Simmons First National Corp (SFNC) 2003 Q4 法說會逐字稿

Good afternoon.

My name is Debbie and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Simmons First National first quarter conference call.

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

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

If you would like to ask a question, press star, them 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, Debbie.

Good afternoon.

I'm Barry Crow, Chief Financial Officer of Simmons First National Corporation.

We want to welcome you.

With me today is Tommy May, our Chief Executive Officer.

The purpose is to provide the data of our regular quarterly earnings release issued this morning.

We'll begin with prepared comments and Mr. May and I will entertain questions.

We have invited analysts from investment firms who do research on our companies to participate.

Others are in a listen only mode.

Our goal is to make it as easy as possible to understand the future plans, prospects for our company.

To that end we will make certain forward looking statements about our plans and expectations for 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 risks and uncertainty some of which we will point out during this call.

For more information concerning the risks associated with our business you should look at the form on 10-K and other public reports filed with the S.E.C.

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

Thank you, Barry.

Welcome, everyone, to our fourth quarter conference call.

Today, Simmons First National Corporation announces record earnings of $23.8 million or $1.65 cents diluted earnings per share for the end of December 31st, 2003.

They reflect 11 cents for 7.1% increase in diluted earnings per share on a year-to-year basis.

Return on average assets and return on average stockholder equity for year ended Dec 31st 03 was 1.18% and 11.57% compared to 1.12% and 11.56% respectively for the year ended 2002.

The increase in 2003 earnings over 2002 is primarily attributable to the increase in the company's mortgage production volume, investment banking revenue, the growth in lone portfolio, and a lower provision for loan losses which correlates to improved asset quality.

Needless to say we were particularly pleased with the results of 2003, since we were reasonably close to our own expectations.

At our Q 2 and Q3 teleconferences we discussed an non-reoccurring income related to a reserve that had been established in conjunction with Reps and Warney’s associated with the 1998 sale of mortgage servicing.

Excluding this non-reoccurring item, the company would have reported $1.62 diluted earnings per share for the year ended December 31st, 2003.

Earnings for the three month period ended December 31st were $5.3 million or 37 cents diluted earnings per share, compared to $5.7 million or 40 cents for the three month period into December 31st 2002.

These earnings reflect a 6.1% decrease in net income, and a 7.5% decrease in diluted earnings per share, over the fourth quarter last year.

The decrease in 2003 Q4 earnings versus Q4 last year is primarily attributable to a lower refinancing volume in the company's mortgage production, and reduced revenues and increased expenses from the company's bankcard operations.

We will discuss these items in more detail later during the teleconference.

The company's net interest margin on a quarter over quarter basis declined by 24 basis points from 4.41% to 4.17%.

The yields on earnings assets declined by 81 basis points, while the cost of funds decreased 67.

While the company's earning assets increased a very respectable 9.2%, the resulting asset mix only produced an increase in net interest income of 3.6%.

This can be attributed to three factors.

The first is the high level of call securities and prepaid loans with interest rates being at historical lows over the last several months.

Second, while there was growth in the company's loan portfolio, two of the higher yielding products, credit cards and consumer loans decreased an average of $25 million on a quarter over quarter basis.

Lastly, while the recently completed acquisition is anticipated to be EPS accretive it does negatively impact interest margin approximately 10 basis points on a yearly basis.

Non-interest income for the fourth quarter of '03 was $9 million compared to $9.2 million for the same period last year.

This slight decrease can be attributed to the reduction we experienced again in our mortgage loan production volume.

For Q4, mortgage income, net of commissions was $792,000, or $489,000 less than the same quarter last year.

Like most of the banking industry, the mortgage production revenues allowed us to grow earnings in a low interest rate environment.

The challenge going forward is that the market has slowed significantly, even with 30 year rate at less than 5.5%.

To compound the problem, the experts expect to see higher interest rates during 2004, which will naturally result in a continuance of reduced revenues from this source.

Additionally, credit card fees declined $219,000 on a quarter over quarter basis.

This decline is the result of an ongoing reduction in the number of cardholder accounts, due to the competitive pressure in the credit card industry.

Non-interest expense for the fourth quarter of '03 was $19 million, an increase of 1.4 million or 8.1% over the same period last year.

This increase is primarily the result of an increase in salary and employee benefits, and credit card expenses.

The salary and employee benefit component is principally associated with normal salary adjustments and increased cost of health insurance.

The credit card expense increase was primarily attributable to the company's airline miles reward program.

Based on our continuing analysis of projected air miles usage, we increased the estimated liability associated with this program by $500,000 in Q4.

As matter of note, 2003 was the company's third year in this program, which is typically the time frame when card holders have accumulated enough miles to begin exercising their accrued miles.

For 2004, the company is projecting a quarterly expense for airline miles reward of $115,000.

Concerning our loan portfolio, as of December 31st of 2003, we are pleased to report loans totaled $1.4 billion, an increase of $161 million, or 12.8% from the same period a year ago.

While the primary increase was due to the approximately 100 million dollars in loans acquired in the recently completed acquisition of nine branches from union planner's bank we were also pleased with the increase in lone construction portfolios.

As previously reported, portions of the customer market remains a challenge.

We continue to experience relatively slow customer loan demand, which we attribute to the general economic conditions and competitive pressures in the credit card and in direct lending.

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

As of December 31st, the allowance for loan losses as a percent of total loans equaled 1.79%.

In the allowance improved to 219% of non-performing loans.

The net charge-off ratio for the quarter was 77 basis points.

As mentioned in the previous teleconferences while our net charge-off ratio appears a bit higher than our peer it should be remembered our credit card net charge-offs represent 31 basis points of the 77 basis points.

Further the net charge off ratio is 2.6% of the average credit card portfolio, which is some 350 basis points below the industry average of 6.1%.

As previously discussed, the company has a stock repurchase program that authorizes the repurchase of up to 800,000 shares.

During 2003, the company has repurchased 82,000 shares of stock, with a weighted average repurchase price of $20.99 per share.

We have about 55,000 shares remaining.

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

Let me take a minute to update you on the company's recent acquisition activity.

First, as previously discussed, during the forensic of 2003, the company completed the purchase of nine financial centers in north central and northeast Arkansas with loans and deposits totaling approximately $100 million in loans and $130 million in deposits.

Second, the company also announced the merger of alliance Bancorp of Hot Springs into Simmons First National Corporation with assets totaling approximately $140 million.

The alliance transaction is expected to close in the first quarter of 2004.

These transactions, which are expected to be slightly accretive in 2004, allow us to fill a geographic void we currently have and reflect a vision Simmons First first to provide our customers statewide access.

After completion of the recent acquisitions, Simmons first corporation will have assets of approximately $2.4 billion with eight community banks conducting financial operations from 79 offices, of which 77 are financial centers in 45 communities.

All in Arkansas, by the way.

As we look toward 2004, we expect the volume of mortgage loan production to return to more normal levels.

Competitive pressure on our consumer loan and credit card portfolios will likely continue to be a challenge.

Our net interest margin will be slightly compressed, in a rising rate environment, and as we have previously discussed, and reported, the 2003 earnings per share did include non-reoccurring gain of 3 cents per share.

As a result of all these issues we expect to see only a modest increase in earnings per share in 2004.

We remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and credit card portfolios.

And quarterly estimates should always reflect this seasonality.

That concludes our prepared comments and we would like to now open the phone line for questions from our analysts and let me ask Debbie to come back on the line and once again explain how to queue in for any questions.

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

We'll pause for just a moment to compile the question and answer Roster.

Your first question is from Barry McCarver with Stevens, Incorporated.

Good afternoon

How are you?

I'm doing great, how about yourself

Good.

Tommy, a little clarification on the statement you made about 2004 expectations.

Are you suggesting '04 is going to with flat with '03 including the non-recurring gains we had in '03?

I don't think so.

I think what I'm suggesting is that we will again -- our expectations would be a -- yeah, a modest increase from the $1.65 level.

Okay.

Can you talk a little about if you have seen any change in, you know, I guess, just general loan demand in the last part of the year, anything here in January, and then secondly, talk a little bit about the acquisition pipeline, and just, if you can, once again, give us a little description over the type of acquisitions you're looking for.

Okay.

Let me start with the first one, I guess, loan demand.

I believe, as we look at our pipeline, we another seeing a little bit of something that would give us some levels of optimism in central Arkansas.

Also, in northwest Arkansas.

And then in a couple of our markets in northeast Arkansas.

Most of that like we have seen this year, is in the commercial and commercial real estate area.

I think, in the credit card portfolio, where we obviously would love to see some increase demand, and our challenge there is not necessarily the volume of our existing customer base, our challenge there is all these competitive gimmick pricings that are out there, that continue to be out there, that causes us to lose some of those relationships.

We're not seeing a turnaround in that right now.

We are introducing some new initiatives to work on that.

I do think the pipeline is reasonably positive.

For '04, in the -- in the commercial side.

And, again, primarily in growth markets.

Now, the second question had to do with the acquisitions.

I think, you know, we have stated that we really want to have a state-wide presence for our customer base.

We have filled the void this last year, two voids, I think, one in north central Arkansas, and then the other in a really good market, Hot Springs, Arkansas.

We still have a void in southwest.

We continue to look in the northeast to complement what we have, and we continue to look in central Arkansas.

So, that part of our acquisition strategy, you know, would kind of center around those regions.

I would tell you that we also would like to be looking -- you know, our stated objective, is that we want to move toward a level of having state-wide market share in the 10% range.

And you know, we're probably at about 5 1/2 to 6%, probably at 6% right now.

Now, to fill that, in the merger and acquisition side, I think we would be -- we would like to look at institutions that are probably in the $200 million and above and would be in the regions we've talked about.

We believe there's still opportunities there.

Great.

Thanks.

Okay, Barry.

Thank you.

Your next question comes from Joe Stevens with 5 fell Nicolas.

How are you?

Good.

My first two questions were answered regarding growth of acquisition and a little bit about the markets.

Can you talk a little bit more on your margin expectations?

You said that in a rising rate environment you start to feel a little pinch.

Wouldn't that be somewhat offset if we get a rising loan environment by a higher loan growth.

It would and I appreciate you saying that.

I was trying to say, right now, everybody's talking about interest rates rising in 2004.

Obviously, a whole lot of that is going to depend on what's happening with the economy and several other things.

We probably see our margin in a rising interest rate environment just a slight rise in the interest rate, to be slightly compressed if loan demand stays like it is right now.

If loan demand begins to come back into what we would call normal loan demand in Arkansas, with -- coupled with a rising interest rate environment, we would see that spread and margin to be flat.

Tommy, that's the margin ratio, actually your margin dollars would probably be moving forward still.

Oh, yes.

Absolutely.

I'm sorry.

Ratio only.

Okay.

Thank you.

Thank you.

Your next question comes from Peyton Green with FTN.

Good afternoon.

How are you, Peyton?

Fine.

I was just wondering if you could comment on the credit card business.

A couple of questions.

What is the credit card business generating, in terms of pretext profit for y'all and how much capital are you tying up with it?

Joe, we have about -- Peyton, we have about what is it, 100 --

About 165.

$165 million in our credit card portfolio.

So, you know, capital allocated to that could be in the $12 million range.

And as you know, we've got, you know, lots of capital.

That would answer your question relative to the capital.

What was the other part of the question?

I'm sorry.

What do you make from a pretax perspective, based on -- I mean the service charges and also allocating the costs.

About 15%.

It's about -- I think our yield, based on the current pricing of about 8.95 plus the interchange fees, and plus the membership fees that we’re actually getting would be somewhere in the 14% range.

And 14% of that would be, on a pretax basis, approximately $15 million.

Okay.

Then, from an expense perspective, what do you see, as the expense side of the equation?

Not necessarily from interest expense but the hard costs?

Well, I don't have -- Peyton, I don't have that number with me.

I can tell you, as far as from the standpoint of contribution, to the profit, the overall pretax profits, that number would be -- on the pretax -- about 30%.

Okay.

About 30%, Peyton.

Okay.

Great.

And then follow-up question.

In terms of the margin, and your interest rate sensitivity overall, what environment works better for you from an interest rate perspective?

I think a -- you know, we work well in any environment that is not volatile environment.

Any market that -- I mean, any environment that is not rapidly increasing or rapidly decreasing.

If we have a slow movement up or down, I think we do pretty well in, because we are in the corporation, we are reasonably matched, even though we have some mismatches in the different affiliates, the credit card operation, and that's one of the real benefits of it, the credit card operation, now that we have the Usury law change, gives us the ability -- the Usury law changes gives us the ability to be pretty perfectly matched in the corporation.

Looking at the fourth quarter margin why did they clip you more in the fourth quarter than previous quarters.

I don't think it did, in the fourth quarter.

I think what I was really saying is when I compared it to the fourth quarter last year and what we were saying is over the year, we had a lot of prepayments, Peyton, as everybody else did.

Not only the securities portfolio, quite honestly, pretty heavy in the loan portfolio.

I believe that's one of the things.

And the other issue on the margin, the spread and margin in the fourth quarter had to do with, again, these nine locations we acquired where we brought in $135 million in deposits.

After we went through our put-back arrangement on the portfolio, we brought in $100 million, or $99 million in loans.

So, we had quite an excess of liquidity during that period, on the average, that would affect the margin.

Okay.

I guess another way to ask it is if rates don't go up in '04, let's assume all the experts are wrong and rates go up in '05 but rates go up sharply in '05, what happens?

Do you think that gives you enough time for the margin to move up in the first and second quarter of this year, and then --

I think one of the challenges we have in the first and second quarter is going to be seasonality.

Okay.

Probably the bigger more significant quarters are going to be in the third quarter and fourth quarter.

But I can tell you that right now, as liquid as we are, even with -- if rates do go up, as some anticipate,, you know, I think, like I said, I think from a margin standpoint, we're going to be okay, as long as -- as long as it's not real fast.

Okay.

Thank you very much.

Thank you, Peyton.

There are no further questions.

Are there any closing remarks?

I don't think we have any.

We thank everybody for being here.

Thank you, and thank you for joining the Simmons First National fourth quarter earnings conference call.

You may now disconnect.