Simmons First National Corp (SFNC) 2004 Q3 法說會逐字稿

Good afternoon, my name is DeShanta and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Simmons Third Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS).

Mr. Fehlman, CFO, you may begin your conference.

Good afternoon.

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

And we want to welcome you to our third quarter earnings teleconference and web conference.

Here with me today is Tommy May, our Chief Executive Officer and Barry Crow, our Chief Operating Officer.

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

We'll begin our discussion with prepared comments, and then we will entertain questions.

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

Our 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 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 caption of our Annual Report on Form 10K and other public reports filed with the SEC.

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

Okay, thank you Bob, and welcome everyone to our third quarter conference call.

Today Simmons First National Corporation announced earnings of $6.9 million, or 47 cents diluted earnings per share for the quarter ended September 30, 2004.

As all of you know, and as we have discussed in previous earnings conference calls, in 2003 the low interest rate environment produced an unusually high demand for mortgage production investment banking products.

This issue, coupled with acquisitions in Q4 '03 and in Q1 '04 has created some comparability issues on a quarter-over-quarter basis.

However, when normalized we are pleased with the loan growth, the improvement in asset quality, and growth in non-interest income.

Further, while net income represents only a modest increase, it did meet our expectations.

On a quarter-over-quarter basis, net income was up $296,000, or 4.5 percent.

Now, let's take a closer look at some of the components that made up the performance in Q3.

On a quarter-over-quarter basis, net interest margin declined 27 basis points from 4.43 percent to 4.16 percent.

The yield on earning assets declined by 37 basis points, while the cost of funds decreased 17 basis points.

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

The first is the number of called securities and loans that prepaid during lower interest rate environment.

Second, as mentioned in previous meetings, while there was growth in the Company's loan portfolio, 2 of our higher yielding products, that being credit card and consumer lending, continued to decrease at a level of approximately $17 million on a quarter-over-quarter basis.

Lastly, while the recently-completed acquisitions RETS accreted for 2004, they do negatively impact the net interest margin by about 10 basis points on an annualized basis, primarily due to the additional debt incurred for these transactions.

On a link-quarter basis, it is important to note that the margin improved 11 basis points, which is primarily attributable to loan growth and improvement in our earning asset mix while maintaining a relatively stable cost of funds during a rising rate environment.

Non-interest income for Q3 '04 was $10.4 million compared to $9.9 million for the same period in 2003, or a 4.7 percent increase.

There are 3 key components of non-interest income that deserve discussion today.

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

For Q3 '04, mortgage revenue was $814,000 or a $698,000 decrease from the same quarter last year.

For the fourth quarter of 2004, we expect to see continued pressure on the mortgage pipeline, but the fourth quarter of '04 should be more comparable to Q4 '03.

Second, 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 Q3 '04 were approximately $287,000 on the quarter-over-quarter basis, were down approximately that level, on a quarter-over-quarter basis.

Going forward due to the level of uncertainty in the market, we expect to continue to see sluggish performance in our investment banking operation.

Third, on a positive note in Q3 '04, the Company saw a significant increase in income from core deposits.

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

Now let me move to the expense category.

Non-interest expense for the Q3 '04 was $20.6 million, an increase of $2.6 million or 14.8 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 increase in cost of doing business.

Excluding the acquisitions, the increase in non-interest expense was approximately 4.7 percent.

Concerning our loan portfolio, as of September 30, 2004 loans totaled $1.6 billion, an increase of $277 million, or almost 21 percent from the same period a year ago.

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

Excluding these transactions, loans increased 8.2 percent on a quarter-over-quarter basis.

We were particularly pleased with the increased loan demand in our commercial construction and commercial real estate loan portfolios, which when totaled together represent a 20 percent growth in that portfolio.

Asset quality is strong as of September 30 with the allowance for loan losses as a percent of total loans at 1.72 percent and the allowance equaled 238 percent of non-performing loans.

Non-performing loans on a link quarter basis decreased by $1.2 million, or 9.6 percent.

Accordingly, the non-performing ratio at quarter improved to .72 percent.

The net charge-off ratio for the quarter was 41 basis points, and when adjusted for credit card net charge-offs, that ratio is only 17 basis points.

And as a reminder, the credit card net charge-offs as a percent of the credit card portfolio was 2.7 percent for the Q3 quarter on an annualized basis, which is 330 basis points below the industry average of 6 percent.

During the second quarter of 2004, 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.

Year-to-date the Company has repurchased 73,000 shares of stock with a weighted average repurchase price of $24.28 per share.

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

We also remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agrile (ph) lending and credit card portfolio, and quarterly estimates should always reflect this seasonality.

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

And let me ask DeShanta to come back on the line and once again explain how to queue in for questions.

(OPERATOR INSTRUCTIONS).

Barry McCarver, Stephens, Inc.

Congratulations on a strong quarter.

Thank you.

Tommy just looking at the loan portfolio a little bit, I noticed that for the first time in several consecutive quarters, it looks like credit cards actually came up a little bit.

Is that seasonal or is there something on your side getting a little bit more aggressive?

I don't think that we have moved to a more aggressive mode.

I do think that the $2 million increase was positive.

I think that while we have been in this decline for several reporting quarters, it's not been unexpected because obviously of the competition in the market.

I do think we're starting to, or we hope that we believe that we're starting to see some bottoming out in that area.

I certainly will tell you that our plans for the credit card area to help that slower pace is obviously to always be as competitive as we can on the interest rate side.

And I think secondly we are always looking for new initiatives that might help us.

I also can tell you that one of the things that is not in the consideration, and has not been and won't would be relaxing our standards.

Okay, second question related to the loan portfolio, any particular geographic areas in Arkansas that saw more strength than others?

Yes Barry, there has and I guess the first thing I would point out is that with the recent growth or the growth that we've enjoyed this last quarter, and with the pipeline that we see in our loan portfolio, I think obviously Northwest Arkansas and Northeast Arkansas and Central Arkansas.

Those 3 regions are the ones that are driving both the most recent quarter historical growth, and also our pipeline.

But I would also say that in our North-central region and in our South-central region we've seen some as-expected growth there.

But the Central, Northwest, and Northeast continue to be the most positive growth areas we've had.

That gives us today approximately 67 percent of our total loan portfolio would be either in the niche products or what we would call in the growth areas above I-30, I-40 in Arkansas.

Okay, just 2 quick questions, and then I'll get off and let somebody else.

Any competitiveness on the deposit side that's changed over the last couple of quarters?

And then lastly, does Bob have the net-interest margin for the 3-months in the quarter?

I'll take the first and I'll let Bob look for the other.

As far as the competitiveness on the deposit side, I would say yes, that we've seen some pretty significant change in what we've been looking at in CDs.

It obviously depends on the different markets.

As you know, we community price in that we have 8 community banks.

And some of the communities in these growth areas and in the areas where we've got quite a few De Novo (ph) organizations that are either in the current startup mode or have been it for a period of a year to 2 years.

We're seeing quite a bit of competition on the CD side.

I don't think we're seeing transaction accounts and the savings deposits, we're seeing what we think are reasonable increases there.

Barry this is Bob.

You should find the margin on the last part of the release, but for the quarter is 4.16 and year-to-date was 4.08.

Did you have a monthly during the quarter.

We don't have the monthly right here with us but it was pretty even throughout the quarter.

There wasn't much of a change.

Our cost of funds did stay relatively flat throughout the quarter, and I'd say earning assets were relatively about the same.

So we're, I'd say about 4.16.

Okay.

Barry I think one other thing I mentioned on these deposits, and it goes right hand-in-hand with the margin, and that is that in all but 2 of our markets, the liquidity of the investment portfolio coupled with the either seasonality, meaning coming out of certain of the agrile loans and so forth have allowed us to handle this growth without relying too much or having to get too heavy on the CD side.

And we'd say the seasonality for this quarter is probably only $17 to $18 million, so that's only a couple of basis points in the margin on a quarter basis.

Okay, great, thanks guys.

John Rovis (ph), Segal Nicholas.

First off, nice quarter.

Thank you.

A couple of my questions were already asked, but if we kind of go back to the loan growth again during the quarter, you talked about I guess you saw growth in the Northwest, Northeast, and in the Central parts of the State.

But could you just talk about were these new customers that you were seeing, or were these existing customers that we're drawing down the lines?

Could you kind of go into a little more detail there please?

Yes, I think, and again I don't think I can do it by region, but I think I can tell you that we've had some lines of credit, for example, in our borrowing base that have been activated that had not been for a period of time with our existing customers.

But I think that we've also seen some pretty significant growth in new customer relationships that would be in Northwest and Central Arkansas with some commercial real estate activity.

Okay, one other question if I may.

I guess the tax rate was a little bit lower during the quarter, and I was just wondering if you could kind of give us some guidance going forward as far as that.

We think that the tax rate on an annual basis will be correct.

There was nothing large this month that needs to be mentioned, but a lot of it does affect on our municipalities and the income we have there, but I think somewhere about 31 percent rate on an annual basis, effective rate.

Okay, thanks guys, nice quarter.

Thank you.

(OPERATOR INSTRUCTIONS).

Peyton Green, FTN Midwest Research.

A couple of questions.

One, Tommy if you could talk a little bit about strategic plans and goals for 2005 and what kind of prospects you think exist for loan growth and deposit growth.

But also what you're going to do in terms of pushing the geography or the footprint maybe into faster-growing markets.

Well, let me just start with a general comment about our strategic plan, which I think probably parallels the third question about the growth markets.

When you look at our footprint, again in Arkansas I think it's obvious that much of our organization was built during the first 100 years, so to speak, in Southeast Arkansas.

And over the last 10 years, we have begun to diversify into a lot of the growth areas of the state.

And I think over the last 10 years, we've been very successful there.

I think what we have basically said is that our efforts will continue in those growth markets, and we have scheduled right now in Central Arkansas, which we think there are still lots of opportunities for us because of the growth of that market, and because of our what I would call relatively small percent market share, we think there's some great opportunities for us there.

But we have 2 new locations that should come online recently announced, 1 in Q2 '05 and 1 in Q3 '05, both in West Little Rock, 1 being in the Heights and 1 being in the overall West Little Rock area.

And then in the other growth area there in Central Arkansas would be Conway, and we basically are looking at a new location there in Q2 '05.

And then in the Northwest/Western region -- in the Northwest region we expect 2 new locations, 1 in Q3 '05 and 1 either in Q4 '05 or Q1 '06.

And then in the what we call our Western region, which is primarily the Ft. Smith location, which is the second-largest city in the state, 1 additional location in Q3 '05.

So from a capital expansion standpoint, all of those investments are in those growth markets.

We will obviously continue -- M&A has been very much an important part of our growth strategy historically, and it will continue to be going forward.

And again we will be looking at trying to complement some of the areas where we currently have locations in growth markets and/or where we might have a void in our statewide footprint.

Okay, and then on the stock buy-back, is there anything with the recent run on the stock?

Does that keep you from buying the stock back, or would you look to lever the capital part of the buy-back if M&A opportunities don't happen over the next 6 months?

I believe that's probably very accurate from the standpoint that, first of all on the stock buy-back, obviously we've got sufficient capital.

Obviously, our level of ROE dictates our being more aggressive in that area, and I believe the systematic approach that we've been taking will cause that to happen.

But I also believe that could be accelerated and even at a more aggressive level if in fact the M&A activity is not there for us as we hope that it will be.

Does that answer your question Peyton?

Sure, and it sounds like you're going to De Novo those 6 branches next year if everything goes right.

Is that the goal, or is that -- I guess that sounds like a little bit of an acceleration from what you've done in the past years.

I would say that from a De Novo standpoint that in fact it is an acceleration, and I would say that our growth strategy as far as filling out our footprint, the De Novo a lot of the De Novo will play a bigger role.

Okay, and then just on the credit card side are you seeing anything on the delinquency side that makes you optimistic or a little bit more cautious, or is everything still in very good shape?

I believe that everything remains in very good shape in our credit card delinquency and our credit card loss ratio.

Our biggest challenge in the credit card sector remains competition, and we're not going to let ourselves be forced into sacrificing relative to quality.

Okay, and then the last question, in terms of the interest rate risk, I know historically if the Fed has raised rates, with the higher the degree of frequency and severity it's been tougher for your balance sheet in terms of the income statement.

How do you feel about it going forward, and what do you think happens to the margin in the fourth quarter given the recent move?

I guess from a general statement standpoint I would reiterate what we've said before and that is that probably we are best served by seeing a little bit higher level of interest rates with moderate increases, number one.

What the Fed will do obviously, who knows.

But right now as a corporation over the next 90-day period, our asset sensitivity is a plus.

We're about 113 percent, maybe a little bit less than that from 0-90 days.

I think that the positive side of that is obviously our credit card, which we have been quoted in the paper recently to have converted a portion of those credit cards from a fixed rate scenario to a variable rate scenario, which simply gives us the ability to re-price those a little bit faster than we would have under a fixed rate scenario.

So I think as long as it is moderate increases, we would say that the margin would have a flat to a moderate positive impact.

Okay, but you don't see the deposit side necessarily.

I mean deposit moves at the end of the quarter that might move through the fourth quarter a little more than the earning asset yield side.

No.

Okay, good enough, thank you.

Yes sir.

Thanks Peyton.

At this time, there are no further questions.

Okay, well we thank you all very much.

This concludes today's Simmons Third Quarter Earnings Conference Call.

You may now disconnect.