Simmons First National Corp (SFNC) 2005 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Simmons First National 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.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two on your telephone keypad.

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 first quarter earnings teleconference webcast.

And 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 release issued this morning.

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

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

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

Our earnings release has been filed on form AK and is located at simmonsfirst.com in Investor 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 achievements.

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

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

Thank you, Bob, and welcome everyone.

In our press release issued earlier today, Simmons First reported record first quarter ’05 earnings of $5.9 million, or $0.40 diluted EPS.

This represents a $450,000, or $0.03 increase in our diluted EPS over the same period last year, which is an increase of approximately 8.3 percent.

We’re pleased with the Company’s solid financial performance in the first quarter.

On a quarter-over-quarter basis, the increase in earnings is primarily attributable to the growth in the loan portfolio and improvement in net interest margin, and an increase in the level of non-interest income.

I would like to spend the next few minutes talking about each one of these issues.

On a quarter-over-quarter basis, the Company’s net interest margin increased 14 basis points to 4.17 percent.

This increase in net interest margin can be primarily attributable to the continued growth in real estate loans combined with the reduction in interest expense resulting from the December 31, 2004 prepayment of $17.3 million of trust preferred securities.

While we are pleased with the 14 basis point margin improvement, during March, we have seen some compression due to competitive pressures on deposit re-pricing and a temporary impact from a fairly aggressive corporate-wide deposit promotion based on our projected liquidity needs for the balance of the year.

In all likelihood, we will see a continuation of the deposit re-pricing as interest rates continue to rise from the 5th year loans.

Now we also expect to utilize the 45 million generated in the deposit promotion to fund loans currently in our pipeline, thus a positive impact on our margin.

Now considering both of these issues, we anticipate a flat to slightly compressed margin for Q2 ’05.

Non-interest income for Q1 ’05 was $10.1 million, compared to 9.6 million for the same period in 2004, an increase of 4.4 percent.

This increase is in non-interest income is primarily attributed to acquisitions completed in 2004, normal growth in transaction account, and improvements in the fee structure associated with our deposit accounts.

The Company continues to experience pressure in the mortgage and investment banking areas due to the rise in interest rate environment.

The decrease in income related to these two areas in Q1 ’05 was $226,000 when compared to the same period last year.

Due to our long-term membership in Pulse EST [phonetic], a regional ATM switching network, the Company received a one-time $250,000 distribution as a part of the proceeds when Pulse merged with Discover Financial Services.

Now let me move to the expense category.

Non-interest expense for the first quarter was $21.4 million, an increase of $1.7 million, or 8.7 percent from the same period last year.

The increase is primarily due to the 2004 acquisitions and the normal increase cost of doing business.

Excluding acquisitions, the increase in non-interest expense was 4.6 percent.

Now let me shift our focus to the loan portfolio.

As of March 31, 2005, loans totaled $1.6 billion, an increase of $82 million, or 5.5 percent from the same period a year ago.

We continue to be pleased with the loan demand in our construction, residential and commercial real estate portfolios, which in aggregate increased 11.5 percent.

However, portions of the consumer market remain a challenge.

We continue to experience significant competitive pressure from the credit card industry and financing incentives from the automobile manufacturers.

Concerning our credit card operations, we continue to lose a portion of our cardholder base to the very aggressive pricing of very large credit card banks.

Over the last two years, our portfolio has decreased by approximately $10 million per year and we anticipate the same reduction relative to the average portfolio in 2005.

In order to reverse this trend, we have introduced several new initiatives that will make our product more competitive.

Our primary initiative is to move as many qualifying accounts as possible from our standard Visa product to our Platinum Visa Rewards product.

The Platinum card is very competitive and carries a low fixed interest rate at 8.95 percent and offers the customers competitive air mileage based on their purchases.

Our plans are to expand the Rewards Program beyond the air mileage offerings.

We believe that the increased usage will more than offset the increased costs.

Needless to say, our credit card portfolio carries a very significant potential premium that is not reflected on our balance sheet and is a significant contributor to the earnings of the Company.

Asset quality for the first quarter continued to strengthen as non-performing assets decreased by $5.1 million from the same period last year, a 28 percent decrease.

On a quarter-over-quarter basis, the non-performing asset ratio, .83 and 1.23 percent respectively.

On a late quarter basis, non-performing assets decreased by approximately $700,000.

Non-performing loans to total loans improved to .75 percent from 1.05 percent from the same period last year.

The allows for loan losses improved to 223 percent of non-performing loans as of March 31, 2005, compared to 170 percent as of March 31. 2004.

At quarter end, the allows for loan losses equals 1.67 percent of total loans.

The net charge off ratio for the quarter was 59 basis points.

When adjusted for credit card net charge offs, the ratio is 37 basis points.

As you may recall, we have mentioned in previous teleconferences potential asset quality concerns related to the catfish industry.

Included in the net charge off ratio is a charge off on a single loan associated with the catfish industry.

Excluding credit card and catfish loan, the single catfish loan, the net charge off for Q1 ’05 would be 4 basis points.

As a reminder, the credit card net charge offs as a percent of credit card portfolio was 2.77 percent for Q1 ’05, which is approximately 300 basis points below the industry average of 5.76.

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

During Q1 ’05, the Company repurchased approximately 262,000 shares.

This includes 11,500 shares that were a part of our repurchase plan and an additional 250,000 negotiated in a private transaction that was outside of our plan.

The Company continues to be active in the repurchasing of its stock.

Let us take a minute to update you on our current branch expansion plan.

You will see that our expansion focus is on the growth markets of Arkansas.

We have begun construction on a new branch of [indiscernible] in Bentonville, our first entry into that fast growing community.

When this branch is completed, we will have eleven financial centers in northwest Arkansas MSA, the fastest growing region in Arkansas.

We’ve also acquired land and have begun construction of a new branch facility in Van Buren, which complements our branch network in Fort Smith, Arkansas, which is the second largest city in our state.

When this branch is completed, we’ll have five financial centers in the Fort Smith area.

In central Arkansas, we had two new facilities under construction in Little Rock and another facility in Conway.

When these new locations come online, we will have nine financial centers in the low Ark MSA.

We expect these five new facilities to open before the end of this year.

In addition, we have acquired or are in the process of acquiring property for expansion in 2006.

These locations include Rogers, El Dorado, BB [phonetic], Fort Smith, and Little Rock, and then one additional location that I cannot describe at this time.

As previously announced, we did close three small financial centers during the first quarter of 2005.

The decisions to close these financial centers are a part of our ongoing efforts to improve the efficiency of our branching network, many of which were acquired through mergers and acquisitions.

As a matter of information, we are currently in the process of investing $25 million in bank owned life insurance.

As you know, the regulatory limit on Bowie [phonetic] is 25 percent of capital and our investment will be approximately 12.5 percent.

The $25 million will be moved from marine assets to other assets, thus decreasing margin by about 2 basis points.

However, we project a 3 cent increase in EPS and a 20 basis point improvement in ROE.

The 2005 EPS impact of Bowie transaction is approximately 2 cents per share.

We expect to close the transaction by the first of May.

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

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

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

(OPERATOR INSTRUCTIONS) Your first question comes from Barry McCarver with Stevens Inc.

Hi, Barry.

[Technical difficulties] everybody.

Great.

Couple of questions.

First off, tell me on the share buyback, certainly much more aggressive in the first quarter than you have been, at least for a little while and I see in the press release the average price was 25 and change.

Given where the stock is now, can we assume you’re going to continue to be a little bit aggressive at these levels?

I think you can.

I think the first buyback which we did an announcement on the 250,000 shares, that was an opportunity at the right time.

I think where we find our sales today with the price, then obviously, there’s some opportunities out there and while we want to be a part of a systematic plan, some of that may get accelerated.

Okay.

In your comments regarding the managers [phonetic] margin, I’m wondering depending upon what the Fed does and, I think everybody’s opinion changes everyday whether it’s 25 or 50 basis points, but I guess my question is, if they were to take it up 50 basis points, is that going to really have a much larger affect on your margin in the short term or is it really more a function of what your customers demand for deposit rates?

I think right now, it’s the latter.

I think that if you look at our GAAP, we’re probably in pretty good shape whether it’s 25 or it’s 50.

I think though that demand is probably going to increase by demand – what you said, the customer demand, if in fact we start seeing the 50 basis point increase.

What we’ve seen, and you can again see in our – or we can see in our March spread, in March margin, is that some of these growth markets that were in, we’re seeing some very aggressive pricing for the deposit product.

If we’re in a pretty good position, it’s because of what we’re looking at in our loan pipeline.

We’re sort of excited about that.

So, it’s – if deposits are going to be aggressive in re-pricing, then we certainly want to have the pipeline to support it.

And I think that’s why my comments said that we probably expect to see a little bit of short-term compression, but probably long-term gain.

Okay.

That kind of leads into my second question about competition.

Obviously, northwest Arkansas is no stranger to Simmons even though maybe Bentonville, the new market would be – the number of banks entering Bentonville and Rogers, I can think of a couple of public ones that you compete with now and a slew of other guys starting up in that area.

How do you feel about competition for these new branches and what’s your expectations for the first couple of quarters from those guys?

Well, let me just say – let me talk about the competition of the region first and then I’ll talk a little bit about the locations.

Certainly, the northwest Arkansas region is where we’re not only seeing the greatest growth, we’re seeing a huge increase in the Nuvo [phonetic] Bank and that is obviously going to have an impact on both sides of that bank’s balance sheet, which is, obviously, deposits higher and the loan pricing on loans are going to be cut.

I think from the standpoint of our expansion in northwest Arkansas, our expansion are into new markets where we’re looking for new business, and we think that’ll be a positive.

But we expect that northwest Arkansas market to be pretty tough for the next 12 to 18 months.

Okay.

And then last question and I’ll let somebody else get on, the new card program you mention in your comments, is that something that’s underway today, did it start last quarter?

Let me say that first it’s not a new card, it’s taking an existing card product and which is our Platinum card, and making it better – number one, and, yes, that process is underway.

Secondly, it is an emphasis for us to promote moving many of our existing customers from their current product to where we are more vulnerable to the national market to this improved product, i.e., our Platinum card where we are extremely competitive in the national market.

So did your – did the first quarter have any expenses as a result of this?

Not in the first quarter.

Okay.

Thanks a lot, guys.

Thank you, Barry.

Your next question comes from David Scharf with FTN Financial.

Hi, David.

Good morning, guys.

How are you?

Good.

Great.

I was wondering if we could also talk about the geographic breakout of the state.

I mean, certainly, the commercial [technical difficulty] have wrapped up pretty strong and I was wondering whether that is breaking out geographically.

And then also, seems like the Reserve’s been released a little bit.

Credit card seems to really be improving.

Is that what you can anticipate going forward?

Okay.

Let me start with the geographic distribution of the portfolio and then talk about where the growth is.

And then I’ll move to the bankruptcy – and I think that’s what you asked in your first question, is that right, David?

Yes, sir.

Okay.

I think that first of all, when you take our portfolio as a whole, as a corporation, and if you take the nitch product, which would be our credit cards and our student loans, out of the pie, then I think as far as our loan portfolio probably about 65 percent of that remaining pie is what I would call northwest, central and northeast Arkansas, which would be the growth areas.

I’m told that that number is more along, well I think it’s the 52, 53 percent in the total pie, but if you take out, you could take out the nitches, then the remaining pie is about 60, 62 percent.

Did you get that, David?

Yes, sir, I did.

Thank you.

If you take the nitch product out of the – which is credit cards and student loans, which you’re – obviously you’re statewide and national, if you take those out of the loan pie, then you probably have about 62 percent of that loan – remaining loan portfolio in the growth markets of Arkansas.

And the difference would be the south-central, southeast portion of the state.

Now, growth, as far as our growth and what we’re seeing, we’re seeing in dollars – again, when we’re talking quarter-over-quarter, in dollars, we’re seeing probably the most significant growth in – coming out of the northeast region, the central region, and then what I would call the western northwest region.

Now that would be growth.

Now, and we’ve seen some fairly good growth for us in the rural parts of Arkansas too.

Not double digit or anything, but some decent growth out of the rural areas.

But the biggest growth that we’ve seen that are in the double digit range for us would come through there.

Now remembering, as I said in my discussion that when you take the rural state portion, and it’s around 11.5 percent.

That’s mitigated because of the decrease that we’ve seen in our credit card area.

Now as far as the pipeline, I think that, again, where we’re seeing some really good opportunities are in the northwest and the north-central part of the state.

I’m sorry, excuse me, it would be the northwest and the central part of the state.

There’s some good activity that we’re seeing in our pipeline there.

Is that commercial in nature?

It is commercial real estate in nature.

Okay.

Excuse me, commercial and commercial real estate in nature.

And the following one which is the – it seems to me that you’re really reserved [phonetic] and to set a trend that we can kind of expect going forward?

I do.

I think that the – when you look at our reserve as far as percent of portfolio, percent of non-performing, I think we’ll continue to see some improvements there.

I would qualify that with the idea that there’s still some uncertainty about prices in the catfish industry.

Okay.

And depending on how all that plays out, but I think the rest of the portfolio quality numbers continue to improve.

Did I hear you all correctly – if you exclude that one catfish loan that you guys would have been 4 basis points?

If you exclude the credit card and – which most of our peer [phonetic] does not have the credit card portfolio as a percent of the portfolio that we do.

So if you look at our credit card portfolio by itself in its quality, which is extremely good, but if you subtract that from the total, and you subtract that one catfish charge off then – that one catfish loan charge off – then it’s 4 basis points for the quarter.

Great.

Thank you very much for your time, gentlemen.

Which obviously is a real good number for us.

Your next question comes from John Rodas with [technical difficulties].

Hi, John.

KEVIN O’KEEFE: Hi, guys, it’s actually Kevin O’Keefe.

Congratulations on a great quarter.

Thanks, Kevin.

KEVIN O’KEEFE: We had just one quick question for you.

You touched a little bit on the [indiscernible], but it looked like the – you exhibited pretty strong growth in the CDs and we’re just curious, do you have any comments on that growth, or if you had any aggressive marketing plans in place to kind of explain why they were so strong.

Yes.

Thank you for that.

We’ve – oh, I guess the past two years, we’ve allowed our CD product to decrease simply because we were not getting the loan growth that we needed to maintain it.

We allowed that runoff to take place.

Based on what we have seen in our pipeline, we made the decision that – plus, the pipeline plus the trend in the interest rate market, we made the decision that we wanted to go ahead and shore up our balance sheet to support that growth.

The CD promotion that we had was a three-year product in which we generated some $45 million in new money.

Now if that was the whole story, that would be great, but we also did have some transfer of existing deposits which, obviously, is going to impact our cost of funds also.

KEVIN O’KEEFE: Sure.

But the growth that you see in the CD program was a part of our effort to accomplish exactly that and those dollars will go to fund the pipeline that we have in front of us.

KEVIN O’KEEFE: Great.

Well, congratulations again on a great quarter.

Thank you very much.

At this time there are no further questions.

Are there any closing remarks?

No.

Tina, we thank you and we thank everybody for being here with us.

We look forward to seeing you next time.

This concludes today’s conference call.

You may now disconnect. 3