Simmons First National Corp (SFNC) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Melissa, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Simmons second quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2 on your telephone keypad.

Thank you.

Mr. Crow, you may begin your conference.

Thank you, Melissa.

Good afternoon.

I'm Barry Crow, Chief Financial Officer of Simmons First National Corporation, and we want to welcome you to our second quarter earnings teleconference and webcast.

Here with me today is Tommy May, our Chief Executive Officer.

The purpose of this call is to discuss the information and data provided by the company in our regular quarterly earnings release issued this morning.

We will begin our discussion with prepared comments, and then Mr. May and I will entertain questions.

We've invited analysts from the investment firms who provide research on our company to participate in the question and answer session.

Our other guests in this conference call are in a listen-only mode.

Our goal is to make this call as useful as possible for each of you in understanding the future plans, prospects and expectations for our company.

To that end we will make certain forward-looking statements about our plans and expectations of future events, including statements about our goals and expectations for net income, earnings per share, net interest margin, net interest income, non-interest income and expenses, and asset quality.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call.

For more information concerning the risks associated with our business you should refer to the forward-looking information caption of our annual report on Form 10-K and other public reports filed with the S.E.C.

Now, with that said, I will turn the call over to Mr. Tommy May.

Thanks, Barry, and welcome, everyone, to our second quarter conference call.

Today our company announced record second quarter earnings of $6.5 million or 45 cents diluted earnings per share for the quarter ended June 30, 2003.

These earnings reflect a 5 cent or 13% increase in diluted earnings per share on a quarter-over-quarter basis.

Needless to say, we were pleased with the results of the quarter.

And we think it is important to note that during Q2 we had a non-recurring 3 cents addition to earnings.

And let me take a minute to explain.

As we reported to you earlier this year, on June 30, 1998, the company sold its $1.2 billion residential mortgage servicing portfolio, and as a result of this sale the company established a reserve for potential liabilities due to certain representations and warranties made on the sell date.

The time period for making claims under the terms of the mortgage servicing reps and warranties expired on June 30 of this year.

Thus, the company reversed the remaining reserve in Q2, which resulted in a $771,000 pretax gain.

Excluding this non-recurring gain, the company would have reported 42 cents diluted earnings per share for the second quarter of 2003.

Net interest income for the second quarter increased $207,000, or 1.1% over the same period last year.

Total interest income was down on the quarter-over-quarter basis by $1.9 million due to a 57 basis point decrease in our yield on earning assets, again, primarily associated with the decline in interest rates.

Correspondingly, total interest expense decreased $2.1 million or a 57 basis points drop in cost of funds.

As a result, while the spread remained unchanged, the quarter-over-quarter net interest margin declined slightly by five basis points from 4.45% to 4.40%.

Non-interest income for the second quarter, excluding the non-recurring gain previously discussed, was $9.6 million compared to $8.5 million for the same period in 2002.

This represents a $1.1 million or a 13% increase.

This increase can be primarily attributed to the improvement we have experienced in our mortgage loan production units and investment banking, which were once again driven by the lower interest rate.

Non-interest expense for the second quarter of 2003 was $17.9 million, an increase of $1.1 million or 6.5% from the same period in 2002.

This increase is primarily the result of an $800,000 increase in salary and employee benefits, which is principally associated with normal salary adjustments and increased cost of health insurance.

Concerning our loan portfolio, you may recall earlier this year we noted a slowdown in consumer spending resulting from economic conditions and increased competitive pressure in credit card and indirect lending.

As a result, our credit card and consumer lending portfolios have decreased $37 million or 12% over the same period last year.

The consumer market continues to be a challenge today.

On a brighter note, we were particularly pleased with the 67 million, or 25%, growth in our commercial real estate portfolio.

As you may recall, we previously noted there were several commercial loans in the pipeline that we fully expected to fund this year.

Many of these projects have now funded, and while overall loan demand remains a challenge, we still have a decent pipeline for the balance of '03.

Because of the success of the commercial real estate portfolio as of June 30, '03, loans totalled $1.3 billion, an increase of $39 million over the same period last year.

We continue to be pleased with the trends we are seeing in our asset quality.

Our non-performing loans decreased $2.2 million, or 19%, from this time last year.

As of June 30 the allowance for loan losses as a percent of total loans equaled 1.73%.

The allowance for loan losses improved to 191% of non-performing loans.

We continue to see improvements in our net chargeoff ratio.

The annualized net chargeoff ratio in Q2 was 57 basis points versus 64 basis points the same period last year.

While our net chargeoff ratio appears higher than our peer, it should be noted, as we have noted before, that our credit card net chargeoff represents 34 basis points of the 57 basis points.

Further, the credit card net chargeoff ratio is 2.7% of the average credit card portfolio, which compares favorably by some 350 basis points, better than the industry average of 6.2%.

To recap, while we expect to see continued improvements in our overall chargeoff ratio in '03, because of our credit card portfolio, our chargeoff ratio will always be a bit higher than tier.

As previously discussed, the company has a stock repurchase program that authorizes the repurchase of up to 800,000 shares when adjusted for the 2 for 1 stock split completed on May 1, 2002.

During the second quarter the company repurchased 50,000 shares of stock with a weighted average repurchase price of $19.66 per share.

To date, under the current stock repurchase program, the company has repurchased 712,000 shares of stock, with a weighted average repurchase price of $12.40.

We fully expect to renew the repurchase program upon the completion of the current plan.

As a matter of information, on August 1, the ticker symbol for Simmons First will change from SFNCA to SFNC.

We believe this change will more accurately align our identity on Wall Street with the company's name, and make it more representative of our corporate name.

We expect to send out a press release as a reminder just prior to the change.

That concludes our prepared comments, and we would like to now open the phone line for questions from our analysts.

Let me ask Melissa to come back on the line, and once again, explain how to queue in for questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Joe Stieven with Stifel, Nicholas.

Hi, Tommy.

Hi, Barry.

Hey, Joe.

Hey, Joe.

Just a couple things.

Number 1, you know, there's a -- since your last quarter, there's been a deal announced down in your neck of the woods Superior is selling out.

Does that present any opportunities for you with having some more internal consolidation estates?

That's question number 1.

And question number 2 is, that, you know, with the fed action, you know, right at the end, or actually just a couple weeks ago, will that put a little pressure on the margin in the third quarter?

And then, the final thing is, watch list credits and things like this, any type of movement there at all, one way or the other?

Thanks, guys.

I didn't hear the last one, Joe.

Would you repeat it?

Sure.

Like, internal watch list and going past the non-performers, drilling down a little bit to get into watch list credits, any type of trends there going on?

Okay.

Thanks.

Let me start I guess, with your first question relative to the recent M&A that was announced in our area.

We do have several markets where we do overlap with the acquired institution, and we -- you know, we do believe there will be some opportunities there.

Whether they will be at the level that we've seen at the past, I doubt, especially since they're merging with an Arkansas company.

But I -- yeah, I think there are some opportunities there.

Concerning the question on fed action, yeah, we do feel like we're going to have some compression in our margin with the most recent discount rate adjustment, but I guess our bigger concern would be anything after this one.

We are able to adjust the liability side of our balance sheet, I think, decently this last time, but, you know, I'm concerned as to how much repricing can take place in the future with deposits as low as they are.

But yes, we do see some potential compression, at least on the downside of reduced interest rates.

Finally, on the credit quality side, I would say that when you, kind of, drill down through the past dues, first of all, the 30s, the 60 to 90, and looking at migration and looking at the improvements that we've seen, not only in non-performings, but also in classified assets, you know, I just see some positive in all that, and I would -- I'd like to think that that trend will -- you know, will continue.

Obviously, a lot of that depends on the economy that is out there, but that -- you know, our look at it right now, I think, has been very favorable.

That's good.

Okay.

Thanks, Tommy.

Thank you, Joe.

Again, if you would like to ask a question, please press star then the number 1 on your telephone keypad.

Your next question comes from Peyton Green, SPN Midwest Research.

Hi, Peyton.

Good afternoon.

A question: the credit card portfolio, you mentioned there's some pressure on balances there.

But the fees year-over-year have held up really well.

What should we expect in that area going forward?

Peyton, I think, first of all, the year-over-year improvements, a lot of that came as a result of the usury change.

We were able to, I guess, price to market on certain fees in our credit card operation that we, you know, heretofore could not do.

So, I think we've been very pleased with that.

I think that the biggest challenge that we have on the fee is in the membership fee portion of our portfolio.

You know, we continue to have a membership fee in a large part of our portfolio, and with all the competition out there, that's probably under the -- the greatest pressure that we've seen.

I think the other thing is that we believe that we've probably, you know, priced our portfolio -- you know, we're still a little bit below the market and there is some upside potential there.

But you know, we pretty well priced the fees that can be priced and that are relatively competitive in the market.

So, I think we'll hold our own there.

I don't think we'll continue to see the increases like we've had.

But our biggest challenge is going to be on the membership side.

Okay.

And then on the credit card balance issue, do you think -- I mean, is a lot of this being recaptured by residential refinance and they're paying you off and it will go back up over time, or, I mean, are you seeing customers cut them up and move on?

Peyton, I think a combination.

I think certainly the -- the refinance, probably the entire industry, is seeing more dollars moving out of its portfolio because of the residential refinance opportunities that some customers have that they have not had over the last many, many years.

So, I think that is a challenge.

I think for us, probably, the greater challenge is that there is just so much competition for the credit card dollar out there.

We all know about the gimmick interest rates and the no fees.

And the customer has become very, very sophisticated, and, you know, they're not fooled in the process.

They'll move for six months and then move somewhere else.

But the fact is, that won't continue forever.

I think there will be some reasonableness to come back to the market, ultimately.

I will tell you that one way that we're trying to deal with it, you know, used to, our growth would come because our interest rate was more competitive than anybody else, and I just don't think that world is here anymore.

I do believe that there are a lot of smaller institutions, not only in Arkansas, but other states, that have developed their own portfolio.

They just decided that, you know, we're going to do our own real estate -- I mean, our own credit card lending and let somebody else process it.

And I think that we're seeing that some of those institutions may have decided that that's not exactly what they want to do because they cannot build critical mass, and you can't make a living unless you have critical mass at it.

So, I believe that we're going to be able to, maybe, grow our portfolio on the volume side by making some acquisitions of those smaller ones that are out there.

Any particular regions that you would be more focused on, or is it a nationwide approach?

I think it's probably -- you know, like in New Orleans, one of the things that I did is I showed the regional distribution of our credit card portfolio based on the asset quality.

And there are certain regions in the state where the, you know, the challenges might be a little bit greater than others.

I think, generally, we would look just about anywhere, but probably the Midwest, Southeast is where our focus will continue to be.

Okay.

And then on the commercial loan side, not the commercial real estate, but just simply the traditional C & I, the numbers were down pretty significantly late quarter and down pretty significantly compared to a year ago.

Yeah.

Can you elaborate a little bit on what your commercial customers are doing or not doing, and what your prospects are in that business going forward?

I think, probably on a -- just from a standpoint on a quarter-over-quarter basis, when you looked at the commercial portfolio, a lot of that has to do with what the customers are not doing.

You know, we had some lines of credits that were funded back this time last year, and they were still, you know, the businesses were still active.

You know, the uncertainty that has been in the economy, they have become less active and we have not, you know, we've just not had some of those loans to -- or some of those lines to fund.

And a couple of them were pretty large lines of credit that we are not only an in-house limit lender on, but we also facilitate to other correspondent banks.

They just haven't had the demand out there.

And I think beyond that, it's really just an issue that we're not seeing the opportunities in a lot of the mid-sized commercial loans that we would like to see.

And when we see 'em -- I mean, we're seeing 'em, just like everybody else.

But it is a very, very competitive issue, and we'll compete on the price side, but we're not going to compromise our standards right now.

So, I just think that what we've seen is, it truly reflects the economy that we're in, number 1.

And number 2, a part of it has to do with we just had some large loans, that we still have the lines of credit, they're just not funding.

Okay.

So, it's a funded balance issue, not a commitment slippage?

Absolutely.

Okay.

Great.

Thank you.

Thank you.

Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

At this time there are no further questions.

Okay.

Well, thanks, everyone.

We enjoyed being with you and we look forward to next time.

Thank you very much.

Thank you for participating in today's Simmons second quarter earnings release conference call.

You may now disconnect.