Simmons First National Corp (SFNC) 2004 Q2 法說會逐字稿

Good afternoon.

My name is Tina and I will be your conference facilitator this afternoon.

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

Mr. Fehlman, you may begin your conference.

Thank you Tina.

Good afternoon.

I'm Bob Fehlman, Chief Financial Officer of Simmons First National Corporation.

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 quarter earnings release issued this morning.

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

We have invited analysts from investment firms that provide research on our company to participate in the question-and-answer session.

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

Our goal is to make this call as useful as possible and for each of you to understand 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 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 risk associated with our business, you should refer to the forward-looking information captioning of our annual report on Form 10-K and other public reports filed with the SEC.

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

Thank you, Bob, and welcome everyone.

I hope you're having a good day.

Today, Simmons First National Corporation did announce earnings of $6.3 million, or 42 cents diluted earnings per share for the quarter ended June 30, 2004.

As we have discussed in previous meetings, during Q2 '03, the company recorded a non-recurring 771,000 pretax gain or 3 cents diluted earnings per share from the sale of mortgage servicing.

Excluding this non-recurring gain in Q2 '03, the company would have reported a $228,000 increase in earnings while maintaining the same level, 42 cents diluted earnings per share for Q2 '04.

As all of you know in 2003, the low interest rate environment produced an unusually high demand for both mortgage production and Investment Banking products.

As such, even though interest rates remain relatively low, they have increased in 2004 and as a result, the demand for these products has moderated.

Thus on a quarter-over-quarter basis, excluding the previously mentioned gain of the sale of mortgage service, earnings per share were flat.

Considering the reduced demand in mortgage production and Investment Banking products we are pleased with the level of net income.

On a quarter-over-quarter basis, the company's net interest margin declined 35 basis points from 4.4 to 4.05 percent.

The yield on earning assets declined by 72 basis points while the cost of funds decreased almost 50 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 the resulting repricing when interest rates were at historical lows.

Second, as mentioned in previous meetings, while there was overall growth in the company's loan portfolio, two of the higher yielding products our credit card and consumer lending, continued to decrease at a level approximating $19 million on a quarter-over-quarter basis.

Lastly, while the recently completed acquisitions are EPS accretive for 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.

Noninterest income for Q2 '04 was $10.8 million, compared to $10.4 million for the same period in 2003, or a 3.6 percent increase.

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

First, like most of the banking industry in 2003, mortgage production revenues increased sharply because of the volume of new and refinanced mortgages due to the low interest rate environment.

Again, like most banking -- those in the banking industry beginning with Q4 '03 and continuing in 2004, we experienced a significant slowdown in the volume of mortgage production.

For Q2 '04, mortgage revenue was $1,045,000, or a $418,000 decrease from the same quarter last year.

For the balance of 2004, we expect to see continued pressure on the mortgage pipeline.

Second, during 2003, we also saw a significant increase in revenue from our Investment Banking operations.

This increase in 2003 was also driven by the low-interest rate environment coupled with significant liquidity from call bonds which resulted in increased trading activity.

During 2004, with the anticipation of an increase in interest rates, we have seen a significant slowdown in activity in the bond market and revenues in Q2 '04 were down approximately $400,000, a bit more than expected.

Going forward, due to the level of uncertainty in the market, we expect to continue to see sluggish performance in our Investment Banking operations.

Third, and on a positive note, in Q2 '04, the company saw a significant increase in service charges on deposits.

The $1.1 million increase can be attributed to the recently completed acquisitions, normal growth in our transaction accounts, and improvement and the fee structure and new product offerings associated with our deposit accounts.

Fourth, during Q2 '04, premiums from the sale of student loans totaled $858,000, an increase of $534,000 on a quarter-over-quarter basis.

As we discussed last quarter, throughout the year as student loans reached payout status, the company has historically sold these loans into the secondary market.

Because of competitive changes in the industry relative to loan consolidations, in order to protect our premium, we made the decision to sell some loans prior to the payout period and this resulted in the earlier recognition of the premium income rather than as planned later in the year.

Bottom-line, recognizing that the competition for this product is changing, for the year 2004, we expect to have higher than normal levels of student loan premium income.

Now, let me move to the expense category.

Non-interest expense for Q2 '04 was $20.6 million, an increase of 2.6 million or 14.7 percent from the same period in 2003.

This increase is primarily the result of the operating expenses associated with the recently completed acquisitions, plus the normal increased cost of doing business.

Excluding the acquisitions, the increase in noninterest expense was 4.6 percent.

Concerning our loan portfolio as of June 30, 2004, loans totaled $1.5 billion, an increase of $256 million, or almost 20 percent from the same period a year-ago.

The increase was primarily due to approximately $168 million in loans acquired and to recent acquisitions.

Excluding these transactions, loans increased almost 7 percent on a quarter-over-quarter basis.

We were pleased with the increase in loan demand in our commercial, construction and Commercial Real Estate loan portfolios.

However, as previously reported, portions of the consumer market remain a challenge.

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

Asset quality is strong as of June 30th, with the allowance for loan losses as a percent of total loans at 1.77 percent, and the allowance equaled 213 percent of nonperforming loans.

Nonperforming loans to total loans is 0.83 percent.

The net charge-off ratio for the quarter was 40 basis points, and when adjusted for credit card net charge-offs, that ratio was only 14 basis points.

As a reminder, the credit card net charge-offs as a percent of the credit card portfolio, was 2.6 percent for Q2 which is about 350 basis points below the industry average of 6.1 percent.

During the second quarter, the company announced the substantial completion of the existing stock repurchase program and the adoption by the Board of Directors of a new repurchase program.

The new program authorizes the repurchase of up to 5 percent of the outstanding common stock or approximately 730,000 shares.

During the quarter, the company repurchased a total of approximately 57,000 shares of stock, with a weighted average repurchase price of $24.17 per share.

As we look toward the remainder of 2004, we continue to expect to see modest increase in 2004 earnings per share when compared to the previous year.

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.

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

So, let me ask Tina to come back on the line and once again explain how to queue in for questions.

Tina?

(OPERATOR INSTRUCTIONS).

Barry McCarver with Stephens Inc.

Good afternoon guys.

How are you doing?

Just a couple of quick questions.

Number one, again on the noninterest income line for the mortgage income, I know it was down versus last year pretty steeply, but it was also up over what you saw in the first quarter of this year, and I am wondering if we can speak to what caused that and kind of what your outlook is the rest of the year, if that is a line item that we have any visibility on?

Barry, I believe that probably the second quarter would probably reflect the season, beginning to be summer and so forth, and probably as expected, I think probably on a go-forward basis, that we would expect flat to maybe down just a little bit.

Okay.

Secondly, I guess, on the growth in service charges, we talked a little bit about this last quarter, the three reasons that we saw growth, one of them being obviously the big piece acquisitions, some normal growth, and I'm assuming some seasonality and you introduced some new products.

I am wondering, can we expect some of that growth to come from new products for the rest of the year, or pretty much just from the acquisitions going forward?

I think, Barry you are exactly right.

The three areas that we talked about the M&A activity, the new products, and then the normal growth, I think going forward we could expect to see some further positives on the new products, and obviously the growth on the deposit accounts we hope to see some positives there with some of our acquisitions as we are able to add new product lines and so forth.

Okay.

Lastly, in terms of your interest rate sensitivity, it looks to me like you guys are in a really good situation, benefit from the 25 basis points we discussed (indiscernible) and any additional.

Am I thinking correctly and I guess what would your outlook be, all things equal in your portfolios?

I believe from the standpoint of the corporation, if you look at our sensitivity, we are in good shape.

I think the thing probably to point out would be that our feeling is that in the short-term that we see a little bit of compression there, but in the intermediate-term we see some positives.

The credit card side is probably the thing that would hold us back a little bit on the short-term.

Looking at where our rates are with the competition we think we are in good shape, but the competition is throwing out all kinds of rates like a zero percent balance transfer and the other gimmick rates that we probably will pass, well we did pass on a repricing with the last change, so we didn't benefit from that.

But I think going forward, we see again short-term being flat to a little bit of compression, longer-term being positive.

Okay.

Thanks a lot.

Joe Stieven with Stifel, Nicolaus.

A couple of questions.

Number one, Tommy talk a little bit about economic activity in some of the markets.

We are trying to -- a way we could use your comments and sort to try to predict just your internal loan growth going forward.

I guess that is number one.

Number two, is again, Barry sort of hit on it first, but talk about the margin and your feelings for the margin with the recent debt increase and sort of how you guys are (technical difficulty) things out for yourself going forward?

Thanks guys.

I will take probably the margin first.

We will come back to the internal loan growth.

And as I mentioned to Barry, with our -- overall with our credit card operation and our capacity to reprice that, if you look at our 90 day sensitivity just in percent, we are in a really good position.

But competitively, we may go a little bit slower on that.

I feel like in the short-term it will be pretty much flat to maybe slightly down, and improving after that period.

I think we are also in a good position with our overall securities portfolio, not just the loan side but with our securities portfolio and our ability to reprice that.

On the internal loan growth, Joe, if we look back at this last quarter, I think there is a couple of things that we could say.

First of all, the 7 percent growth on a quarter-over-quarter basis after you eliminate the mergers and acquisitions, one of the reasons that we say that is a positive is that we also have to remember that during that same period the credit card portfolio, which is pretty in size at $154 million, is down slightly, and our indirect paper when you add those two together, you're over $200 million, and both of those are down.

So when you figure you've got two pieces of the puzzle going down and four pieces of the puzzled going up, the net being 70 percent, that is why we, I think, are positive about the seven percent.

Now, when you look at where it came from, the bulk of the growth that we had was Northwest, Northeast, and Central.

On a positive side, all of the other rural parts of the state that we are in have also not only held their own but have had some modest growth.

In looking at the economic numbers in Northwest, Northeast, and Central, and looking at the pipelines that we are getting, the pipeline reports that we are getting from our affiliates, I think again going forward for the balance of the year in those particular regions, we are feeling pretty good.

The one other thing that I would add that if we had -- last year we had an exceptional agri year, and because we had an exceptional agri year, the farmers -- and they needed to have one -- the farmers have lots of cash.

Because they have lots of cash, their actual borrowings this year are lower than we anticipated that they would be.

So again, factoring all of that in at that 7 percent net growth is we think fairly positive going forward.

Joe, did I get everything?

I think you did, thank you.

Peyton Green with FTN Financial.

Good afternoon.

Back to just kind of the sensitivity.

If the Fed played out and raised 25 basis points, two or three more times, by the end of the year, how would your margin react?

If the economy picked up after the lull of news (technical difficulty) gain strength over the next year, year and a half, and the Fed had to raise a good bit more and take some of the excess liquidity out of the system, what do you think would happen to the margin just from the current balance sheet?

But also do you think you would see customer behavior in your markets change or would it maintain itself in pretty good shape?

Peyton, would you go over the last part of the question relative to the Fed.

I just heard the first part about the 25 basis point increase in each of the open market committees.

What was the last?

Basically, if they did 25 basis points two or three more times this year, and then ended up picking up the pace next year, what is your thoughts might be in terms of how the margin would respond and then also what the implication might be on net interest income.

Then also, is there a particular point where you think, just based in your own assessment, where customer behavior might start to change on the deposit side or loan side that might create some other issues?

I believe that first of all, our modeling and our own projections would be that the 25 basis point increase over the next two to three open market committee meetings would again probably have a neutral to a slight negative impact to us, a little bit of a compression because of the way that we probably would handle the repricing in our credit cards.

I think that if the pace gets accelerated, (technical difficulty) from the speed and the amount of the increases of these discount rates, that would be a real (technical difficulty) to us.

Again, probably much of it driven by our ability to reprice the credit cards.

I think as far as the customer behavior on this, I think that, again an accelerated rate or the discount rate -- not discount rate, but accelerated increase by the Fed psychologically could have an impact on our loan demand both from the credit card side and the commercial side.

What we would like to see is the process of slow incremental increases and if they are in that 100 basis points range, we think that probably optimizes our position.

Okay.

On an unrelated matter, what are your growth plans going forward over the balance of the year on a de novo basis?

And then also if you could give us some color commentary on the M&A side of things?

Peyton, I am sorry I missed your question.

What plans do you all have from a de novo perspective and what markets do you think that will play out over the next six to 12 months?

And then also what M&A -- is M&A opportunity picking up or becoming more competitive?

Let me go with the de novo side first.

On the de novo branching side, we believe in the central market, in particular Little Rock, that we will be adding two new locations beginning in '04 and finishing probably in the first quarter of '05.

We believe in a community outside of Little Rock but still in the central region, and the Conway market that we will also be adding a new branch facility in that particular market.

We believe in the Western region of the state, primarily in the Fort Smith, VanBuren (ph) market.

We will be adding a new location in that market during the again, beginning of the third quarter of '04 and finishing up in the first quarter '05.

We believe in Northwest Arkansas that we will be adding new locations in that market, probably two locations in that market beginning in '04 and finishing up in the third quarter of '05.

On the M&A front, we have seen an increase in interest, and we believe that increase is certainly going to remain there for at least the foreseeable near future.

And I think from the standpoint of our company, it is very obvious that as we have said before, there are certain regions that are very important to us, and those are the same regions where we have seen the growth, the Northwest, Northeast, and Central, and one other region to fill out our objective of providing statewide access and that is the Southwest region.

The M&A opportunities we believe are there probably better than they've been in the last three years.

Okay.

Great.

Thank you very much.

Thank you Peyton.

At this time there are no further questions.

Are there any closing remarks?

I don't think we do.

We appreciate everybody having been here, appreciate your questions and hope we gave you the right answers.

Have a good day.

Thank you.

This concludes Simmons First second quarter earnings conference call.

You may now disconnect.