Simmons First National Corp (SFNC) 2006 Q1 法說會逐字稿

Good afternoon.

My name is Michelle, and I will be your conference operator today.

At this time I would like to welcome everyone to the Simmons First National First Quarter Earnings Conference Call. [Operator Instructions]

Thank you.

Mr. Fehlman, you may begin your conference.

All right.

Thank you.

Good afternoon.

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

We want to welcome you to our first quarter earnings teleconference and webcast.

Here with me today is Tommy May, our Chief Executive Officer, and David Bartlett, our Chief Operating Officer.

The purpose of this call is to discuss 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 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 www.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, 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.

Okay.

Thank you, Bob.

And I’d like to welcome all of you.

And as Bob mentioned, David Bartlett, our Chief Operating Officer, is here with us today for the first time in this meeting.

David was promoted to the position of President and Chief Operating Officer this last month.

And he brings lots of really good diverse background with him to this position.

He served both in the manufacturing industry and also the banking industry, having been a part of a major interstate bank in Dallas, a community bank in Plano, another major interstate bank doing business in Arkansas.

And he also was one of the initial founders of a bank that is a de novo bank in Hot Springs, Arkansas, which is now Simmons First Hot Springs.

So from the standpoint of our particular bank, our history and our strategy going forward, David just fits the bill perfectly.

And we’re really excited about him being a part of our corporate executive team.

So David, welcome.

Thank you, Tom.

In our press release issued earlier today, Simmons First reported first quarter 2006 earnings of $6 million.

Our $0.41 diluted EPS, this represents a 2.5% increase over the same period last year.

And given the current interest rate environment, we are relatively pleased with the Company’s performance for the first quarter.

While earnings increased modestly over the same period last year, we did report record first quarter earnings, solid loan growth, and a reduced provision for loan losses resulting from the improvements in asset quality.

Also, non-interest expense increased only modestly through disciplined expense control, even with the full impact of adding six new financial centers since the first quarter of 2005.

On a quarter-over-quarter basis, the Company’s net interest margin decreased 12 basis points to 4.05%.

While we anticipated some margin compression, the 12 basis points were certainly more than expected.

Now this decrease in net interest margin can be attributed to the increase in the cost of funds resulting from deposit repricing, coupled with the effect of the flat yield curve that we’re all experiencing.

We expect to see continuing competitive pressure in the deposit repricing in the short term, and we anticipate slight margin compression for the balance of 2006.

Non-interest income for Q1 ’06 was $10.6 million, compared to $10.1 million for the same period last year, a 5.4% increase.

Service charges on deposit accounts increased $349,000, or 10.2% over the same period.

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

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

For Q1 ’06, this investment contributed approximately $214,000 on an after-tax basis to non-interest income.

In Q1 ’05, due to our long-term membership in Pulse EFT, 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.

Excluding this one-time gain, Q1 ’06 non-interest income increased by 8.1% over the same period in 2005.

Non-interest expense for the first quarter was $22.1 million, which is an increase of $710,000, or 3.3% from the same period in 2005.

Included in the Q1 ’06 are the expenses associated with the Company’s six new financial centers that I mentioned a moment ago, that were opened since the first quarter of 2005.

Normalizing for the expansion expenses, non-interest expense on a quarter-over-quarter basis increased only 1.4%.

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

Now let me move to our loan portfolio.

As of March 31st, 2006, we reported total loans of $1.7 billion, an increase of $105 million, or 6.6%, from the same period a year ago.

The growth was primarily attributable to increased demand experienced in the commercial and real estate loan portfolios.

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 three years, our credit card portfolio has decreased by approximately $10 to $12 million each year.

As noted in previous conference calls, in order to reverse this trend, we have introduced several new initiatives to make our product more competitive.

Now we are somewhat 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 Rewards product, remembering it is our standard Visa product that has been primarily impacted by the competitive teaser rates.

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.

While we believe our initiatives have resulted in a slowing in the number of accounts that close, the average outstanding balance per account has decreased.

The decrease in outstanding balance per account appears to be an industry-wide challenge attributable to home equity borrowings, and according to a recent national article, an increase in use of multiple accounts per borrower.

This trend has resulted in a continued decline in our outstanding credit card portfolio on a quarter-over-quarter basis.

As a continuation of our efforts to stabilize our credit card portfolio, we are introducing an additional initiative in the second quarter.

This new initiative will be a fixed-rate card with no fees and no frills, and will have one of the best interest rates in America.

We believe this card complements both our Platinum Rewards product, which is one of the best reward-based cards in the country, and our classic Visa product.

Now we will update you on the status of this new initiative in subsequent teleconferences.

Moving to another loan-related topic, we are extremely pleased with the continuing positive trend in our asset quality.

On a quarter-over-quarter basis, non-performing assets decreased $3.1 million, a 24% decrease, even as total loans were increasing by 6.6%.

The non-performing asset ratio improved from 83 basis points to 58 basis points, a 25 basis points improvement.

The allowance for loan losses improved to 314% of non-performing loans as of March 31st, 2006, compared to 223% for the previous year.

Non-performing loans to total loans improved to 52 basis points, from 75 basis points a year ago.

At quarter end, the allowance for loan loss equaled 1.56%.

The annualized net charge-off ratio for Q1 ’06 was 15 basis points.

Excluding credit cards, the annualized net charge-off ratio was 7 basis points.

That’s probably the best that I can remember in many years.

For the first quarter of 2006, the credit card net charge-offs as a percent of the credit card portfolio was 1.07%, more than 400 basis points below the industry average.

As you know, credit card charge-offs in Q4 ’05 were accelerated due to the new bankruptcy law that went into effect in October.

While bankruptcy filings have declined significantly from the fourth quarter highs, we do not expect that the first quarter results will be maintained throughout the year.

However, we are cautiously optimistic that it will take several months for the credit card charge-off to return to a normalized level of approximately 2.5%.

As a result of the asset quality reflected in the numbers we have already discussed, the provision for loan losses was reduced by approximately $500,000 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 Q1 ’06, the company repurchased approximately 90,000 shares, with a weighted average repurchase price of $28.12.

There are approximately 455,000 shares remaining under the current repurchase plan.

Finally, let me update you on our de novo branch expansion plans.

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

This past year, we opened five new financial centers and relocated another.

In 2006, our plans call for opening six new financial centers, primarily in growth markets of Arkansas.

In March, the first of those locations was opened in the Heights area of Little Rock, bringing our total to 10 financial centers in the Little Rock MSA.

Additional locations are expected with further expansion in the El Dorado and our initial entry into North Little Rock, Paragould, and Beebe.

We have also acquired land for a new financial center in White Hall, Arkansas, and a new headquarters facility for our Northwest Arkansas affiliate, which will be completed in 2007.

Because most of these financial centers are located in growth markets of the state, we are excited about the opportunities they bring in the long term.

However, it should be noted that the short term impact of our de novo financial expansion will result in an increase in our non-interest expense, and the projected impact on EPS will be between $0.06 and $0.08 for 2006.

As expected, financial centers opened during 2005 and the first quarter of 2006 negatively impacted Q1 ’06 EPS by $0.02.

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 credit card portfolios, and quarterly estimates should always reflect this seasonality.

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

So let me ask Michelle 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.

Hey.

Good morning, guys.

And welcome, David.

Thank you, Barry.

Tom, just on the margin just for a second, you mentioned in the press release as well about deposit competition.

Can you give us a little more detail about what it looks like across all your markets?

Is it competitive everywhere, or primarily in the growth areas?

Well, I mean it’s pretty competitive everywhere, throughout the market area.

Out of that 12 basis point decrease--we had a 12 basis point decrease quarter-over-quarter.

In [link] quarter, we have 5 basis points, and out of that 12, about 4 or 5 of it was related to the credit card operation.

And the other 5 to 7, or 7 basis points, was related to this cost of funds issue.

And it’s not totally cost of funds, because obviously part of it is a result that the earning assets just haven’t been able to keep pace because of the flat yield curve.

But the cost of funds is--I mean, it’s pretty competitive everywhere.

Obviously in Northwest Arkansas, Central Arkansas, and Northeast Arkansas, where we have a lot of the growth opportunities, and quite honestly, a lot of the new de novo banks, we’re feeling quite a bit of pressure there.

But there are parts of rural Arkansas up in North Central Arkansas where you have some of the interstate banks that are doing business here and have some branches up there.

It’s pretty competitive there, too.

To any extent, are you guys able to gather deposits in some of these slower growth markets, given your footprint all over the state, and lend in some of the better markets?

Is that happening?

I think it does, Barry, and I think that’s a good point.

Generally speaking, much of the success that we’ve had in serving the slower-growth areas, and we’ve got really good ROAs in affiliates in those areas, has been just simply because we’ve been able to have better spreads there.

And we didn’t have the cost challenges that we have other places as far as deposit procurement.

So generally speaking, in rural Arkansas, we do have a lower cost of funds.

And we are able to--we also have a lower loan/deposit ratio, so we are able to do exactly what you said.

Okay.

Probably North Central Arkansas is the exception to that.

That’s directly related to, again, the number of interstate banks that have some branch locations in those markets.

I’ve got a couple of questions for Bob, and I’m going to come back to you, Tommy.

Okay.

Bob, a little bit of a jump in salary expenses.

I guess--I normally expect it to come down a little bit off the fourth quarter because you accrue from [bonus] and a little bit more in the fourth quarter.

But it was up about $500,000.

Was that just the new branches, or was there anything else in there?

Yeah.

Mostly, it was the new branches.

On a quarter-over-quarter basis--I know you’re talking about fourth quarter, but on a quarter-over-quarter basis, on non-interest expense, we had about $400,000 related to the new branches coming on line, in non-interest expense.

But there was nothing unusual in the first quarter over the fourth quarter.

It’s pretty level.

We didn’t have a lot of growth.

We had maybe a branch come on in the first quarter, and another one in the fourth.

December.

Two in the latter part.

Two in the latter part of the fourth quarter.

Yeah.

But we didn’t have a full impact in that fourth quarter.

But I would say it’s all--when you look at our salary expense and back [out] the new branches, it was up probably about 3%, 4%.

It’s pretty low.

Okay.

And is any of that related to future branches’ staffing now getting ready to open new?

A little bit of that would be related to that.

What I’m getting at, Bob, is that, going forward, are we--should we see any bigger pops for the new branches, or are we at a pretty good [run rate] now?

Well, I think each time we put on a branch, you’re going to see the--the couple of months before that, you’re going to see that branch coming on.

Like we have one in Little Rock that opened in March time frame, and it started probably at the end of December.

Okay.

And the branches we have--I think we have one opening up sometime in June or so.

You’ll see that a couple of months beforehand.

I think we’ve also--Barry, I think we’ve factored in, which I believe we said in the script.

I’m not sure.

But we factored in what the impact would be with those branches opening up, to 6% to 8%, counting the branches that we added in ’05, and then as they come on in ’06.

Okay.

Another question for maybe Bob, maybe Tommy.

But charge-offs for the credit card portfolio just sort of fell of a cliff this quarter.

Is that the new product, or was there something else in there?

Bob wants to answer that, and I want to answer it.

We like that one.

Oh, it’s so good.

No, you do it.

Well, on the fourth quarter, basically, you had the fourth quarter rush to the bankruptcy filings.

And so if you look at the fourth quarter bankruptcy, the September, October, and November.

September, normal.

October and November--excuse me.

The last four months.

September, normal.

October, November, and December, extremely high, because of the rush to file.

Then in January to February to March, the pipeline that you normally see went down quite a bit.

And so much of it just is a result of the acceleration that took place in the fourth quarter.

But I think that our folks would also tell you that while the bankruptcy filings are down significantly because of that, I think they also would tell you that there’s just some improvement that we’re seeing in that particular area.

We do expect it to climb back up, but it would probably be about to the 2.5% level.

And it’ll [be a ladder] through the remainder of the year.

Our asset quality and our credit--our asset quality overall is just really good.

But our asset quality in our credit card portfolio is extremely, extremely good.

And then this is the last question, Tommy.

At the annual shareholder meeting, you were talking about internal growth, and then potential acquisition opportunities.

And I know we didn’t really have a time frame in mind for that.

But you talk about possibly stepping outside the state.

Right.

Could you expand on that just a little bit?

Well, yeah.

But before I do, could I just simply say on the internal growth strategy, like the last ten years was so much about external growth.

Mergers and acquisitions, because we were trying to diversify geographically.

And that’s why mergers were so important to us.

And we did so.

We were very successful in that.

Today, we have lots of capacity with that infrastructure that we built, and that’s why we think internal growth is really important to us relative to our Arkansas holdings.

Likewise, we believe that we’re really positioned well, not only with infrastructure and technology and back office support, but also management, to maybe go beyond the borders of Arkansas.

And if we do, obviously that’s where the M&A is going to play a big role.

Now to the question, you know, I mentioned in the meeting that this would what I call a slow-grow strategy, because we’re going to be, again, very meticulous and conservative, like we generally are, and maybe sometimes too much.

But right now, we are trying to identify the markets.

And so I fully expect that during 2006, we will be spending a lot of time in not only identifying the markets that best fit what we’re trying to accomplish, but also identifying potential partners.

And so I guess the third component of that that gets really significant and important, the pricing side of it that’s making it all happen.

It will probably not happen in ’06.

But we’re really excited about this opportunity for us.

So are we.

Okay.

Thanks a lot, guys.

Thank you, Barry.

Your next question comes from David Scharf.

Hello, David.

Hey, David.

Hi.

How are you all doing?

Great.

Good.

Barry went over most of the things I wanted to touch on, but I wasn’t aware of the [inaudible] annual meeting, so I wasn’t aware that you guys were looking to go outside the state.

Is there any particular type of market that you’re more interested in?

Do you want to go into a higher growth market, such as Northwest Arkansas expansions?

There’s no question that our strategy outside of Arkansas will parallel the strategy that we’ve had for the last several years, and that is looking for growth opportunities, meaning growth market.

Certainly, our focus would be border states.

Not necessarily every border state, but border states that have some pretty good history of not only higher growth performance, but also some pretty good trends relative to employment and disposable income and so forth.

So specifically, while I don’t know that--well, I do know that we haven’t identified a specific area, there are some metroplexes in some of these contiguous states, such as Tennessee and Missouri, Texas, Oklahoma, that we would have some interest in.

That doesn’t mean the other states, we would not.

But in those particular areas, we have a little bit of knowledge about those particular markets.

But yes.

Growth markets is going to be a focus for us.

Now our plan also is that we would be probably looking at an area maybe at the outskirts of one of those communities.

Okay.

And would the acquisitions size stay relatively small like you had done historically?

Absolutely.

It would be between the $200 and $400 million range.

Now that doesn’t mean that we--I guess historically, ours would be from the $125 million range up to the $200 million range, or $225 million range.

I believe that the range we’d be interested in in the out-of-state area would be a $200 to $400 million institution that would have at least four or five locations in those particular markets, if not more.

Okay.

And leave the decentralized structure?

We would leave the decentralized structure.

[Inaudible] just for a follow-up question on the de novo activity and how that’s affecting personnel expense.

You guys put on essentially five de novo branches, relocated one, and that’s roughly [reported] as about a $400,000 increase in personnel expense.

Is that a fair enough number to extrapolate for the other six coming on line?

Yeah.

And that $400,000, David, is non-interest expense.

And the bulk of that would come to employees.

Personnel.

That $400,000 for a full quarter impact.

Okay.

Great.

Well, thanks for taking my questions.

David, one other thing I might add about this new market emphasis that we have and the focus on possibly--and I have to qualify by possibly.

It’s still in our thinking and planning stages about the out-of-state market.

Another key thing for us obviously is going to be culture.

Sure.

I think where we have been successful in the past, not only in getting the right partner, but making the integration of that work for us, is because we found partners that had similar culture to what we’ve had.

And so market will be critical to us.

But probably on that same scale will be finding the right institution with the right culture.

And at the right price.

Yes.

That sounds like a good idea.

Thank you.

Thanks, David.

Okay.

Your next question comes from Barry McCarver.

Hi, guys.

Just a quick follow-up.

Can you hear me?

Yes, sir.

Just looking at the last three or four years, it doesn’t seem like your performance in the first quarter, which we know seasonally is your weakest quarter, is really much a reflection on the rest of the year.

Is that something I’m just seeing, or do you guys agree with that?

It’s hard to judge us by the first quarter, because that seasonality does have an impact.

Yes, I think the first quarter--again, the seasonality issue is a pretty big issue with us.

I don’t think you can judge the year based on the first quarter.

Certainly, the first quarter numbers, the EPS numbers, are certainly a couple of cents below what we would have expected.

But when you consider the fact that most of it is margin driven, and we still got our 7% growth in loans, we will had expense control, and we still have good asset quality, and we’ve done all of this during a period of a flat yield curve, I think we’re still relatively optimistic about Q2, 3, and 4.

All right.

I think also, one other point, Barry, on the margin, if you look at last year, we maintained in the 410, 417 range, and didn’t really drop when a lot of other banks were.

We had a little bit of loss in this first quarter.

Some of that is seasonality, and some of it related to the credit cards.

But over the last 18 months, we didn’t really have that much of a drop in our margin compared to some other institutions.

Okay.

Thanks.

Thank you, Barry.

There are no questions at this time.

Okay.

Well, we thank all of you for being here.

Have a great day.

This concludes today’s conference.

You may now disconnect.