Simmons First National Corp (SFNC) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Regina and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Simmons first-quarter earnings 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. (OPERATOR INSTRUCTIONS).

Thank you.

Mr. Crow, you may begin your conference.

Good afternoon.

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

We want to welcome you to our first-quarter earnings teleconference and Web cast.

Here with me today is Tommy May, our Chief Executive Officer, and Bob Fehlman, our Chief Financial 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, Bob and I will entertain questions.

We've invited the analysts from the investment firms who provide research on our company to participate in the Q&A 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 and 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 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 SEC.

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

Thank you, Barry, and welcome, everyone, to our first-quarter conference call.

Today, Simmons First announced earnings of 5.4 million, or 37 cents diluted earnings per share for the quarter ended March 31, 2004.

These earnings reflect a slight increase of $79,000 in Q1 '04 earnings, compared to Q1 '03.

The extremely low interest rate environment in Q1 of 2003 produced unusually high demand in both mortgage production and investment banking products.

As such, even though interest rates remain low, the demand has been moderated.

Thus, on a quarter-over-quarter basis, net income was only up slightly.

Considering the reduced demand in mortgage production and investment banking products, we were relatively pleased at the level of non-interest income, since the increase was driven by the improvements in service charges on deposits and an increase in income from our student loan product.

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

On a quarter-over-quarter basis, the Company's net interest margin declined 36 basis points from 4.39 percent to 4.03 percent.

The yield on earning assets declined to 76 basis points, while the cost of funds decreased by 48 basis points.

The decrease in net interest margin can be attributed to several factors.

The first is the number of call securities and loans prepaid during 2003 and then resulting repricing when interest rates were at historical lows.

Second, while there was an overall growth in the Company's loan portfolio, two of the higher-yielding products, credit cards and consumer lending, decreased approximately $22 million on a quarter-over quarter-basis.

Lastly, while the recently completed acquisitions are anticipated to be EPS accretive in 2004, they do negatively impact net interest margin approximately 10 basis points on an annualized basis, primarily due to the additional debt incurred for these transactions.

Non-interest income for the first quarter of '04 was $9.6 million, compared to $9.3 million for the same period in 2003, or a 3.7 percent increase.

While the actual dollar increase is not significant, there are four key components of the non-interest income that do deserve discussion.

First, like most of the banking industry, the 2003 mortgage production revenues increased sharply because the volume of new and refinanced mortgages due to the low registered environment (sic).

Again, like most of the banking industry, beginning with Q4 '03 and continuing into Q1 '04, we experienced a significant slowdown in the volume of mortgage productions.

For Q1, mortgage revenues were 751,000 or a $413,000 decrease from the same quarter last year.

While we have seen a slight pickup of activity near the end of last quarter with the recent uptick in mortgage interest rates, we still expect to see a lower volume of mortgage production throughout the remainder of 2004.

The second issue in non-interest income -- during 2003, we also saw a significant increase in revenue from our Investment Banking operations.

This increase in '03 was driven by a low interest rate environment, coupled with significant liquidity, which resulted in increased activity in the bond market.

During Q1 '04, with an anticipation of an increase in interest rates during the year, we have seen a slowdown in activity in the bond market and revenues were down approximately $316,000.

The EPS impact of the first two non-interest income items that I've just discussed, mortgage production revenues and fees associated with the Investment Banking operations, there is a decline of approximately 3 cents per share for Q1 '04 versus Q1 '03

The third issue would be, on a positive note, in Q1, the Company saw a significant increase in service charges on deposits.

This increase can be attributed to the recently completed acquisitions, growth in our transaction accounts and improvement in the fee structure associated with our deposit accounts.

The last item in noninterest income that I'd like to visit on is student loans.

Throughout the year, as student loans reach payout status, the Company generally sells these loans into the secondary market.

Because of changes in the industry relative to loan consolidators, in order to protect our premium, we made the decision to sell some loans prior to the payout period.

This resulted in the earlier recognition of the premium in Q1 rather than as planned later in the year.

During Q1, 2004, premiums from the sale of these student loans totaled $607,000, an increase of $300,000 on a quarter-over-quarter basis.

Now, we estimate that $30,000 of this increase is associated with normal growth and will happen each quarter, 100,000 is associated with the sale of plus loans that we would normally keep in the portfolio, except they are now also subject to consolidators.

Then 170,000 would be attributable to the previously mentioned timing issue.

Now, let me move to the expense category.

Noninterest expense for the first quarter, '04 was $19.7 million, an increase of $1.5 million, or 8.2 percent, from the same period in 2003.

This increase is primarily the result of the normal, ongoing operating expenses of the recently-completed acquisitions.

Excluding the acquisitions, the increase in non-interest expense was a modest 3.3 percent.

Concerning our loan portfolio, as of March 31, 2004, loans totaled $1.5 billion, an increase of $247 million, or 19.6 percent, from the same period a year ago.

The increase was primarily due to approximately $168 million in loans acquired in the recently completed merger of Alliance Bank and the nine branches acquired in North Central and Northeast Arkansas.

Excluding these transactions, loans increased 6.5 percent on a quarter-over-quarter basis.

We were pleased with the increased loan demand in our construction and commercial real estate loan portfolios.

However, as previously reported, portions of the consumer market remains (sic) a challenge.

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

As of March 31st, the allowance for loan losses as a percent of total loans equaled 1.78 percent and the allowance equaled 170 percent of nonperforming loans.

The net charge-off ratio for the quarter was 51 basis points.

As we have mentioned in previous teleconferences, while our net charge-off ratio appears higher than our peer, it should be noted that our credit card net charge-offs represent 31 basis points of the 51 basis points.

The credit card net charge-off ratio for our company is 2.8 percent, which was some 330 basis points below the industry average of 6.1 percent.

Now, let me take a minute to update you on the Company's recent acquisition activity.

On March 19th, the Company completed the merger of Alliance Bank of Hot Springs, Arkansas, into Simmons First National Corporation with loans and deposits totaling 70 million and $110 million respectively.

This transaction, which is expected to be slightly accretive in 2004, allows us to fill a geographic void that we had and reflects the strategy of Simmons First to provide our customers with statewide access.

We expect to complete the product and systems conversion for Alliance within the next two weeks.

Today, Simmons First National Corporation is a financial holding company with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers (ph), Searcy, Russellville, El Dorado and Hot Springs, all in Arkansas.

Upon completion of a recently announced branch acquisition scheduled for June, the Company's eight banks will conduct financial operations from 79 offices, of which 77 are financial centers located in 45 communities.

You might be interested to know that, with the recent additions, Simmons First has financial centers in more communities in Arkansas than any other Bank except for one, which is a large interstate bank doing business in Arkansas.

As we look towards the remainder of 2004, we expect the volume of mortgage loan production to be at more normal levels.

We think that 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 interest rate environment and as we previously reported, in Q2 of 2003, earnings per share included a non-recurring gain of 3 cents per share.

Now, as a result of all of these issues, we continue to expect to see only a modest increase in the earnings per share in 2004.

We remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and also our credit card portfolios, and that quarterly estimates should always reflect this seasonality.

Now, that concludes our prepared comments.

We would like to now open up the phone line for questions from our analysts.

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

Thank you. (OPERATOR INSTRUCTIONS).

Barry McCarver with Stephens, Inc.

Tell me just a little bit more on net interest margin.

Your comment was that it would probably be a little compression there in a rising interest rate environment.

I don't believe we're going to have -- or are not likely to have interest rates come up, at least until the end of the year.

Could you comment a little bit about what your expectations are for at least maybe the second and the third quarter for net interest margin, kind of all things being equal?

We think that, you know, again, probably in an interest rate -- and probably I should've said this -- if we find ourselves in a rising interest rate environment in which the rates are rising at a pretty quick rate, then in fact we will have margin compression.

I think, under the scenario that you have set out, we would probably see some slight improvement in the margin in the third and fourth quarter.

Great.

Secondly, on the service charges being up a little bit in the quarter, do you kind of quantify how much of that was from a hike in fees on your part, and how much was from the other two factors you talked about?

Would you say that one more time?

I'm sorry, Barry.

On the service fees being up -- (multiple speakers) -- in the quarter, obviously we had the acquisition in there.

You commented on a number of factors that were influencing that.

One of them I noticed -- I think the third factor you said was some rising fees on your part.

It sounded like maybe you took fees up a little bit.

Can you quantify how much of that was affecting that and how much was just truly the acquisition?

I think the acquisition, you know, out of the $773,000 of the M&A activity would probably account for, say, 200 to $205,000 of that.

Then the growth in deposits would result in another 100 to $125,000 of that.

Then the introduction of an overdraft protection plan would balance that out.

Great.

Then just lastly, a couple of housekeeping questions for Bob.

Can you give us the diluted share count for the quarter?

Secondly, amortization expense?

Sure, we've got that.

The diluted share is about 358,000.

We had average shares outstanding of 14,181,000.

The amortization expense, net of tax, is about 109,000 per quarter.

Thanks a lot, guys.

John Rodis with Stifel Nicolaus.

I'm just wondering if you could talk a little bit about the M&A environment, what you guys are seeing and maybe your thoughts, just going forward, now with the completion of your current acquisition?

John, I think the environment is good right now for us in Arkansas.

I think we have several institutions out there that might have had some interest three or four years ago and did not pursue it.

Then obviously the M&A activity slowed down considerably.

I think now, with some of the things that have been announced, there are others that are now interested.

I think also, you know, with the increases that we've seen in stocks, the value of stock, I think that probably some of the prices that can be introduced to them is (sic) certainly more attractive and I think a lot of folks are looking at it from the standpoint of the stocks are in favor and they certainly are more interested in the stock side, tax-free exchange than just the cash side.

Then, on the other hand, we've got a lot of folks with the changes in the capital gains issues that are also interested on the other side.

So, I think the interest is there and it's been very positive and we're still looking.

So sellers' expectations are maybe a little bit more reasonable?

I believe so, yes.

Okay.

Another follow-up question just regarding loan growth -- when you talk to your lending officers and so forth, what are they telling you about customers and stuff?

Are people starting to draw down on lines?

Are you guys starting to see a lot of new customers maybe being interested in doing some deals on the loan side?

I think that probably -- you know, we felt pretty good about the non-merger increase that we saw in our loan portfolio at 6.5 percent all being, again, internal growth, especially factoring in the fact that we still had some challenges on the consumer side, meaning the competition taking away some of our credit card dollars and indirect lending dollars, to still be up net 6.5 percent internal was very, very positive.

When we start taking a look at it, you know, again, it's probably focused in three growth regions for the Company -- I mean, much of that growth being Northwest and Northeast and the central region of Northwest Arkansas -- Jonesboro and the central region.

Then we've picked up some moderate growth in some of the other areas.

So, I think what they are telling us, though, is that we are seeing some of the lines drawn on some of the mid-sized companies to some of the larger companies.

We're still seeing some growth in the -- or some demand -- in the commercial real estate area.

I don't think, on the consumer side, either direct and/or indirect and/or credit card, that we've seen a lot of anything that stimulates us there.

I will tell you, in our credit card portfolio, I mean, we kind of use that as a barometer of what the consumer is thinking.

I think we've seen the merchant volume go up on the merchant side, which tells us that people then our again starting to spend a little bit more.

So, we're hoping to see some positive results on the credit card side that would come from that.

Thanks, guys.

Peyton Green with FTN Midwest Research.

A couple of questions -- can you comment a little bit more about loan growth, going forward?

I mean, would you expect it to be kind of low single digits overall on a period-end basis over the balance of '04 from first quarter?

Then also, I mean, what do you expect to happen to your deposit base?

Let's just say market rates are a little bit higher, not necessarily fed rates.

Would you think you would start to see some deposit flows out?

I think, first of all, on the loan side, I think we still are I guess cautiously optimistic and we believe that we will still see the mid-single digits.

It's probably what we're forecasting right now.

I think, on the deposit side, like anyone else, we're trying to, at least on the CD side, to make sure that that deposit growth is managed based on the loan growth that we have to maximize that spread.

But outside of that, I do believe that we are starting to see a few dollars that were in the non-interest-bearing and in the savings-type accounts to begin to move a little bit towards the equity market.

I believe that probably there's still some risk dollars there.

Okay.

Then how much of the margin compression was related to the acquisition?

I don't guess much of it really would have been.

About 10 basis points.

Okay.

On the credit side, how much of the uptick in MBAs (ph) linked quarter, if you all had NPAs (ph) of about 14.9 at end of the year and it went up to 18.3.

How much of that was related to the acquisition?

Say that again, now.

Your nonperforming assets plus ninety-day past dues for -- (multiple speakers)?

It's about 600,000.

Okay, so y'all had some movement actually into NPAs (ph) from your portfolio.

Is that --?

Yes, we did.

I think I can tell you a little bit about that.

First of all, I guess that number was 700,000.

I don't know if I said 500, but I think the merger side was only about $700,000 of really clean portfolio.

I think that what we have seen is that one of our affiliates has some catfish -- quite a bit of dollars and even though it's a small percent of the total dollars, a few dollars in the catfish industry.

It has been under fairly significant pressure.

There's really one loan that they've had that has accounted for about $1 million moving into non-accrual because it went beyond the 90 days past due.

We really do believe and we've previously reported that -- we really do believe that that particular loan is well-secured by real estate and that we will work through that.

I think the other thing is that one of our banks has reduced or will reduce their non-accruals by $1.2 million by the end of next Tuesday.

The property actually has been sold -- I said 1.2, I think it's $1.4 million -- by the end of next Tuesday.

If you take that $1.4 million off of the non-accruals and the nonperformings, then it pushes that down from 105 to about .93 is what I remember.

How does your watchlist feel?

I mean, has there been any change in kind of the level of adverse credits one way or the other?

No, I think the migrations that we've seen in past dues, the migrations we've seen from watch to OAEM (ph) and substandard, I think we still feel pretty good about our asset quality.

I think it's really -- the changes that we've seen and the classifications are all really relative to an industry, and we're talking about the catfish industry right now.

Other than that, I think it looks pretty good.

Bob, what is the amortization anticipated, going forward, for the next year or so?

On the core deposits?

Yes.

It depends.

We have a study done on each of the acquisitions and the most recent one we had, I think it was about nine years.

It was a pretty good, stable bank.

So, I mean, it's going to go up ballpark by how much?

Your asking dollar amount?

On an annual basis, let's see.

We're trying to -- okay, I've got that right here.

It's probably about 150,000 pretax a year.

Great, thank you.

Peyton, did I answer your question on the deposit side?

Yes, thank you.

(OPERATOR INSTRUCTIONS).

There are no further questions at this time.

Well, thanks, everybody.

I appreciate it very much.

Have a good day.

Thank you for participating in today's call.

You may disconnect at this time.