Simmons First National Corp (SFNC) 2005 Q2 法說會逐字稿

Welcome to the Simmons First National Corporation Second Quarter Earnings Release Conference Call. [OPERATOR INSTRUCTIONS] I will now turn the call over the Bob Fehlman, CFO.

Please go ahead, sir.

Thank you.

Good afternoon.

I’m Bob Fehlman, CFO 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 CEO, and Barry Crow, our COO.

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

We’ve 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 in a listen-only mode.

Our earnings release has been filed on form 8-K and is also located at simmonsfirst.com in the investor relations earnings release section of our Web site.

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 the 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 and in our form 10-K.

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

Thank you, Bob, and welcome, everyone, to our second quarter conference call.

In our press release issued earlier today, Simmons First reported record second quarter 2005 earnings of $6.9 million or $0.47 diluted EPS.

This represents a $655,000 or a $0.05 increase in diluted earnings per share over the same period last year, an increase of approximately 10.4%.

For the six-month period ended June 30, 2005, net income was $12.8 million, an increase of $1.1 million, or a 9.4% increase, over the same period in 2004.

On a diluted earnings per share basis for the six-month period, it was $0.87, which is an increase of $0.08 or 10.1%.

The second quarter results were excellent for Simmons First.

We’re obviously very pleased with our earnings performance, loan growth and continued improvement in asset quality.

The increase in earnings over the same quarter last year is primarily the result of an improvement in net interest margin, driven by the growth in our loan portfolio, coupled with a modest 1.9% increase in non-interest expense.

Now, let’s take a few minutes and discuss each of these areas.

On a quarter-over-quarter basis, the Company's net interest margin increased 10 basis points to 4.15%.

This increase is primarily attributable to the growth of the loan portfolio and a reduction in interest expense associated with the 2004 prepayment of $17.3 million of trust preferred securities.

Now, while we are pleased with the 10 basis points margin improvement during the second quarter, we have experienced, as anticipated in our last earnings release, a slight compression of 2 basis points on a linked quarter basis due to the competitive pressures on deposit re-pricing.

In all likelihood, we will see a continuation of the deposit re-pricing as interest rates continue to rise from their 50-year lows.

As noted in our last conference call, we continue to anticipate a flat to slightly compressed margin for the balance of 2005.

Non-interest income for Q2 ’05 was $10.8 million.

While this total is relatively flat when compared to the same period in 2004, there are several items that warrant discussion.

Like most of the banking industry, we experienced a decline in the volume of mortgage production when compared to Q2 ’04.

The Q2 ’05 mortgage revenues decreased $330,000 from the same quarter last year.

As you will recall, we reported in 2004 that we had increased our student loan sales due to competitive pressures from consolidation lenders.

As expected, student loan sales returned to a more normal level in 2005.

As a result, premiums from the sale of student loans in Q2 ’05 decreased by approximately $200,000.

During Q2 ’05, we sold certain investment securities obtained in a prior acquisition that did not fit our current investment portfolio strategy.

As a result of this liquidation, we recognized a one-time, after-tax loss of $168,000.

On a positive note, service charges on deposit accounts increased $386,000 or 10% over the same period last year.

This increase can be primarily attributed to normal growth in transaction accounts and improvements in the fee structure associated with our deposit accounts.

As we discussed in our previous earnings teleconference, we have invested $25 million in bank-owned life insurance.

For Q2 ’05, this investment contributed approximately $190,000 on an after-tax basis to non-interest income.

Since these dollars were previously an earning asset, it should be noted that the net pickup is approximately $100,000, after tax, on a quarterly basis.

Now let me move to the expense category.

Non-interest expense for the second quarter was $21 million, an increase of almost $400,000, or 1.9%, from the same period in 2004.

While we are very pleased with this modest increase, we do expect to see increases in non-interest expense related to the previously announced expansion of our branching network.

Later in this discussion, we will give you an update on our expansion progress.

Shifting our focus to the loan portfolio, we reported total loans of $1.7 billion, an increase of almost $120 million, or 7.7%.

The growth was attributable to increased demand experienced in the commercial and real estate loan portfolios, which in aggregate increased some 11%.

However, as we have discussed in our last several teleconferences, we continue to experience significant competitive pressures from the credit card industry and financing incentives from the automobile manufacturers.

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

As noted in our Q2 ’05 conference call, in order to reverse this trend, we have introduced several new initiatives to make our product more competitive.

Let me take a moment to update you on the status of these initiatives.

We have been relatively successful in our primary initiative to move as many qualifying accounts as possible from our standard Visa product to our Platinum Visa Rewards product.

To date, we have converted 8,000 accounts, or approximately 30% of the targeted accounts, to the Platinum card.

Additionally, we have begun to see an increase in volume from our expanded rewards program.

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.

We’re very pleased with the trend we see as asset quality for the second quarter continued to strengthen.

Non-performing assets decreased by $2.9 million from the same period last year, a 20% decrease.

On a quarter-over-quarter, the non-performing asset ratio improved from 94 basis points to 70 basis points, a 24 basis points improvement.

On a linked quarter basis, non-performing assets decreased by approximately $1.6 million.

Non-performing loans to total loans improved to 61 basis points from 83.

The allowance for loan losses improved to 267% of non-performing loans as of June 30, 2005, compared to 213% as of June 30, 2004.

At quarter end, the allowance for loan losses equaled 1.63% of total loans.

The annualized net charge off ratio for the second quarter of ’05 was 33 basis points.

Excluding credit cards, the annualized net charge off ratio was 11 basis points.

As a reminder, the credit card net charge offs as a percent of the credit card portfolio was 2.68% for Q2 ’05, some 300 basis points below the industry average of 5.68%.

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

During Q2 ’05, the Company repurchased approximately 36,000 shares.

Year-to-date, the Company has repurchased approximately 297,000 shares of stock with a weighted average repurchase price of $25.74 per share.

Of these shares, 47,000 were a part of our repurchase plan, while 250,000 shares were negotiated in a private transaction that was outside of our plan.

There are approximately 618,000 shares remaining under the current repurchase plan.

Let us take a minute to update you on the current branch expansion plans.

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

Construction is underway on a new branch facility in Bentonville, our first entry into that fast-growing community.

We expect this branch to open in Q4 ’05.

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

Construction has also begun on a new branch facility in Van Buren, which complements our branch network in Fort Smith, the second largest city in Arkansas.

When this branch is completed in the fall of 2005, we will have five financial centers in the Fort Smith area.

In central Arkansas, we have just opened a new branch in Little Rock, have another branch under construction in Little Rock, and are nearing the completion on a facility in Conway.

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

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

These locations include Rogers, El Dorado, VB, Fort Smith, Bentonville, and Little Rock.

Obviously, Rogers is in northwest Arkansas.

El Dorado is south central Arkansas.

VB in the central region.

Fort Smith in the northwest/western region.

Bentonville is in the northeast, and Little Rock, which is the state capitol, is central.

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.

As an additional note, we reported at our annual shareholders meeting in April that Barry Crow, our EVP and COO, has announced his retirement, effective December 31, 2005.

As you know, we have already made Bob Fehlman our CFO as part of our overall succession planning.

I’m going to move away from the script for just a second while I have the benefit of you who are many of Barry’s friends on the phone, and since I have Barry here, I just want to say a special word of thanks for Barry and all that he has done.

He has been a part of this Company for over 35 years.

He has been strategic in helping us create and achieve the growth that we have achieved over the last many years, and while Barry will certainly be missed, we also are going to not let him go completely.

We’re going to use Barry on some special projects and doing some consulting work with us.

I just have obviously been very benefited by Barry being here during the 19 years that I have and he’s certainly made me look good on many, many occasions.

That’s why we’re going to keep him around on a consulting basis, so he’ll continue to make us look good.

So, Barry, we appreciate you.

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

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

[OPERATOR INSTRUCTIONS] Joe Stieven of Stifel Nicolaus.

Good afternoon, guys.

This is John Rodas [ph].

Nice quarter.

Tommy, I was just wondering if maybe you could go into a little bit more detail about the loan growth in the quarter, specifically, I guess, within construction and single family and then the financial institutions line item.

If you could just talk about kind of what you’re seeing there?

Okay.

Well, certainly.

Let me tell you first of all, our growth by region, and that wasn’t a specific part of your question, but I will address that.

Our growth quarter-over-quarter was really spread out pretty good, both from the northwest region and the northeast region.

We really had a good growth in the northeast region.

And, then, again, the northwest, central Arkansas and, maybe not to even a lesser degree but an equal degree, we saw probably equal growth out of the western region, which is Fort Smith, Little Rock and Conway.

So, we had acceptable anticipated growth in the markets that we call slower growth, and then we had probably a little bit better than anticipated growth in the growth markets.

Now we did have during that period one loan that was to a financial institution that is a long-time correspondent bank with our Company.

That particular loan was associated with an acquisition that that bank was doing.

I believe those probably were your questions, John.

As far as that correspondent bank loan, is that going to be around for a while, or is that relatively short term in nature?

That one will be around for a while.

It may reduce maybe 10% or so down from where it is now on the short term, but it will be amortized over probably a five-year period.

Okay.

And what sort of terms do you get on that?

I don’t know the specific terms.

I can tell you it’s not the normal bank stock loan.

It’s got a much shorter maturity with it.

Okay.

Within the single –

Again, when I’m saying much shorter maturity, I’m talking about in the – I believe the expectations are that probably it will pay off in a five-year period.

OK.

The single family residential – what sort of loans are you keeping there?

Is it 15-year, or is it adjustable rate?

I don’t know specifically.

I do know we’ve had really good growth in the ARMS portion of our loans.

In some of our markets, we have – there are a couple of our markets that have a very strong medical community.

We’ve been able to tap that market fairly good and provide them some portfolio loans because they don’t expect to stay in the home for an extended period of time.

But, most of it probably has been in the ARMS type financing, and some in the home equity loan financing.

Okay.

As far as asset quality goes, NPAs were down again, which is nice to see.

What sort of watch list trends are you guys seeing for delinquencies?

Our delinquency trend on a linked quarter basis has been very good.

Now last quarter we had a couple loans on there that really should not have been on there.

It was sort of a temporary situation.

But, our trend from the last quarter was down.

Our numbers are down.

The migration is a positive migration.

We’re relatively optimistic with it.

Obviously, we have -- Like anybody else, we’ve got some concerns about spike ups, not necessarily in the delinquency side, but there could be some spike ups in the charge off side with the new bankruptcy laws going into effect in October.

We’ve not seen it to date.

If we have, it’s only been moderate.

Just from an asset quality, it’s possible that we could see some spike ups in the credit card area as we approach that October date.

Again, past dues, the delinquency – I just believe the migration has been relatively positive.

Okay.

One final question just on service charges.

You talked a little bit about it in your remarks.

You said the growth was partially driven by account growth, and then you said a change in the fee structure.

Can you kind of elaborate a little bit on the change in the fee structure you’re talking about?

Well, I think that there’s probably been a couple of changes.

Our NSF fees – We did increase our NSF fee last year, and that would be probably one structure that we did.

We also have a couple of other things we did relative to our sequence of payments that have some kind of impact on the NSF.

We, I think, got more inline of the way that everybody else would in check processing.

Other than that, it’s primarily related to new opportunities and new business.

Okay.

So you think the current level of service charges is kind of a good base number going forward then?

I do.

I don’t see a lot of increase from where we are.

I will add there have been a few tweakings within the – the credit card side doesn’t show up.

[OPERATOR INSTRUCTION] Barry McCarver of Stephens Inc.

I want to make one request that Mr. Crow comes back and does all the shareholder meetings going forward.

I’m going to make that same request.

Just a couple of questions, Tommy.

First off, when you were talking about the margin going forward and suggesting flat to slightly down, were you talking about sequential quarters, and were you taking into account seasonality?

I would tell you that seasonality – We’re really talking on a linked quarter basis, and I think that seasonality might disguise it a little bit.

Certainly, our third quarter seasonality may make the margin look a little bit better than we think a normalized impact would be.

So yes, we’re taking it into consideration.

We’re simply saying that third quarter it may look a little bit better than it will at the end of the year.

OK, that’s what I was seeing.

In terms of loan reserves, obviously credit quality is getting a lot better.

But, it ticked down to the lowest level in quite some time.

What are your auditors saying about where would you put reserves, and in terms of the next couple of quarters, is the allowance going to have much of a change?

I will tell you that there’s been obviously an ongoing discussion about levels of unallocated reserve.

We have a very healthy reserve.

As the asset quality continues to improve, then I think it would be our drive to not allow that unallocated reserve to probably go much above a 25% level.

And so there may be some – We may see some slight reduction in the level of the provision.

Our reserve has seen a very healthy growth over the last several years.

Is it adequate to think that in terms of the allocated first portion, you’re at the high end of what you’re allowed?

I think it is.

And then just lastly, looking at other non-interest expenses, it’s down pretty sharply versus the first quarter.

Is there anything in that?

Barry, what we have in the first quarter is a lot of – that’s when you hit your social security and FICA taxes and some of our audit fees.

In the first quarter, we had a lot of our audit fees, and some of that related to Sarbanes-Oxley.

That was some of that you see down in there.

It was a couple hundred thousand dollars, I believe, overall decrease.

David Scharf of FTN Midwest.

I was wondering if you guys had any thoughts on international paper with the reorganization and how that was going to affect the Delta area.

Could you comment on that?

You may know more than I do on the final decisions.

All I know is what I have read on the Internet.

Certainly, in our area, there are probably about 1,200 employees.

I know the discussion has been that there are several options that they are looking at.

One of those options, obviously, is reorganization, and another one of them would be finding a buyer.

At this time, I really don’t know any more than you do.

I’ll tell you – has anything been announced that you’ve seen today?

No, sir; not that I’m aware of.

Well, David, my belief would be that they’ve got a major, major infrastructure investment here.

My belief will be that its greatest value by far is that as an ongoing concern.

And so until I know otherwise, I’m going to think positive that they’re either going to continue to own it or there will be another investor.

We’ll just hope that another investor will keep the number of people here.

They are one of the largest employers in the immediate Pine Bluff, Arkansas, region.

They’re certainly not the largest employer in the Delta at all.

As far as your relationships and how that can affect it – there’s really no direct way to quantify it yet, but it’s sort of like wait it out and see.

If you look at the overall mix of our loans in our total portfolio, over 70% of our loans are outside of the southeast Arkansas region.

I think it would be very similar on the deposit side.

I think it would be ludicrous for me to say that if all 1,200 of those jobs went away, it wouldn’t have an economic impact.

It would, but I just don’t see that happening.

At this point in time, I’m going to say that we see the impact as being minimal.

Can I make one comment?

David, about two years ago, IP made a substantial investment on one of the lines out there, expanding and changing that product line.

I’ve forgotten how many millions of dollars they pumped into that, but they modernized that whole side of it and redid it.

That thing has some value.

It’s not likely to all go away by any stretch of the imagination.

[OPERATOR INSTRUCTIONS] Barry McCarver of Stephens, Inc.

Guys, just a couple of follow-up questions.

Number one, we’ve seen the efficiency ratio come down really over the last couple of years.

You’ve, I think, cut some overhead here and there where there was some overlap.

Any additional thoughts on that?

Anything else that you’ve seen just recently that we might expect in the near future?

David, I don’t think there is anything immediate.

Obviously, we would like to see that efficiency ratio certainly into that high 50 range, as you well know.

We’re challenged to get there because (1) of the support of the niche products and (2) because of the number of locations that we actually have and (3) because of our strategy of having separate charters and a multi-bank holding company.

Barry, I just believe in my mind that there will be some opportunities, but probably not immediately.

Secondly, the discussion about International Paper made me think about the expansion at the Jacksonville Air Force Base.

Can you tell us about your exposure there and give us a reminder?

We don’t have anything in Jacksonville.

OK.

All of our locations there would be in the immediate Little Rock area.

I guess on a side note, though, the arsenal here right outside of Pine Bluff, between Pine Bluff and Little Rock, survived, or at least it appears, has survived BRAC.

While we didn’t lose anything, it is possible there could be a couple of pickups there.

That is very important to our community and our bank.

At this time there are no further questions.

Are there any other remarks?

No, we don’t.

Thank you very much.

We appreciate everybody attending.

Thank you.

This concludes today’s Simmons First National Corporation Second Quarter Earnings Release Conference Call.

You may now disconnect.