Simmons First National Corp (SFNC) 2005 Q3 法說會逐字稿

Good afternoon.

My name is Crystal and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Simmons First National third-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. (OPERATOR INSTRUCTIONS).

Thank you.

Mr. Fehlman, you may begin your conference.

Good afternoon.

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

We want to welcome you to our third-quarter earnings teleconference and 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 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 in 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 in that certain matters discussed in this presentation may constitute forward-looking statements that 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 our Form 10-K.

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

Thank you, Bob, and good afternoon, everyone.

Welcome to our third-quarter conference call.

In our press release issued earlier today, Simmons First reported record third-quarter 2005 earnings of $7.3 million, or $0.50 diluted earnings per share.

This represents a $427,000 or $0.03 increase in the diluted earnings per share over the same period last year, an increase of approximately 6.2%.

For the nine-month period ended September 30, our net income was $20.1 million, an increase of $1.5 million or 8.2% over the same period in 2004.

On a diluted earnings per share basis for the nine-month period, we were at $1.37, an increase of $0.11 or 8.7%.

Simmons First generated solid, high-quality results again this quarter.

We continue to be pleased with the trends that we see in our earnings performance, our loan growth, and certainly our asset quality.

The increase in earnings over the same quarter last year is a result of continued loan growth, an increase in non-interest income, and disciplined expense control while we have reduced the provision for loan losses resulting from improvements in asset quality.

Now, let's take a few minutes, if we could, to discuss each one of these areas.

On a quarter-over-quarter basis, as expected, the Company's net interest margin decreased 6 basis points to 4.10%.

As we stated in our last conference call, we experienced a slight compression in margin, driven by an increase in cost of funds resulting from competitive pressures and deposit repricing.

This increase in cost of funds was somewhat mitigated by the growth in our loan portfolio and a reduction in interest expense associated with the 2004 prepayment of $17.3 million in trust-preferred securities.

Over the next few months, we expect to see continuing competitive pressure and deposit repricing, as the Federal Reserve works to keep inflation in check.

As a result, we anticipate a flat to slightly compressed margin for Q4 2005.

Non-interest income for Q3, '05 was $10.7 million.

While this total reflects a modest 3.4% increase when compared to the same period in 2004, there are several items that warrant discussion.

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

As expected, the student loan sales returned to a more normal level in '05 and as a result, premiums from the sale of student loans in Q3, '05 decreased by approximately 122,000.

On a positive note, service charges on deposit accounts increased 226,000 or 5.7% over the same period last year.

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

As we discussed in our previous earnings teleconference, we invested $25 million in Bank-owned life insurance in April of 2005.

So for Q3 '05, this investment contributed to approximately $290,000, on an after-tax basis, to non-interest income.

Now, let me move to the expense category.

Non-interest expense for the third quarter was $21 million, an increase of $666,000 or 3.2% from the same period in 2004.

While we are 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 107 million or 6.7%.

The growth was attributable to increased demand experienced in the commercial and real estate loan portfolios, which in aggregate increased 8.8%.

However, as we have discussed in our last several teleconferences, we continue to experience significant competitive pressure from the credit card industry.

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

As noted in the previous conference calls, 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.

While it is too early to tell, we are pleased with the response to our retention strategy of moving as many qualifying accounts as possible from our standard Visa product to our Platinum Visa Reward product, remembering it is our standard Visa product that has been primarily impacted by the competitive teaser rates.

To date, we have converted 9,400 accounts, or approximately 35% of those targeted, to our Platinum card, which is one of the most competitive products on the market.

Additionally, as part of our retention and growth strategy, we are seeing an increase in volume from our expanded Rewards program, which in turn is having a positive impact on our fee income.

While we are pleased with our effort to reduce the number of lost accounts, we have not seen an increase in the number of new applications.

However, on a positive note, in recent articles in the Wall Street Journal and other newspapers throughout the country, Simmons First has received some excellent publicity relative to the quality of our Platinum card versus the market.

Hopefully, this publicity will convert to an increase in the application volume.

As a final note on the credit card discussion, let me remind you that 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.

Shifting gears, we are pleased with the trend that we see in our asset quality.

On a quarter-over-quarter basis, nonperforming assets decreased $1.8 million, a 13% decrease while the nonperforming asset ratio improved from 83 basis points to 68 basis points, a 15 basis point improvement.

The allowance for loan losses improved to 289% of nonperforming loans as of September 30, '05, compared to 238% as of September 30, '04.

On a linked-quarter basis, nonperforming loans to total loans improved to 55 basis points from 61 basis points.

At quarter end, the allowance to loan losses equaled 1.6% of total loans.

The annualized net charge-off ratio for the third quarter '05 was 33 basis points.

Excluding credit cards, the annualized net charge-off ratio was only 13 basis points.

As a reminder, the credit card net charge-offs as a percent of credit card portfolio is 2.65% for Q3 '05, more than 300 basis points below the industry average.

As a result of the asset quality reflected in the numbers we just discussed, the provision for loan losses was reduced by approximately 200,000 on a quarter-over-quarter basis.

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

During Q3, '05, the Company repurchased approximately 48,000 shares.

Year-to-date, the Company has repurchased approximately 345,000 shares of stock with a weighted average repurchase price of $25.96 per share.

Of these shares, 95,000 were a part of the repurchase plan with 250,000 shares negotiated in a private transaction that was outside of our plan.

There are approximately 570,000 shares remaining under the current repurchase plan.

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

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

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

We expect this branch to open in Q4 '05 and when this branch is completed, we will have 11 financial centers in northwest Arkansas MSA (ph), the fastest-growing region of Arkansas.

Construction is substantially complete on a new facility in Van Buren, which complements our branch network in Fort Smith, the second-largest city in Arkansas.

When this branch opens later this fall, we will have five financial centers in the Fort Smith at MSA and eight in our Western region.

In central Arkansas, we have recently opened new branches in Little Rock and Conway and have another branch under construction in Little Rock.

Also, in August, we announced the acquisition of a branch facility in southwest Little Rock and expect to close the transaction in November.

When these four financial centers come online, we will have ten 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, Fort Smith, Little Rock, along with our initial entries into BD (ph), Peragu (ph), and North Little Rock.

Because these financial centers are located in growth markets of Arkansas, we are excited about the growth opportunities they bring.

However, it should be noted, as these financial centers come online, we will see an increase in noninterest expense and a projected impact on EPS of between $0.06 and $0.08, for 2006.

We expect these branches to reach breakeven level in 18 to 24 months.

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

This concludes our prepared comments.

We would like to now open the phone lines for questions from our analysts.

Let me ask Crystal to come back online and once again explain how to queue in for the questions.

Crystal?

(OPERATOR INSTRUCTIONS).

David Scharf with FTN Midwest Securities.

Good afternoon, gentlemen.

I was wondering if you could talk about just the level of increase, you know, cost of funds, as far as you're seeing on the deposit side.

Well, we had a linked quarter, 5 basis points, if I remember, decrease in margin and a quarter-over-quarter 6 basis points.

The actual increase in the cost of funds on a quarter-over-quarter basis was what?

About 28 basis points, and most of it obviously in the time deposit area.

Right.

Are you seeing any more of the pressure on the loan side also?

Did that contribute at least partially to margin coming in?

Well, we have seen -- the biggest pressure on the margin side was not the loan portfolio as much as it is the flat yield curve and the inability to reprice the liquid dollars that we have in our investment portfolio while the cost of funds are increasing.

Maybe I shouldn't say "inability";

I guess I should say the unwillingness to step out at this point in time.

We do believe there's going to be some opportunities there, which might mitigate some of our thoughts relative to the fourth-quarter margin compression.

In other words, I think I said, in the presentation, that we see the fourth-quarter margin impact being flat to slightly down.

We think there's still going to be pressure on the cost of funds side.

If it just is on the cost of funds side, we think that we will have some further compression in margin.

But if we get a little bit more play in an upward-sloping yield curve, we think that the reinvestment of some of those dollars in our security portfolio is going to mitigate that.

Okay.

Then as far as it relates to the loan loss reserve, do you (indiscernible) you know, credit has definitely looked pretty solid over the last few quarters.

Can there be less provisioning going forward, as far as you see the outlook of credit?

David, one of the things that we do, since we have multibank holding companies, we, each quarter, we take each one of those institutions and we have six benchmarks.

We go through those six benchmarks and if all of them have a green light and then at that point in time -- and if they have an unallocated reserve, at that point in time, we will go ahead and make a change in the provision, just like we will if they have any red lines in those six benchmarks go the other way.

At this point in time, we believe that, in the fourth quarter, there may be some moderate tweaking in the provision, but it would be moderate.

We do think that, maybe going into the first quarter, there might be a little bit more -- remembering that a lot of our provision is related to the credit card portfolio and even with our loss ratio as low as it is, that provision represents a pretty significant portion of the total.

Sure.

Okay, well, thank you, gentlemen, for taking my questions.

I appreciate it.

John Rodis with Stifel, Nicolaus.

Actually, guys, this is Steve Covington.

Good afternoon.

Actually, a couple of my questions were already answered, but can you please add a little color to the growth you've seen in the construction portfolio, the construction lending portfolio?

It looks like you had some real nice growth for about the past four straight quarters.

Well, let me start off by telling you that probably when you look at the net growth numbers, obviously they're even -- that's one of the reasons that we have pointed out, in the commercial real estate side of the real estate side, that number is obviously higher than the total number, because we've had the compression in the credit card side.

But let me start off by region and tell you that, once begin, that the largest growth that we had has come in the Northeast region and the Northwest region of the state.

The bulk of that growth, in the Northeast region, would've been in maybe a combination of the one to four residential and the commercial real estate.

Also, in the Northwest region, the bulk of that would've been in the commercial real estate area, which continues to grow relative to that market out there (inaudible) pretty amazing taste.

We obviously continue to monitor that very closely as to the mix of that commercial real estate, i.e. construction lending versus owner-occupied and so forth.

We've also had, outside of the Northwest and Northeast, Steve, we've had pretty good growth in the Little Rock market and what we call our Western region and the Central region.

Without the credit card portfolio, overall, though, if you take the Central, Northwest, Northeast and the Western region, we probably had about 9% growth if you take the credit card out.

That's great.

Thanks, guys.

Barry McCarver from Stephens, Inc.

Good afternoon.

This is actually Matt (indiscernible).

Barry couldn't be on the call, unfortunately.

He and I talked and had a few questions.

Most of them have been answered.

I wanted to ask you about the service charge revenue.

The growth kind of petered out compared to the second quarter.

Is this something that you're seeing pressure because of the higher interest rates and we should expect kind of lower growth going forward?

Or is this something that can get back on track to higher growth the next few quarters?

Well, I think that probably there were a couple or three initiatives that we introduced in the probably -- I'm not sure if it was in the fourth quarter, fourth quarter '04, first quarter '05 -- but those initiatives would have been ramping up during that period and then levelizing out.

I think that we would not expect those to continue to ramp up.

Plus, you also have to take into account the mortgage income, as it's down this year in that whole non-interest category, and then our dealer bank income, investment income that it produces.

As Mr. May talked about earlier on our student loans, that we did have a little bit where, last year, we had some consolidation lenders and we chose to sell some of those earlier in the process to protect our premium.

We expect this year to be more on a normal basis.

We saw our service charge for the quarter-over-quarter on our deposit accounts going up almost 6%.

Okay.

Switching gears a little bit, I think Tommy mentioned earlier kind of a strategy in the securities portfolio.

Obviously, there's not too much that's attractive out there right now.

But is there a certain bogey or a certain hurdle you guys are looking forward in terms of what would be attractive for -- to be more aggressive on the securities side?

Well, I guess probably I would be pulling it out of the sky if I told you what that number was, because I just don't have that at-hand.

I can tell you that, if you look at the duration of our portfolio, it looks relatively long, but a portion of that is because of the step-ups.

When you look at the dollars that we -- well, the dollars that we have coming due in our securities portfolio and if you look at our ladder, and we basically have -- you know, we try to work within a ten-year ladder.

It is the back year -- 6, 7, 8 and 9 where we have lots of opportunity for investment.

You know, we have established a trigger of where we would like that to be, but I just don't have that at-hand.

You know, I'm sorry.

I will tell you this -- that based on what we're seeing out of the Federal Reserve and the discussions relative to inflation and what we are hearing in the marketplace, we believe there may be a continued increase in those (indiscernible) rates in the next four, five, six-month period and that that might be the window of opportunity that we're looking at.

But to give you the trigger rate, I can't do that;

I just don't have it.

That's fine.

I appreciate it, guys.

(OPERATOR INSTRUCTIONS).

A follow-up question from David Scharf with FTN Midwest Securities.

From a modeling perspective, when you were talking about the buildout of the branches and the hiring needs, what do you think is a fair representation of per-branch or in an aggregate amount?

I mean, how much do you expect costs to increase from the buildout?

What sort timelines are you modeling for them to kind of get to a breakeven point?

I think, you know, our belief is that we are about $350,000 impact and from a modeling standpoint, we are showing 18 to 24 months.

As we've mentioned, we think that the '06 impact is in the $0.06 to the $0.08 range, when you consider the ramp-up of what we've got going and what we have planned.

I think that the fact is, you know, we would like to move that model -- breakeven to a shorter period, and to do that is going to depend on a lot of things.

The bottom line, you know, what you can get in loans or what you can get in deposits and what you're just going to grow it from a pure de novo scratch standpoint or you're going to try to bring somebody in that can bring some portfolio with it.

So, there's a lot of intangibles out there.

But just based on the things that we know, that would be the issue, the 18 to 24-month range.

As we said, we've got five branches that will either come in towards the end this year but will be fully in for next year and then another four to six in next year's time range; that would come in somewhere during the course of next year.

I think it's probably important to remember that, while we've had a lot of growth and expansion, most of our growth and expansion has been through mergers and acquisitions and as we move into a de novo phase of filling out, if you will, the exceptional footprint growth that we've been able to achieve in Arkansas and the growth markets that we are in, as we fill that out and as we do it de novo-wise, there is going to be an impact for a couple of years, but hopefully we are going to reach the point to where what we are bringing on would be paid for by what we have brought on in the previous 18, 24 months.

Okay, so as far as the analyst range out there, you guys feel kind of comfortable going with what's going on there?

I know you don't give direct guidance, but if I'm looking at -- what I'm looking at as a normal growth rate, which I think you guys definitely will do, and I have ramped up costs associated with the buildout.

Do you feel comfortable with the ranges that are out there or do you think the Street has been a little bit aggressive?

To the extent that you can answer that question?

Sorry to put you on the spot like that!

I'm just kind of curious.

(LAUGHTER).

Well, thank you for not.

But I think what we did say in there is what we see, right now, would be the 6 to the 8% -- $0.06 to $0.08 is going to be the impact in '06, which would be what I consider out of the norm of historical impact.

Okay, well, very good.

Thanks again for answer my questions.

At this time, there are no further questions.

Okay, well, thanks again for everybody.

Have a good day!

This concludes today's Simmons First National third-quarter earnings conference call.

You may now disconnect.