Simmons First National Corp (SFNC) 2004 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Simmons First fourth quarter earnings conference call. [Operator instructions] Thank you.

Mr. Fehlman, you may begin your conference.

Okay, thank you.

Good afternoon.

I’m Bob Fehlman, Chief Financial Officer of Simmons First National Corporation, and we want to welcome you to our fourth quarter earnings teleconference webcast.

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 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 we will entertain comments.

We have invited the analysts from our 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 earnings release has been filed on Form 8-K, and is located at SimmonsFirst.com in the Investors Relations Earnings Release section of our website.

I would remind you of the special cautionary notice regarding forward-looking statements, and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from our current expectations, performance, or achievement.

Additional information concerning these factors can be found in the closing paragraphs of our press release in our Form 10-K.

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

Thank you, Bob, and welcome, everyone, to this meeting.

In our press release, issued earlier today, as Bob just mentioned, Simmons First National Corporation reported fourth quarter 2004 earnings of $5.8 million, or 39 cents diluted earnings per share, and 12-month earnings of $24.4 million, or $1.65 diluted EPS.

Further, the release noted a $771,000 pre-tax nonrecurring item in Q4 ’04 for the early write-off of deferred dead issuance costs associated with the prepayment of the $17.3 million in Trust Preferred securities, which, as you may recall, we announced in early November.

The impact of this item to diluted EPS is 3 cents.

As such, considering the size of the nonrecurring item, for the purposes of our discussion today, we will talk in terms of operating earnings.

When normalized for nonrecurring items, Q4 ’04 operating earnings are $6.3 million, or 42 cents diluted operating EPS.

This represents a $992,000, or 5 cent, increase in diluted operating EPS over the same period last year, which is an increase of approximately 13-1/2 percent.

Operating earnings for the 12 months were approximately $24.9 million, or $1.68 diluted operating EPS, an increase of 3.7 percent.

While this nonrecurring charge did adversely affect our earnings for the fourth quarter and year, going forward, this prepayment will reduce interest expense by approximately $1.6 million per year.

We project the savings will have a 5 cent positive impact to diluted EPS in 2005 as well as a positive impact going forward.

When normalized for the nonrecurring items, we’re pleased with the company’s solid financial performance in the fourth quarter.

On a quarter-over-quarter basis, the 13-1/2 percent increase in operating earnings is attributed to growth in loan portfolio, increases in noninterest income, and a lower provision for loan losses, which correlates to the continued improvement in asset quality.

On a quarter-over-quarter basis, the company’s net interest margin declined 8 basis points, from 4.17 percent to 4.09 percent.

This decrease in net interest margin can be primarily attributed to the interest expense on the $30 million in trust preferred securities that were issued in late December 2003 and were associated with the company’s most recent acquisitions.

Going forward, we expect the prepayment of the $17.3 million in Trust Preferred on December 31, 2004, will have a positive impact on spread.

At this time, if interest rates continue a gradual increase, we still believe our margin will be positively impacted.

But if the interest rate increase accelerates, then there can be some compression in our margin.

Noninterest income for the Q4 2004 was $10 million compared to $9 million for the same period in 2003, or a 10.4 percent increase.

This increase in noninterest income can be primarily attributed to the recently completed acquisitions, normal growth in our transaction accounts, and improvement in the fee structure and new product offerings associated with our deposit product.

Now, let me move to the expense category.

Noninterest expense for the Q4 ’04 was $21.6 million, an increase of $2.6 million, or 13.8 percent, from the same period in 2003.

This increase is primarily the result of the nonrecurring write-off of deferred dead issuance cost, operating expenses associated with the recently completed acquisitions, plus the normal increased cost of doing business.

If we exclude the nonrecurring charge, and acquisitions, the increase in noninterest expense was 2.7 percent.

Now, concerning our loan portfolio.

As of December 31, 2004, loans totaled $1.6 billion, an increase of $153 million, or 10.8 percent, from the same period a year ago.

The increase included approximately $70 million in loans acquired as a part of our Q1 acquisition.

Excluding this transaction, loans increased almost 6 percent on a quarter-over-quarter basis.

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

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

We continue to experience relatively soft loan demand in consumer products, which we primarily attribute to competitive pressures in the credit card and indirect lending.

Asset quality is strong as of December 31, with the allowance for loan losses as a percent of total loans at 1.69 percent, and the allowance equaled 221 percent of nonperforming loans.

Nonperforming loans to total loans is 76 basis points and the nonperforming asset ratio is 89 basis points.

The net charge-off ratio for the year was 52 basis points, and when adjusted for credit card net charge-offs, that ratio is 30 basis points.

As a reminder, the credit card net charge-offs as a percent of that portfolio was 2.5 percent for Q4, which is approximately 290 basis points below the industry average of 5.4 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 2004 period, the company repurchased a total of approximately 73,000 shares of stock, with a weighted average repurchase price of $24.28 per share.

As you know, we were precluded from being in the market during Q4 ’04 due to our pending announcement of the prepaying the Trust Preferred.

During 2005, I think it is reasonable to expect the company will become more aggressive in the stock repurchase program.

Now, let us take a minute to update you on our current branch expansion.

We had previously announced two new financial center locations in Little Rock, one in the Heights and one in West Little Rock, in the Rodden Fair Marion (ph).

We have also acquired land in Conway (ph) to expand our presence in that major growth market.

We recently completed the purchase of land for two additional locations in northwest Arkansas, one in Bentonville and one in the Rogers area.

In addition, we will soon begin construction on a financial center in Van Buren, which is located in Fort Smith MSA (ph).

We expect these facilities to open from third quarter 2005 through year end.

For your information, we have just announced the pending closure of three small financial centers.

The decisions to close these financial centers are a part of our ongoing efforts to improve the efficiency of the company.

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.

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

Melanie?

[Operator instructions.] Your first question comes from the line of John Rovis.

[Greetings] A couple of questions.

First one -- Tommy, I think you talked about the consumer loan portfolio.

You talked a little bit about some of the competitive pressures you guys are seeing.

Can you maybe just kind of talk about what you think you can do in the future to maybe increase the growth, or are you thinking about maybe getting out of some of those businesses, or what do you think of that?

Well, let me start with the indirect loans.

Our indirect loan portfolio is about $35 million of our total consumers.

At one time, that number was probably up close to $65 million or maybe even $75 million.

At that time, we purposely decided that we were going to slow down that piece of the business.

And the reason was simply the risk reward that was out there with all the competitive pricing pressures that we were seeing from the manufacturers.

Well, we did slow it down, and we slowed it down, probably, a little bit more than we would like, but then, the pressures have gone on a little bit more than we anticipated.

But we’d like to see the indirect portfolio continue to be a part of our piece of (ph) business, and we’d like to see it increase moderately from where it is right now, and maintain that.

Now, how do we do that is a challenge.

I think that we’ve got a pretty good process in place at the lead bank relative to dealer contact.

I think that one of the things that probably we will do is that we’ll work the dealers and some of the affiliates maybe a little more aggressively than we have in the past.

And then, the only thing beyond that is going to be a pricing issue.

So I do think that we do not play into fully exit that business.

We would like to maintain and grow it moderately, and I think that we’ve got some initiatives in place that will let us do that.

Now, I believe the bigger part of the consumer business, where we have pressures beyond that, is going to be in the credit card portfolio.

And I don’t need to tell you or anybody else the challenges that are out there relative to a small number of large banks that are very aggressive to grow their portfolios with their gimmick pricing -- their zero interest rates -- and the challenges there.

Our objective in our credit card portfolio is to be able to maintain that portfolio about at the level that it is, anywhere between the $140 and $150 million level.

We’re not trying to aggressively grow it beyond that level, but if we can maintain it at that level, then it will continue to be a major contributor to the possibility of [unintelligible].

It is our largest-yielding asset.

When you factor in all the things with the interest rates, it’s a very good profit center.

Now, how we’re going to do that becomes a challenge.

This last year, the average loans in that credit card portfolio were down somewhere between $8 million and $10 million, and that is about what they were down the previous year.

We don’t expect the competition to change, so we continue to look at a couple of options.

One of the options has to do with possibly buying portfolios from some of the smaller banks that really can’t afford to keep them in service.

That would be one area; we’ve done that in the past, and we’ll continue to look at that.

And then, the other would be some new initiatives that I’m really not prepared to talk about, but some new initiatives in our credit cards that would make a portion of our credit cards be a bit more attractive, that not only would allow us to maybe increase the new accounts, but also would protect us on retaining some of the accounts that we’ve been losing.

And that’s what we will be working on in 2005.

We expect it still to be a challenge in 2005, but we want to believe that we’ll begin to see that trend change.

Okay, that makes sense.

A couple other questions.

I just want to make sure within the ag portfolio -- I guess the drop there, that was just more seasonal, wasn’t it?

Yes, the drop was seasonal, the quarter-end drop.

In 2004, we were a little bit under our plan in the agra (ph) portfolio, but it was only because 2003 was so good that the farmers did not have to borrow as much money in ’04. ’03 and ’04 were-- ’03 was an extremely good year, and ’04 also was good.

Okay, and then, two final questions, guys.

I noted, I guess net charge-offs were up slightly.

If you could maybe just touch on that issue.

And then, within the margin, the margin was down linked quarter.

Could you just maybe give me the trend during the quarter on a month-by-month basis?

Like, where did you end in December?

Yes.

Let me go with charge-offs first, and then I will come back with the margin.

On the net charge-offs, for the corporation for the year, our total charge-offs were actually down in actual dollars, I believe the number is.

But I believe over the quarter, charge-offs were probably up.

And the reason is that we have an affiliate that has loans in the catfish industry.

And the catfish industry has been under pressure for probably anywhere from 24 to 30 months.

And we have a loan in the catfish industry that we have been working our way out of, and we took the charge-off on that loan as we moved through the liquidation process.

So that was primarily-- the change there was primarily related to one loan, and it was primarily in that single industry.

Do you see much more exposure there?

No.

Relative to the corporation, we have minimal exposure to the catfish industry as far as the total dollars.

Certainly until the industry resolves some of its woes with competitive pressures with Vietnamese fish and some of those things-- there’s still going to be some potential challenge.

We think we’ve got them identified, quantified, and reserved accordingly.

Okay.

And then, I guess, just the margin.

Yes.

On the margin trend, it’s actually up for October, November, and in December.

Okay, so you’re seeing more of a trend’s coming up in November, December from October; so a little bit of improvement there over the quarter, average?

Okay, thanks, guys.

Sure.

See you, John.

[Instructions] Your next question comes from the line of Barry McCarver.

[Greetings] Along the lines of the charge-off discussion a second ago, your asset quality really has been improving over the last several years.

What do you think that’s going to do to a loan-loss provision going forward?

Instead of ticking down a little bit, is ’05 going to see further decline?

Certainly, your reserve-to-loan ratio is very healthy.

Our asset quality has been improving.

We could have a lift from here to there related to the catfish industry, but we think that, yes, the provision during ’05 will be down.

It was down slightly in ’04, and-- the provision was slightly down, I think, in ’04 over ’03, and it will be down again in ’05.

What kind of-- are you targeting a particular reserve ratio that might help us get to a better level?

Well--

Sorry to put you on the spot.

Yes, I think that it’s hard to target a specific ratio when you still have a little bit of a challenge with an industry.

And I think because, again, of the issues with the catfish industry and some uncertainty there, that we still think that we need a healthy reserve, and our reserve is healthy; again, at the level we are relative to nonperforming.

We still would like to have a target of 1.5 percent of our portfolio and 150 percent of our nonperformings as our corporate-wide minimal target.

We’re a little bit above that right now, and we justify that based on, as I said, the challenges that are still hard to quantify in the catfish.

Even though we don’t have a lot of loans vulnerable to that industry, there is still some uncertainty there.

And I think beyond that, we’ve got some pretty good growth going on right now, so some of that will be absorbed in the growth and move us closer to those target ratios of 1.5 and 150 percent.

So I guess the answer to your question is that our corporate target is 1.5 percent of loans, 150 percent of nonperforming; not less than those levels.

And then you adjust those based on conditions out there.

Okay, fair enough.

Tommy, can you tell me where the three centers that you shut down-- where were those located?

One of them was in Russellville, Arkansas, called London.

It was about 7 miles outside of the town there.

And then one of them was in Cheryl (ph), Arkansas, which is about 10 miles outside [off-mike correction]-- about 15 miles outside of Pine Bluff.

And then, the third one is in Pine Bluff, and it was a branch that was acquired when we bought some S&L branches, and it was only-- like I say, only about a six-iron away from one of our other branch locations; a couple of blocks.

And we left it open for a period of years to try to take some pressure off of that branch we already had.

It was one of the best-performing branches that we had in the entire state, and we felt like it would take some pressure off of it.

And sure enough, over that period of time, it did take some pressure.

About a year ago, we closed down the lobby and just left the drive-in open, and much of that activity moved to one of our other branch locations.

So it really is purely an issue of efficiency; there won’t be any customer inconvenience or displacement of customers.

Okay, that’s what I was trying to get to -- your network coverage is still-- hasn’t really changed.

Oh, yes.

This really does not change the network coverage at all.

And in terms of strategy, do you have other branches that could conceivable go the same route, or was this more of a one-time event?

Well, I think that-- one of the things that I think I mentioned in the report here is that we are-- we’re at the size, and we have to-- as we grow, and we grow through mergers and acquisitions, we also have to do a good job of analyzing how successful some of these locations are, and looking at it from an efficiency standpoint, and at the same time, looking at it from the standpoint of customer coverage.

And so, we’ll continue to evaluate these.

But at this point in time, we don’t have anything else on the drawing board relative to closures.

Okay.

And then, lastly, I was wondering, Bob, or really, whoever -- give us a little bit more color on the margin, and-- I know there’s a lot of moving parts there, but if we assume that Fed rates are going to continue kind of the way they have in the past, shall we be thinking about a fairly big pop in the first quarter as a result of the Trust Preferred, and then more steady the rest of the year, or is it going to be more gradual the rest of the year?

What should we expect from margin movement?

Well, I think the margin, then, probably should be looked at two ways, and I’ll ask Bob to jump in if I mess this up.

First is that the Trust Preferred impact is going to be 5 cents.

Five basis points.

Five basis points is going to be the positive impact relative to the early redemption of the Trust Preferred.

But you have to remember, in the margin calculations, the seasonality that we have in the first quarter when the agra loans will have paid off and will not have started borrowing back up, and some of the Christmas borrowings under the credit cards will have paid off.

So this is where the discussion on the seasonality will come into play on the margin.

But, yes, a 5 basis point impact relative to the Trust Preferred.

Now, beyond that, with the Fed.

If history is a good indication about the immediate future -- and who knows if it is or not -- if the open market committee adjustments come out in that quarter-of-a-basis-points range, and they continue to do that through the first two or three quarters of the year or even through the whole year, then we believe that there will be some benefit to our margin in that process, and it will be a gradual benefit happening by quarter as those adjustments are made.

Barry, does that answer your question?

Yes, exactly.

Thank you very much, guys.

You bet; thanks.

[Instructions] At this time, there are no further questions.

Well, thank you, and we appreciate all of you being here; hope you have a great week.

See you later.