Simmons First National Corp (SFNC) 2006 Q2 法說會逐字稿

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

[OPERATOR INSTRUCTIONS]

Thank you.

Mr. Fehlman, you may begin your conference.

Okay.

Thank you.

Good afternoon.

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

We want to welcome you to our second quarter earnings sales conference 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 quarterly earnings release issued this morning.

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

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

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

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, unknown, and uncertainties and other factors which may cause the 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'll turn the call over to Tommy May.

Thank you, Bob.

Welcome, everybody, to our second quarter conference call.

Hope you're having a good day.

In our press release that was issued earlier today, Simmons First reported record second quarter earnings for the period ended June 30, '06.

Net income for the second quarter was $7.3 million or $0.51 diluted earnings per share.

And that compares to $0.47 per share for the same period in '05.

Or an increase of 8.5%.

Now, for the six-month period ended June 30, net income was $13.3 million, an increase of some $481,000 over the same period last year.

Diluted EPS for the six-month period was $0.92, an increase of $0.05.

Given the current interest rate environment, we're pleased to report again, record earnings for the second quarter.

We, like the rest of the industry, continue to be challenged with the margin compression and during this period of rising interest rates, we were able to achieve earnings growth due to the strength of the Company's asset quality and reduced credit card charge offs, and of course the related reduction in the provision for loan losses.

On a quarter over quarter basis, the Company's net interest margin decreased 14 basis points to 4.01%.

However, on a link quarter basis, net interest margins decreased by only four basis points.

We expect to see continuing competitive pressure in the deposit repricing in the short term and this repricing coupled with the flat yield curve leads us to anticipate continued margin compression for the balance of 2006.

Non interest income for Q2 '06 was $11.5 million compared to $10.8 million for the same period last year, again an increase of about 6.3%.

One of the larger components of the increase in non interest income was $138,000 increase in other service charge and fees which was primarily attributable to an increase in ATM income based on volume and in improvement in the fee structure.

Also, as expected, income on bank on life insurance or BOLI, increased $170,000 from the same period in 2005.

Of this increase, approximately $90,000 was a result of a full quarter impact of the investment in '06 compared to only a two month impact in '05.

The remaining $80,000 can be attributed to an improved earnings credit on that investment.

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

There were no recognized gains or losses from the sale of investment securities during Q2 '06.

Non interest expense for the second quarter was $22.3 million, an increase of $1.3 million or 6.4% from the same period in '05.

Included in the Q2 '06 on the expenses associated with the Company's seven new financial centers that were open since the second quarter of '05.

Normalizing for the expansion expenses, non interest expense on a quarter over quarter basis increased only 4.2%.

And later in this discussion, we'll give you an update on our expansion progress.

Now, let me move to our loan portfolio.

As of June 30, '06, we reported total loans of $1.7 billion, an increase of $76 million or 4.6% 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 pressure from the credit card industry.

As noted in previous conference calls, over the past three years, our credit card portfolio has decreased by approximately $10 to $12 million each year.

On a positive note, during the second quarter, we experienced some slowdown in that trend on a quarter over quarter basis, outstanding balances decreased $8.9 million and more importantly, on a second quarter link basis, the portfolio increase for the first time since 2001, up $2.6 million.

We believe that the initiatives discussed in previous teleconferences have resulted in some slowing of the number of accounts closed.

Net loss accounts have declined from a high of 5,500 in 2002 to only 75 through June 30 of '06.

As a continuation of our efforts to stabilize our credit card portfolio and as mentioned in our last teleconference, at the end of July, we're introducing another initiative to increase new accounts.

This initiative will be a 7.25% fixed rate card with no fees and no rewards and to our knowledge, is the best fixed rate card in America.

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

Moving to another loan-related topic, we continue to be pleased with the Company's asset quality.

As of June 30, '06, non performing loans to total loans were 62 basis points and the non performing asset ratio was 72 basis points.

At quarter end, the allowance for loan losses equalled 1.51% of the total loans.

The annualized net charge off ratio for Q2 '06 was 25 basis points.

Excluding credit cards, the annualized net charge off ratio was 19 basis points.

For the second quarter of '06, the credit card net charge offs as a percent of credit card portfolio was 1.14% which is down from 2.68% in Q2 '05 and more than 350 basis points below the most recently published industry average of 4.81%.

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 fourth quarter highs, we do not expect that our year-to-date results will be maintained throughout the year.

However, we are cautiously optimistic that it will take several months for credit card charge offs to return to a normalized level of approximately 2.5% which is still very good compared to the industry.

During Q2 '06, we reduced our provision for loan losses by $1.2 million on a quarter over quarter basis.

While our asset quality numbers continue to be strong, the provision change is primarily driven by the decrease in credit card net charge offs and a higher than targeted level of unallocated reserve that was created by significant improvements in a couple of loans with specific reserves.

It is possible that the provision for loan losses will return to its historical level at some point during the last half of 2006, obviously depending on credit card charge offs and the levels of unallocated reserves.

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 '06, the Company repurchased approximately 75,000 shares with a weighted average repurchase price of $26.74 per share.

There are approximately 379,000 shares remaining under the current repurchase plan.

Finally, let me update you on our De Novo branch expansion plans.

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

In 2005, we opened five new financial centers and relocated another.

This year, our plan calls for a construction of 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.

In May, we opened a new location in El Dorado.

Additional locations are expected with our initial entry into north Little Rock, Parago, and Beebe.

We've also acquired land for a new financial center in White Hall and a new headquarters facility for our northwest Arkansas affiliate.

Both scheduled for completion in 2007.

Because most of these financial centers are located in growth markets of Arkansas, 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 projected impact on EPS will be between $0.06 and $0.08 for 2006.

As expected, financial centers opened during 2005 and the first half of 2006 have negatively impacted Q2 '06 EPS by $0.02.

We expect these financial centers to reach a break even level in 18 to 24 months.

We remind our listeners that Simmons first experiences seasonality in our quarterly earnings due to our agra 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 the phone lines for questions from our analysts.

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

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from Barry McCarver with Stephens, Inc.

Hello, Barry.

Good afternoon, guys, how you doing?

Good.

Good quarter.

Thank you very much.

Tommy, in your comments on the profit fee income from ATM, I was wondering did any of that relate to the bank moving up ATM charges a little bit?

A little bit.

Probably from that and then certainly a little bit of it was the fact that I think more of an issue of cost that we had been passing along where we were being charged that we simply pass that along to the customer which, again, is a net effect of increasing our fee income.

Most of those, Barry, were fees at foreign ATMs per say .

Historically we had been eating the charges that most banks have and we kind of looked at how to be more competitive and we changed some of the fees up and it gave us a tick up.

I think volume expansion --

is the biggest part.

Is the bigger part of that total income.

Okay.

Would you disclose in talking about your loan loss reserve, I was wondering if you would tell us what percentage is considered an unallocated reserve?

Well, I'm guessing that's probably a big debate out there among a lot of institutions, relative to what the SEC believes.

I guess how one defines unallocated.

The bottom line is what we have said is that we want to be in a target level of no more than 25%.

And our current level at June 30th after we had made the adjustments brought that level to 31%.

Now, let me tell you a little bit about what prompted this process.

First of all, shortly after the end of the first quarter, we may have made some slight adjustments in the first quarter but after the first quarter, we had some loans that had some specific reserves that were tied to those particular loans.

And through a little bit of luck and a lot of hard work, by our affiliate, those loans worked out and we were able to eliminate that specific reserve.

That would be number one.

Probably even a bigger issue was when you look in retrospect of what our historical credit card charge off is, and the related provisions associated with that charge off, and then you look at the current situation for the first quarter and/or year-to-date, the charge offs were actually down significantly to the extent of $1.2 million.

And the cause of that, we felt like it was necessary to reduce the provision to reduce -- thereby reducing the unallocated reserve until the trend changed.

And that's really the bottom line.

We do have a systematic approach in which each and every month, you know, we do have, again, we're a multibank Company so we have eight banks and each month, we look at it on a consolidated basis and we look at it on each -- at each bank and we have seven bench marks and then we analyze where they are on each one of those bench marks and then we look at that relative to the unallocated reserve.

So, we're really making adjustments systematically based on the asset quality of each one of those banks.

But in June, because of this credit card thing, we felt like we needed to go ahead and make a -- at least a one-time change in the June -- or the second quarter provision in order to get it down to the level of approximately 30%.

Given where the charge offs on the credit card portfolio are, if I were to assume that they remain the same or maybe trickle back up a little bit, do you feel like you have some play room there on the provision enough to keep the auditors happy or are you kind of maxed out?

You're talking about if the trend were to stay the same, are we going to have to see further reductions in the provision?

That's correct.

I think probably if the trend in the credit card were to stay the same, we probably would have to have some further reductions in the provisions in the third quarter.

You know, based on our crystal ball which obviously we don't have, we think that credit card charge offs are not going to stay the same and it will ramp up in Q3 and Q4 and as a result, we'll have to start ramping up that provision, maybe not back to the -- to where it was totally before but we'll have to begin ramping it back up.

We don't expect for that trend to stay down.

We expect it to ramp up.

Ok.

And then just lastly, I have a question.

I'm going to point to David since he's not new anymore, it is time we started to rough him up a little bit.

But David, I wondered if you could comment on the strength in the commercial, commercial real estate portfolio.

Obviously, there's seasonality to everybody's business but that looked particularly strong.

Was there anything big in there?

At quarter end, we were fortunate enough to continue to see some good commercial real estate lending opportunities in our northwest Arkansas facilities and that office.

We did see a little tick up in commercial lending in the Little Rock markets as well.

So, again, our asset quality is of significant importance to us and still reviewing and keeping that asset quality where it is, we did see some nice increase in both -- in the northwest affiliate and in the Jonesboro affiliate.

What's the pipeline look like for the rest of the year there?

Let me touch on the pipeline.

Right now, over the next 12 months, you know, we've projected that at a level that would probably be annualized growth of about 5% so our pipeline projections are down a little bit right now.

Okay.

Thanks, guys.

Thanks, Barry.

Your next question comes from David Schaefer with FTN Midwest Securities.

Hi, guys.

How are you?

Good.

I was wondering if you could talk on whether or not you have the ability to run off the CD portfolio given that loan growth has kind of slowed down.

David, I can barely hear you.

I apologize.

I wondered if you could guys could talk about the ability to run off some of the CD portfolio and use some of the securities portfolio to float ongoing loan growth and your thoughts on how that would affect the margin.

Right now, we're in the midst of a CD promotion.

Just simply, you know, our projecting ahead not only with the pipeline even though the pipeline is not as great as it has been.

We believe that we're about -- at our lead bank, we're at about an 85% pledging requirement.

So, we don't have a whole lot of opportunities to use those dollars to replace say the higher cost CD sources of funding right now is the bottom line answer to it.

What sort of pricing are you giving on your CD special?

Right now, we're at -- it is a 550 and let the customer choose the maturity of 7, 10 or 14.

And you know, we're probably halfway through the program and it is pretty much on target relative to the number of dollars that we're trying to write.

Ok.

And you sound like you're more inclined to go with the retail.

Is this what the new branch expansion, is this the CD to bring customers in as opposed to going to the broker market?

That's a big part of it, yes.

With the expansion of not only '05 but our '06 with our new branch locations.

Let me tell you we're not beyond using the wholesale market and we have, you know, we have done that to a certain degree.

You know, obviously when it makes sense for us, the cedar program or brokered deposits.

If we get them at a cheaper source but also, through the federal home loan bank.

We have developed our secondary source of funding in a way that we try to use the federal home loan bank on our seasonal borrowings and then just use the more expensive retail side right now when we think it's permanent growth in portfolio.

Okay.

Just so I understand, you mentioned that you had -- we've had two branches open up this year, year-to-date.

Planned additional four to be opened in '06 and then an additional two in '07, is that correct?

Yeah, right now, the two in '07 would -- all I was referring to there is land that we have already acquired that we'll start construction on in '06 and complete in '07 or we'll start construction on in '07 and complete in '07.

It does not mean that we won't do more than that but we haven't acquired land to do that but the answer is yes on those six.

In '06, they'll all be started and well under construction.

A couple of them could roll into '07 before they're actually open.

We'll be well into construction by the end of the year.

What do you expect the pro forma to be at the end of the year?

Pro forma branch count?

About 85.

85 branches.

Great.

I don't want to take any more of your time.

I thought it was very good.

Thanks for your time.

I might just add one thing David Bartlett pointed out here is as we do our analysis on the wholesale side versus the retail side, obviously one thing we factor in is the migration issue that we get from the pure retail side and that's a real good point.

At this time, there are no further questions.

Gentlemen, do you have any closing remarks?

No, we don't.

We thank everybody for being here and the opportunity.

Hope you have a great day.

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

You may now disconnect.