institutions that fit into the Simmons organization very-very well. So we’re going to concentrate on integrating this one while we continue to look for other opportunities that we’re certainly not on the sidelines by any stretch of imagination.

Operator

Our next question comes from the line of [Aaron Vogel] with Stephens Incorporated. Your line is now open.

Unidentified Analyst

Good morning guys, this is Aaron filling in for Matt. How are you? First congrats on deal. I know you guys have talked about the mortgage and some of the other non-interest income expenses that drove to the East Tennessee market in Citizens National specifically. But is there any commercial opportunity out there within that Chattanooga and Knoxville market or is there any strategy to gain any more commercial loan exposure there?

George Makris

Well, we think absolutely. Let me give sort of give you a reference on our strategy here. So we've said for some time the corridor between Knoxville and Chattanooga is very attractive market for us. What we’ve done is we’ve started building the road from the middle, so now our objective is to finish it off at both ends. Quite honestly we have not been successful in finding good merger partners in the Knoxville area or the Chattanooga area thus far. So what we have done with acquisition of Citizens is we now have a base to support growth in East Tennessee. So we will be looking for executive and substantial talent in both the Knoxville and the Chattanooga markets, to be supported by the infrastructure of the Citizens Bank team.

So we see a heck of a lot opportunity going forward with our ability to recruit and provide resources to top notch provisioners in both the Knoxville and the Chattanooga market. Let me also say this, we see a lot of opportunities through the legacy Citizens franchise for increased opportunity based on our scale. So we have identified several participations of some larger loans that Citizens had originated that gives us a lot of optimism that they have the relationships already with commercial loan customers of substantial size. So we believe that we're going to open the door with additional resources and scale that Citizens can immediately take advantage of. Barry, do you any other comments on that?

Barry Ledbetter

I think you're right. I think one thing that's exciting to us is that -- the management at Citizens is excited about their relationships they already have in Knoxville and Chattanooga. And as George mentioned, I think one of the challenges they've had really with their size of the bank, their capital, lending limits things like that, they've had limitations that they're no longer going to have. So I would tell you that their management is excited about those opportunities plus we've already started discussions on the potential executives in each of those markets that we could hopefully have join the Simmons team. So we're excited overall, we think will really strengthen us in that East Tennessee market.

Unidentified Analyst

Okay, well that's great color guys, I really appreciate that. And then the last one I have is within the presentation you referenced that there was a third party review that was engaged based on the risk profile the institution. Is there anything unique to Citizens National in regard to that or is that typical procedures that you all follow on every deal?

George Makris

It's typical procedures. We use several third parties, they come in, take a look at IT contracts. We have a third party come in and do peer lending review. Those are just typical third party reviews that we use in most of our diligence process.

Unidentified Analyst

Okay great, well I appreciate it guys and once again congratulations.

George Makris

Thank you very much.

Operator

And your next question comes from the line of Stephen Scouten with Sandler O’Neill, your line is open.

Stephen Scouten

Good morning. Congrats on the deal here. Question for you, I know I heard you talking about kind of some of the motivations there and the strategy and maybe some larger loan sizes that you guys are able to take advantage of. But can you give me an idea on what you all think you can take advantage of from a concentration type when it comes to lending. Are there agriculture opportunities here that you see as advantageous or what's kind of the drill down on why these rural markets may be valuable to you apart from the geographic location in between Chattanooga and Knoxville?

George Makris

Well the first reason is they have a great market share in the markets where they are today and as we've said that's really important to us. In many of our markets we have a strong market share and we just understand your ability to integrate products and services when you already have that great customer base. So that's very appealing to us first of all.

Marty Casteel

Generally in that market there you have a pretty stable group of customers who are pretty loyal. It’s a community bank has a strong relationship to those borrowers. But we mentioned before, I think the most attractive thing to us is the opportunity to go north and south of Athens as far as Chattanooga and Knoxville, we're just going to expand our presence in East Tennessee and help us in that more than anything.

George Makris

We mentioned earlier, there may be a concentration in the tourism business, that's big business in East Tennessee. Citizens doesn't have necessarily a major concentration in the tourism business but they do have their foot in the door and certainly a lot of context. We don't expect a whole lot of agro business pickup, we're in the mountainous area of Tennessee so don't grow a lot of things we grow in South East Arkansas there. But we have a pretty strong consumer lending base. We mentioned mortgage, we mentioned credit cards. And they have a lot of consumers in their portfolio, so we think that there's an opportunity not to concentrate our lending but to actually spread that throughout their current customer footprint.

Stephen Scouten

Okay, yes, that makes sense. And then maybe as it pertains to the cost saves, the 25% cost saves have you put out a number in terms of the branches that you may or may not keep there, or given that most of these branches do have a larger market share, would you anticipate keeping most of these branches?

George Makris

Right now, plans are to keep all the branches. If you look at the map they don't have any concentration, there's several branches in a single market and all of them have substantial deposit base and customer base so our plans are to keep all the branches.

Stephen Scouten

Okay great, and then looking at their deposit mix. It looks like they had a kind of maybe a slightly disproportionate amount, a jumbo time deposits and just a few higher cost deposits. Do you think you could have some incremental benefit of remixing the balance sheet there from this acquisition? Because it looks their loans yields are actually pretty good, maybe 486 average loan yields. So, what do you think you can get done there?

Marty Casteel

Well, they did have a higher concentration of jumbo time deposits and what we do in our balance sheet. And we do think there maybe some room to improve the cost at once. But we are also understanding that they are a committed bank, and they’re banking to their customer base and we’ll be very diligent and concerned about how quickly we do anything regarding any re-pricing. But we do think there are opportunities.

George Makris

Well, firstly, for end markets…

Marty Casteel

That’s right.

George Makris

And their bank has a 75% loan to deposit ratio and sort of capacity there, and also our Company has plenty of liquidity. So, together, we think it will be a good fit to continue as a community bank, just like that. But we consider these to be core deposits.

Stephen Scouten

And then maybe one last question is just following up on Brady’s question from earlier about incremental M&A. Would you expect to be more focused on the potential for metro market expansion from here? And I know you’ve mentioned St. Louis in previous calls and other metro markets. Would that be your focus or is it just -- you’re going to go where the opportunities are regardless, and feel like you can benefit from both type of deals?

George Makris

Well, I would say we have a mixture of both in our queue right now; certainly, some of the metro markets where we have less of a share than we would like to have long-term, we can find a good partner there that would be a priority for us. But as we said before, we understand rural markets and profitability associated with great share in those markets. So we don’t turn our back on any of those opportunities either.

Operator

[Operator Instructions] Our next question comes from the line of John House with [Doya]. Your line is now open.

Unidentified Analyst

Great deal, I love the market you’re entering. On the cost saves not to -- this bank you are buying looks like it has a pretty high efficiency ratios. So, I would think maybe there is more on the cost saves. But will you let to turn that around, get the efficiency to your level, and use that to invest? Or is there potentially upside in the cost saves?

George Makris

John, I’ll address that first and then Bob could talk about the numbers specifically. But we believe that 25% is very conservative number. But we also see an opportunity to invest in that market. So, we earlier said that we’re going to be looking to hire talent in Chattanooga and Knoxville. So, as we experienced those savings, we will reinvest in that market and personnel, and that’s a lot of the upfront cost. So, we don’t want to be too aggressive about what we’re actually going to add to the bottom line for the cost saves because we intend to invest in those communities. So, we’re trying to be pretty conservative with regard to the financial impact of cost saves just out of that market altogether. And then Bob will speak more specifically with some…

Bob Fehlman

No, that’s exactly right. And then also in addition to that, remember we have a couple of locations in the Knoxville MSA. But this is really, as I go, and it is going into a new market. And so you’re going to have less cost saves than you would if we had branch overlaps, if you had other option overlap. So, we believe 25% is a good number to go in with our reinvestment strategy and also going into the new market.

Unidentified Analyst

No, that makes total intuitive sense. I just wanted to clarify building long-term value. I think it's all right. Great call, thank you. Good deal.

George Makris

Thank you, John.

Operator

At this time, I am showing no further questions. I would like to turn the call back over to George Makris for any closing remarks.

George Makris

Well, thanks to all of you for joining us this morning. I can’t tell you how excited we are about the opportunity to bring the Citizens’ associates and customers into the Simmons family. We think it's a great fit. And in fact we’ll be leaving here shortly headed Athens Tennessee and meet with associates and visit all the branches tomorrow. So, look forward to seeing all of our new family in East Tennessee, and thanks again for joining us this morning.

Operator

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

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