Simmons First National Corp (SFNC) 2006 Q3 法說會逐字稿

Good afternoon, may name is Annie and I will be your operator today.

I would like to welcome everyone to the Simmons First third quarter earnings conference call. [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, and we would like to welcome you to our third quarter earnings teleconference and webcast.

With me is Tommy May, our Chief Executive Officer, and David Bartlett, our Chief Operating Officer.

The purpose of this call is to discuss the information and data provided by the Company in our 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.

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 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 third-quarter conference call.

In the press release issued earlier today, Simmons First reported record third-quarter earning for the period ended September 30, '06.

Net income for the third quarter was $7.4 million or $0.51 diluted earnings per share compared to $0.50 per share for the same period in '05.

Very close to our expectations.

For the nine-month period ended September 30, '06, net income was $20.7 million, an increase of $591,000 over the same period in '05.

Diluted earnings per share for the nine-month period were $1.43, an increase of $0.06 or 4.4%.

Given the current interest rate environment and the competition for deposits, we are relatively pleased with the earnings report.

We, like rest of the industry, continue to be challenged with margin compression.

During this period of a relatively flat yield curve, we were able to still achieve earning growth due to the strength of the Company's asset quality and reduced credit card charge-offs and related reduction in provision for loan losses.

On a quarter-over-quarter basis, the Company's net interest margin decreased 19 basis points to 3.91%.

On a link quarter basis, the net interest margin decreased by 10 basis points.

As I matter of information, approximately four basis points of the link quarter decrease was associated with a statewide city deposit campaign.

As noted in our last conference call, we expect to see continuing competitive pressure in deposit repricing in the short term.

This repricing, coupled with the current inverted yield curve leads us to anticipate flat to slight margin compression for the balance of 2006.

Non-interest income for Q3 '06 was $11 million, compared to $10.7 million for the same period last year.

While this total reflects only a modest 2.7% increase over the same period in 2005, there are four items that warrant some discussion.

The first of those items, other service charges and fees, increased by $124,000 or 26.3% over the same period last year.

This increase was primarily attributable to an increase in ATM income based on volume and an improvement in fee structure.

The second item, premiums on the sale of student loans increased by $118,000 over the third quarter of '05, due to an acceleration of loan sales to prevent the loss of premiums to consolidator lenders.

The third item, income on bank-owned life insurance, increased $103,000 from the same period in '05, due principally to an improved earnings credit on the investment.

The fourth item, the increase in Non-interest income was partially offset by a decrease of $181,000 in service charges on deposit accounts.

This decrease was due to reduced income on NSF charges.

We believe the decrease is associated with an increase in consumer use of debit cards and internet banking, which appears to be a nationwide trend.

Non-interest expense for the third quarter was $22.1 million, an increase of $912,000, or 4.3% from the same period in '05.

Included in Q3 '06 are the expenses associated with the Company's seven new financial centers that have opened since the second quarter of '05.

Normalizing for the expansion expenses, non-interest expense on a quarter-over-quarter basis increased only 2.8%.

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

Now let me move to our loan portfolio.

As of September 30, '06, we reported total loans of $1.8 billion, an increase of $79 million or 4.6% from the same period a year ago.

The growth was primarily attributable to increased demand experienced in the real estate loan portfolio.

The increase was distributed between construction, single family residential, and other commercial real estate loans.

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

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

However, on a positive note, during the second and third quarters of '06, we saw some slowdown in this trend.

We believe this slowdown is associated with the initiatives discussed in previous teleconferences.

Which have resulted in a slowing of the number of accounts closed.

In addition, on a proactive basis, in July, we introduced a new initiative to increase new accounts.

This initiative was a 7.25% fixed rate card with no fees and no rewards, and to our knowledge is one of the best fixed rate cards in America.

Since introducing the new initiatives, we have experienced a positive net growth in credit card accounts.

On a year-over-year basis, outstanding credit card balances decreased by only $4.5 million, and on the link quarter basis, the portfolio actually increased for the second quarter in a row, up $3.8 million from March 31, '06, a significant improvement but not yet where we want to be.

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

As of September 30, '06, nonperforming loans to total loan were 61 basis points, and the nonperforming asset ratio was 46 basis points.

At quarter end, the allowance for loan loss equaled 1.45% of total loans and 239% of nonperforming loans.

Annualized net charge-offs to total loans for Q3 '06 were 20 basis points.

Excluding credit cards, annualized net charge-offs to total loans were 13 basis points.

For the third quarter of '06, the credit card net charge-offs as a percent of credit card portfolio were 1.10% down from 2.59% in Q3 '05, and more than 300 basis points below the most recently published industry average of 4.23%.

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

Now while bankruptcy filings have declined significantly from Q4 '05 to extraordinarily high levels, we do not expect that our year-to-date results will be maintained in 2005, we expect that credit card charge-offs will gradually return to the historical level of approximately 2.5%, which is still significantly better than where the industry will be.

During Q3 '06, we reduced our provision for loan losses by $1.1 million on a quarter-over-quarter basis.

While our asset quality continued to be strong, the provision change is primarily driven by the sustained decrease in credit card net charge-offs.

It is possible that the provision for loan losses will increase in the last quarter of 2006 depending on credit card charge-offs, loan growth, and asset quality.

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

Year to date, the Company repurchased approximately 189,000 shares, with a weighted average repurchase price of $27.54 per share.

There are approximately 355,000 shares remaining under the current repurchase plan.

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

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

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

Originally, our plans called for the construction of six new financial centers in 2006.

As of today, we have opened two of these locations, one in Little Rock, and one in El Dorado.

We have begun or are about to begin construction on three other locations which include our initial entry into North Little Rock, Paragould, and Beebe.

We expect these financial centers to open during the first half of 2007.

We have also acquired or are acquiring land for new financial centers in Little Rock, Whitehall, and a new headquarters facility for our northwest Arkansas affiliate.

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, as we have discussed from the beginning of our de novo expansion program, the short-term impact of our expansion program even with the delays will result in an increase in our Non-interest expense and the projected impact on EPS will still be between $0.06 and $0.08 for 2006.

As expected, the financial centers opened during 2005 and 2006 have negatively impacted the Q3 '06 EPS by $0.02.

Bottom line, we experienced moderate loan growth, 5%, margin compression, 19 basis points due to an increase in cost of funds, and good expense controls normalized at 2.8%, excellent asset quality, and low credit card charge-offs resulting in a reduction in provision which in aggregate resulted in a 2% increase in earnings per share.

Not exactly where we want to be, but where we expected to be considering the impact of the de novo strategy and our current interest rate environment.

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 that concludes our prepared comments.

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

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

[OPERATOR INSTRUCTIONS].

We'll pause for a moment to compile the Q&A roster.

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

You talked about in the second quarter, the rollout of a CD promotion to stimulate deposits.

Can you give us some details on how that went and if it's still going on.

I can.

The promotion was for approximately a 30-day period, and it was throughout the Corporation.

It was to help fund the growth we already had our pipeline and what we expected going forward and also anticipating the maturities that we had.

The new money that we had in this particular promotion which was 7 months, 10 months, and 14 months in term, was $43 million in new money, and $37 million or $37.7 million in transfers.

As you know, in any new deposit promotion today, as far as retail deposits, the biggest challenge that we have is migration.

I think in this one, while we had what we expected to see in migration, I think on the positive side that most of those dollars, we felt like like we would have the opportunity to either reprice -- obviously we timed this with the CD maturities, that we were going to have the opportunity to reprice after coming out of this low interest rate environment into a higher rate c.d.

In other words, they were going to move from -- many of them would move from the transaction accounts anyway.

So the timing of the promotion we think was favorable for us.

Beyond just seasonality, which I'm not sure has a big effect, have you seen any change in deposit competition recently?

I think the deposit competition continues to be very, very aggressive.

I can not -- I think it has been for some time, so I'm not sure that we've seen much change.

But it's still very aggressive.

Our campaign was at 5.35%, and basically, we gave the option that any of those term, that 5.35% rate, so that tells you a little bit about the competition that was driving us in the pricing there.

I think it continues to be aggressive.

It's probably flattened out a little bit just based on what's happened with the money market rates.

Switching over to the credit quality side for a second, looking at your charge-off levels, you wouldn't even know Simmons has a credit card portfolio.

Right.

But I'm just thinking going into -- into the fourth quarter, which is seasonally very, very big for the credit cards if I'm not mistaken, and the fact your reserve ratio came down a little more and quality on the trim line is still getting better, should we expect basically a flat reserve ratio given the fourth quarter here, or is there a potential that could still come down a little bit?

No, I don't think there's much potential that can come down.

I believe that in the text that one of the things that I mentioned that that the decrease in our provision, while our asset quality throughout the portfolio is what we would consider very, very good, the decrease in the -- in the provision probably was driven primarily by the -- the low credit card charge-offs.

And we expect that we will begin to see that ratchet up not only in the fourth quarter but certainly in the first quarter and second quarter of '07, again getting to a level of about 2.5% ultimately.

So we see some maybe racheting up in the fourth quarter, but certainly not to that -- to that 2.45% level.

Okay.

And then -- and then just lastly, and I'll get off and let somebody else --

Barry, let me qualify that.

Sure.

And I think I did in the text of the presentation.

That while we anticipate that provision probably going up some because we expect some of the credit card charge-offs to -- to begin rising, if we're wrong relative to the credit card side, then I think probably you still would see that the provision would be at least flat, fourth quarter versus third quarter.

If in fact the credit cards move as expected.

All right.

That's very helpful.

And then just lastly, just recently we were up in the northwest markets and in the northeast markets of Arkansas.

Sounds like one of your best teams may be in northwest market.

I'm wondering, growth potential in those two markets looking any better for '07?

I think we were already expecting quite a bit from those markets.

But particularly in the northeast, seems like things are really getting strong there.

I think we still are very positive on three markets, northwest, central, and -- and northeast.

I think as we move to the Paragould market in '07, we have some good expectations from that particular area.

In the north, probably the northwest, you read what we read relative to and what we see relative to the houses that are -- that are on the market at $400,000 and above and the number of lots that are developed and the number of lots that are available to -- to be developed.

So we probably see a little bit of a slowdown and expect a little bit of a slowdown in the -- in the northwest.

But yes, we are -- we are very positive about both the -- all three of the markets, northwest, northeast, and central.

Okay.

Thanks a lot, guys.

Thank you.

[OPERATOR INSTRUCTIONS].

At this time, you have no further questions.

Okay.

Well, we thank all of you and hope you have a -- thank you for being here, and hope you have a great weekend.

Have a good day.

This concludes today's Simmons First National conference call.

You may now disconnect.