Simmons First National Corp (SFNC) 2005 Q4 法說會逐字稿

Good afternoon.

My name is Kathy and I will be your conference operator.

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.

Good afternoon, I am Bob Fehlam, 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, Chief Executive Officer.

The purpose of this call is to discuss the information and data provided by the Company in our regular quarterly earnings 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 in our Company to participant 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 located at Simmonsfirst.com in the 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, our achievements.

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

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

Thank you, Bob.

Welcome, everyone.

I hope you're having a good day.

In our press release that was issued earlier today, we reported record fourth-quarter 2005 earnings of $6.8 million or $0.47 cents diluted EPS.

This represents a $985,000 or an $0.08 increase in the diluted EPS over the same period last year, which was an increase of approximately 20.5%.

Operating earnings per share, which exclude nonrecurring items increased $0.05 cents on a quarter-over-quarter basis or 11.9%.

For the year ended December 31st 2005, our net income was$27 million, an increase of $2.5 million or 10.3% increase over the same period in 2004.

Diluted earnings per share for the 12-month period was $1.84, an increase of $0.19 or 11.5%.

Now once again, on an operating basis, 2005 earnings per share increased $0.16 or 9.5%.

Obviously, we are pleased with the Company's performance for both the fourth quarter and for the year, and we continue to see positive trends in earnings, loan growth, and asset quality.

The increase in earnings over the same quarter last year is the result of continued loan growth and increase in our non-interest income, disciplined expense control, and a reduction in our provision for loan losses, which results from an improvement in our asset quality.

If you will, I'd like to take a few minutes and discuss each of these areas.

On a quarter-over-quarter basis, the Company's net-interest margin increased one basis points to 4.10%.

This increase in net-interest margin can be attributed to the growth in our loan portfolio and a reduction in interest expense associated with the December 31st, 2004 prepayment of $17.3 million of trust preferred securities.

All of which we've discussed previously.

However, we continue to experience pressure on our margin driven by the increase in cost of funds resulting from deposit repricing.

Over the next few months, we expect to see continuing competitive pressure in deposit repricing, and when coupled with our seasonal fluctuation in the loan portfolio, we continue to anticipate a flight to slightly compressed margin, certainly in the first quarter 2006.

Non-interest income for Q4 '05 was $10.7 million, compared to $10 million for the same period in 2004, representing an increase of 7.3%.

Service charges on deposit accounts increased $455,000, or 12.5% over the same period last year.

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

Also, as discussed in our previous earnings teleconferences, we invested $25 million in bank-owned life insurance in April 2005.

For Q4 '05, this investment contributed approximately $281,000 on an after-tax basis to our non-interest income.

Now let me move to the expense category.

Non-interest expense for the fourth quarter was $22 million and increase of $343,000 or 1.6% from the same period in 2004.

As a reminder, in Q4 '04, we recorded a $771,000 non-recurring expense for the early write-off of deferred debt issuance cost associated with the prepayment of the $17.3 million in trust preferred securities that I mentioned a moment ago.

Also, included in this Q4 '05 are the expenses associated with the Company's recently opened financial centers.

Normalizing for both the prepayment and the expansion expenses, non-interest expense on a quarter-over-quarter basis increased $709,000 or 3.4%.

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

Concerning our loan portfolio, as of December 31st, 2005, we reported total loans of $1.7 billion, an increase of $147 million, or 9.3% from the same period a year ago.

The growth was attributable to increased demand experienced in the commercial and real estate loan portfolios, which in aggregate increased 12%.

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

Over the previous two years, our credit card portfolio has decreased by approximately $10 to $12 million each year, and as anticipated, our average credit card portfolio balance decreased by approximately $11 million in 2005.

As noted in previous conference calls, 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're pleased with the response of our retention strategy of moving as many qualifying accounts as possible from our standard Visa product to our Platinum Visa reward product.

Remembering that it is our standard Visa product that has been primarily impacted by the competitive teaser rates.

To date, we have converted approximately 15,000 accounts, or 50% of those targeted to our Platinum card , which is one of the most competitive products on the market.

As a result of this conversion process, we have been able to reduce the number of closed accounts.

Simmons first received excellent publicity in articles in the Wall Street Journal and other newspapers throughout the country relative to the quality of our Platinum card versus the market.

This publicity, along with several new marketing initiatives, has resulted in an increase in application volume.

Additionally, as part of our retention and gross 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.

Asset quality is strong as of December 31, 2005, and we viewed -- and when viewed on a link quarter perspective has improved each quarter throughout the year.

On a quarter-over-quarter basis, non-performing assets decreased $3.9 million, a 28% decrease, while non-performing asset ratio improved from 89 basis points to 58 basis points, a 31 basis point improvement.

The allowance for loan losses improved to 319% of non-performing loans as of December 31, '05, compared to 221% from the previous year.

On a link quarter basis, non-performing loans to total loans improved 49 basis points from 59 basis points.

At quarter end, the allowance for loan losses equalled 1.57% of total loans.

Net charge offs for the fourth quarter were somewhat distorted due to the significant increase in bankruptcy filings, prompted primarily by the credit card consumers rush to file before the effective date of the new bankruptcy law that went into effect on October 17th.

The net charge off ratio for 2005 was 43 basis points.

Excluding credit cards, the net charge-off ratio was 20 basis points.

For 2005, the credit card net charge offs as a percent of the credit card portfolio was 2.92%, more than 250 basis points below the most recently published industry average of 5.51%.

As a result of the overall positive trend in asset quality, the provision for loan losses was reduced by approximately $300,000 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 Q4 '05, the Company repurchased approximately 29,000 shares.

For the year '05, the Company repurchased approximately 371,000 shares of stock with a weighted average repurchase price of $26.10 per share.

Of these shares, 121,000 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 544,000 shares remaining under the current repurchase plan.

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

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

We completed and opened a new branch facility in Bentonville in December, our first entry into that fast-growing community.

We now have eleven financial centers in northwest Arkansas MSA, the fastest growing region of Arkansas and certainly one of the faster-growing regions in the country.

In November, we opened a new branch facility in Van Buren, which complements our branch network in Fort Smith.

The second largest city in Arkansas.

We now have five financial centers in the Fort Smith MSA, and a total of eight financial centers in our western region.

In central Arkansas, we recently opened financial centers in Little Rock and Conway, and acquired a branch facility in southwest Little Rock in November.

We have another branch under construction in the heights area of Little Rock.

When this financial center comes online in early 2006, we will have ten financial centers in the Little Rock MSA.

Lastly, we have acquired additional properties for further expansion.

These locations include Rogers, El Dorado, Fort Smith, Little Rock, and White Hall, along with our initial entry into the BB, [Paragul], and north Little Rock market.

Because of these financial centers are located in growth markets of Arkansas, and we're excited about the opportunity they bring us in the intermediate and long-term.

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

We expect these financial centers to reach a break-even level in the 18 to 24 month range.

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 this seasonality.

This concludes our prepared comments and we would like to now open the phone lines for questions from our analysts and let me ask Kathy to come back on the line and once again, explain how to queue in for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Barry McCarver.

Hello, Barry.

Good afternoon, guys.

Good quarter.

Thank you very much.

Tommy, Ozark said the same thing about the cost of funding and that it appeared to have creeped up pretty significantly in the fourth quarter.

Can you give us a little bit more color about the competitive environment for deposits and how you feel about that for 2006?

Well, I think the competitive environment is just that, very, very competitive.

Obviously, there in certain markets of Arkansas, there has been a pretty good influx of [Denovo] banks and so the competition for the deposit dollar is up just by that.

And at the same time, we've seen some increases in loan demand and so with those two -- those two out there together, we see that as a pretty good challenge.

Especially on the deposit procurement side.

I think the other thing is remembering that we've had -- I think, 13 consecutive increases in the old discount rate and Fed funds rate, and I think, that probably by industry standards is what we're looking at is not over yet.

So, I think it's going to continue to be a challenge and so as we're in a rising interest rate environment, and we have seasonality in our portfolio, we automatically feel a little bit of compression there in that first quarter.

I think the other thing, that when you look out over the whole year, there's still a lot of concern about the flat yield curve.

I think, we've all hoped and expected to start seeing a reasonable slope in that yield curve, and that's not happened to date, and if it continues as it is, then that too will be a challenge relative to the spread.

Yes.

Well, I guess is it fair for me to say that deposit pricing is probably gotten a little bit tougher in the fourth quarter, accelerated maybe versus the first three quarters of '05?

Yes, I think that's fair.

Okay.

Secondly, you referenced in the press release the loan growth, and I know we have to adjust it seasonally, but the commercial real estate, where there are certain big deals that came on during the quarter, or was it broad geographic growth?

Well, let me -- if I could, Barry, I'll approach it first from the standpoint of just the overall loan growth versus the loan growth by type.

And I would tell you that on a very positive note that in the growth markets of northwest Arkansas, central Arkansas, and northeast Arkansas, we reported double-digit growth.

And obviously, with northwest being the biggest opportunity there.

But we saw it also in, like I said, in central Arkansas and northeast Arkansas.

We also saw some good growth, in fact, double-digit growth, in the western region of Arkansas, which is that Fort Smith market.

But probably the best news was, because I think we expect that in those particular markets, the best news was that in our other affiliates that might be in slower growth areas of rural Arkansas, we saw some pretty decent growth in those areas in the mid- to closer to the third quartile in single-digits in those areas.

So that was -- I think that was positive.

Concerning the particular type of loans, there were a couple of larger projects that came on during that time that would account for part of the -- or a big part of the commercial real estate.

Also, on the commercial side, we have two loans that are -- one new loan that is pretty good sized.

That came on on a quarter-over-quarter basis, was in our fourth quarter '05, it was not in our fourth quarter '04.

I think we've talked about that before.

We said that we believe that is probably just projected out a three to a four-year-type loan.

Then we had a line of credit that funded in the -- well, it funded in '05, and I honestly don't remember if it was the second or third -- probably the third quarter.

Third quarter it funded fully, but it paid off right at the -- right before the end of the fourth quarter.

Did it completely pay off or pay down?

Partially pay off.

I think it was fully funded in the third quarter '05 and was not funded at all in -- or if it was, it was very small in '04.

And then in the fourth quarter, right at the end of the fourth quarter, it paid off about 50% of it.

And so from a quarter-over-quarter basis, that was a pretty large line of credit that we did a part of, or actually the lead bank in for many, many years.

It was just funding, whereas, it is normally not funding in the fourth quarter.

So that would account for that.

Okay.

And lastly, you mentioned in your opening remarks the significant pickup in credit card applications due to the competitive nature of your offering.

Can you quantify that a little bit for us?

I can tell you that -- is this the volume right here?

It's probably, if you look at the fourth quarter '05, versus the fourth quarter '04, we've actually probably increased our applications by as much as 60%.

Okay.

The fact is that our application volume at the end of '04 was probably at about a five-year low, or six-year low.

Yes.

I think you have to temper that pickup a little bit from that standpoint.

But I think the positive news is that when you look at the application pickup in '05, it was in October, November, and December, all about the same levels, and all of it was pickup over the same months in '04.

I think the other thing that you have to realize is that we also, our net loss of accounts was almost neutral in '05, whereas our net loss -- I mean, we had a net loss -- I'm sorry in the fourth quarter of '05.

So on a net basis, our pickup in fourth quarter '05 allowed us to basically have a wash relative to the accounts that were rolling out because of competitive pressures.

Whereas in the fourth quarter of '04, we would have had an overall net loss.

So, you know, I attribute that to many of the initiatives that we have put in place.

Great, that's very helpful.

I'll let somebody else ask questions.

Let me say this.

We're not where we want to be with these new initiatives, because we obviously want the new initiatives to accelerate the new application to flow to where we're having a net pickup.

Thank you, Barry.

Your next question comes from David Scharf.

Hi, David.

Hi,guys.

How are you?

Good.

Good.

I kind of wanted to follow up on Barry's conversation or question regarding CD re-pricing and could you -- It looked like the cost of [Indiscernible] on a year-over-year basis is up almost 85 basis points.

When you're looking at the CD environment, as you've outlined, it's very competitive.

What sort of of one year to 18-month money, what are the pricing throughout the market that you are seeing?

Well, I'm going to -- I'm going to probably need a little bit of help on the actually CD pricing that we're looking at relative to Arkansas or regional.

I just don't have that answer.

It seems like you've really been pushing the CD portfolio.

Well, I'll tell you where I think a lot of our challenge is is in our CD side is that we had a promotion earlier in the year to generate about $45 million in deposits and if you're going to generate $45 million in deposits, even at the first of the year in a rising rate environment with all the competition out there, you're going to have to get ahead of the game.

And I can't remember -- I think our average cost on that was like a 4.25%.

Now, that didn't look very good at the time, but it's looking a whole lot better right now and that was 24 to 34-month money.

Okay.

So if you want to use that as a baseline, comparing it on a regional basis.

That 24-36-month money is probably where a lot of that CD growth came from and that was the cause.

I think another thing, though, that is going to cost us going forward is, as we all as an industry, our money market accounts, our interest-bearing transaction accounts, as we price those down in that 50-year low, now we're at the point of having to -- if we don't want those migrating into CDs and we're wanting to keep them in those transaction-type accounts, or we don't want them to migrate out into the equity market, then we're going to have to start seeing some increase in those particular areas.

And I think that's probably the -- as much as a challenge in the cost of funds.

It's not only on deposit procurement.

It's going to be on deposit retention.

And I think, you're already seeing market pricing on the CDs, but I think there's still some -- we see some challenge still there on the transaction-type accounts.

Okay.

Then as these new [Denova] branches open up, I assume they'll have CD campaigns associated with them also?

Yes, each one will have some campaigns associated with them that will have some impact both on raising some dollars and probably the cost side.

Okay.

When we look at the personal expense, it didn't go up a great deal, but was there any sort of acceleration of year-end bonuses or anything, or was that a safe number to look at it?

From the two branches that came on?

That would totally be there.

No unusual transactions relative to bonuses or anything such as that.

Okay.

All the salary side would be the normal adjustments that we would be making plus the impact of the '05 branches that were coming on at the end of the year.

Just to give you an idea of that fourth-quarter impacts for the branches was in the $4 to $500 ,000 range just for the branches.

And as Mr May said earlier, when you normalize our non-interest expense for the writeoff last year for the new branches coming on in the fourth quarter, about 3.5% is our non-interest expense increase.

That's pretty reasonable there.

Yes, sure is.

Certainly.

That's all I have.

Thank you, David.

Take care.

Okay, bye.

We have a follow up question from Mr Barry McCarver.

Just a couple of follow ups.

First off, on the net charge offs, I want to make sure what's going on there.

I know seasonally, the fourth quarter is always the strongest, but it was half of what it -- or almost half of what it's been in the past couple of years in the fourth quarter.

Is there anything else going on there?

Did you see that number?

Let me get to the number on the total charge offs, your question, for example, in December, or fourth quarter '04, 3,875,000, versus the December or the fourth quarter '05 at $2,548,000.

That's the question?

Why it's so much lower in the fourth quarter?

Well, I was thinking more of it as a percentage of total loans .But yes, that's the question.

Well, I can tell you when you just look at the break down -- our asset quality has improved significantly in every respect.

And I think it's simply reflecting in the charge offs.

Our fourth quarter charge offs in credit cards, for example, was $1,455,000 versus a norm of about 1,100,000 or so.

And as I said in the text, a lot of that is because of the rush to file under the new bankruptcy law.

So we were actually up in the fourth quarter on the credit card side, but when you look at the consumer side, the real estate side, and the commercial side, it is significantly lower.

So I would say that the 2.5 is about as good as it's been over the last 24 months or so.

Right.

Especially when you consider your credit cards are going to be about a million two, or a million three every quarter.

I think it's just improved asset quality.

Okay.

And then, secondly, on the conversion of the credit cards to the new program, you're about 50% there.

Is that -- how does that work?

Is the first 50% faster than the second?

Or have you ramped up?

What should we expect timeline for that second 50%?

I would say -- I would say that the first 50% is faster.

I would say that the -- that you'll see an extended ramp-up on the last 50%.

And we'll have to remarket the second 50% again.

More than once.

That's right.

Okay.

Right.

Okay.

Thanks.

Thank you, Barry.

At this time, there are no further questions.

Thank you.

Well, thank you all very much.

Appreciate you being here.

That concludes today's conference call, you may all disconnect.