Simmons First National Corp (SFNC) 2006 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Simmons First National Corporation's fourth 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. Garner, you may begin your conference.

Thank you, Amy.

Good afternoon.

I am David Garner, Investor Relations Officer of Simmons First National Corporation.

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

Here with me today are Tommy May, our Chief Executive Officer, David Bartlett, our Chief Operating Officer, and Bob Fehlman, our Chief Financial Officer.

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

Additional information concerning these factors, can be found in the closing paragraph of our press release, and in our Form 10-K.

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

Thank you, David, and welcome everyone to our fourth quarter conference call.

In our press release issued earlier today, Simmons First reported fourth quarter earnings for the period ended December 31st, 2006.

Net income for the fourth quarter was $6.8 million or $0.47 diluted earnings per share, virtually unchanged from the same period in 2005.

For the year ended December 31st, 2006, our net income was $27.5 million, an increase of $519,000.

Diluted EPS for the 12-month period was $1.90, an increase of $0.06 or 3.3% over 2005.

Despite the 2006 interest rate environment and the competition for deposits, which has been very significant, we were able to achieve modest annual earnings growth.

And we, like the rest of the industry, were challenged with margin compression.

However, we remain very pleased with the continuation of our strong asset quality, which has resulted in a reduction in the provision for loan losses.

Likewise, we are pleased with our ability to control non-interest expense during this period of expansion.

On a link quarter basis, net interest margin decreased by 5 basis points to 3.86% and on a quarter over quarter basis, it decreased 24 basis points.

We expect to see continuing competitive pressure in deposit repricing in the short-term.

However, approximately $110 million of our security portfolio will reprice within the next 12 months, of which 52% will reprice within the first quarter.

On a positive note, we expect 150 basis point yield pickup based on projected cash flows and the current yield curve.

The security yield pickup, countered by higher interest rates from the deposit repricing, leads us to anticipate a flat to slightly improving margin in 2007.

Non-interest income for Q4 '06 was $10.8 million, compared to $10.7 million for the same period last year.

While this total reflects only a modest 1.1% increase over the same period of 2005, there are three items that warrant some discussion.

First, other service charges and fees increased by $208,000 or 41% over the same period.

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

The second item is income on bank-owned life insurance or BOLI, increased $108,000 from the same period in 2005, due principally to an improved earnings credit on the investment.

The third and final item is the increase in non-interest income, was partially offset by a decrease of $247,000 in service charges on deposit accounts.

Now 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, and the normal bell-shaped curve that has been experienced in the industry.

Non-interest expense for the fourth quarter was $22.5 million, an increase of $528,000 or 2.4% from the same period in 2005.

Included in Q4 '06 are the expenses associated with the Company's six new financial centers that have opened since the third quarter of '05.

Also, in Q4 '06, we reversed $190,000 accrued for the long-term incentive plan for the corporate CEO after it was determined that the payout was not probable.

Normalizing for the expansion expenses and the incentive plan adjustment, non-interest expense on the quarter over quarter basis increased by 2.5%.

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

Now let me move to our loan portfolio.

As of December the 31st, '06, we reported total loans of $1.8 billion, an increase of $65 million or 3.8% from the same period a year ago.

The growth was primarily attributable to a 9% increase in the real estate loan portfolio.

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

However, the growth was somewhat mitigated by a $15 million payoff of a bank stock loan in our corresponding banking area, a $12 million reduction in a commercial line of credit, a $5 million reduction in the student loans due to early sales in order to avoid consolidation lenders, and a larger than normal seasonal drop in our [agra] borrowings.

All of those were unexpected.

While we see some softening in loan demand, we do expect a pipeline that will produce better loan growth in -- than in 2006.

Let me give you an update on our credit card line of business and recent initiatives.

We continue to experience significant competitive pressure from the credit card industry, and as we have discussed this for many reporting periods.

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

However, on a positive note, and as discussed in our last teleconference, during the second and third quarters of 2006, we saw some slowdown in this trend.

In Q4 '06, we experienced a slight increase of $300,000 on a quarter over quarter basis.

We believe this improvement is associated with the initiatives discussed in previous teleconferences, which have resulted in a slowing of the number of accounts closed.

Over the previous five years, 2001 through 2005, we have had a net cumulative decrease of 14,500 accounts.

In 2006, we had in addition of 1,650 new accounts with the most significant growth coming since introducing our 7.25% fixed-rate card in July.

And I should point out that the 1,650 increase is net new accounts.

Now while these results are positive, we cannot be assured at this time that a sustained growth trend has yet been established but we're cautiously optimistic.

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

As of December 31st, 2006, non-performing loans to total loans were 56 basis points and non-performing asset ratio was 67 basis points.

At quarter end, the allowance for loan losses equalled 1.42% of total loans, and 252% of non-performing loans.

Annualized net charge-offs to total loans for Q4 '06 were 26 basis points.

Excluding credit cards, annualized net charge-offs to total loans were 19 basis points.

For the fourth quarter of 2006, the credit card net charge-offs as a percent of the credit card portfolio were 1.05%, which is down from 3.35% in Q4 '05 and more than 350 basis points below the most recently published industry average, which is 4.67%.

Now we all remember that credit card charge-offs in Q4 '05 were accelerated due to the new bankruptcy law that went into effect in October of '05.

While bankruptcy filings have declined significantly from Q4 '05 extraordinarily high levels, we do not expect that our 2006 results will necessarily be maintained in 2007.

We expect that credit card charge-offs will gradually return to our historical level of approximately 2.5%.

I think the big uncertainty is when will that happen?

During Q4 '06, we reduced our provision for loan losses by $967,000 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, and the improvement, or payoff of several large classified credits.

It is probable that the provision for loan losses will increase during 2007, of course 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.

During 2006, the Company repurchased approximately 203,000 shares with a weighted average repurchase price of $27.80 per share or $5.6 million.

There are approximately 341,000 shares remaining under the current repurchase plan.

We expect to be slightly more aggressive with our stock repurchases in 2007.

Finally, let me update you on our de novo branch expansion plans, which are currently focused 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.

We have opened three of these locations, one each in Little Rock, El Dorado and Beebe.

We have begun construction on two other locations, our initial entries into North Little Rock and Paragould.

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

In addition, we have acquired land for a new financial center in Little Rock Midtown and a new headquarters facility in Rogers for our northwest Arkansas affiliate.

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

However, as we have discussed from the beginning of our de novo expansion program in Q3 '05, the short-term impact, even with the delays, results in an increase in non-interest expense.

Financial centers opened as part of the expansion program had a negative quarter over quarter impact of approximately $0.01 on Q4 '06 EPS, and a year-over-year impact of approximately $0.06 on 2006.

We believe the expansion program will negatively impact year-over-year EPS by $0.06 to $0.08 in 2007.

Bottom line, on an annual basis, we experienced moderate loan growth, 4%; margin compression, 17 basis points due primarily to an increase in cost of funds; good expense controls, normalized increase of 2.5%; excellent asset quality, low credit card charge-offs, 1%, resulting in a reduction in our provision, which in aggregate resulted in a 3.3% increase in EPS.

Once again, not exactly where we wanted to be, but where we expected to be, considering the impact of the new financial centers, and more importantly, the 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.

Generally speaking, our first quarter has the lowest EPS due to this seasonality.

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

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Barry McCarver.

Hi, Barry.

Hey, good afternoon, gentlemen.

Cold up there?

Can you hear me?

I can.

I can just barely hear you guys.

I may have a bad connection.

Sorry about that.

Can you hear me better?

Yes, there we go.

Good afternoon, first off.

I was thinking about seasonality in the fourth quarter that normally incurs and thinking about the little bit of margin contraction you had during the quarter, and I was wondering, tough question, but can we separate out what was deposit pricing and deposit competition versus what was just a little bit of the seasonality in the quarter?

I think it will be hard for us to do that, Barry.

I think-- let me just say this, though, concerning the seasonality part of it.

While we got some pickup in the credit card seasonality that we have not seen in the last two years, we had some falloff in the agra sector, to where the payouts were greater than we anticipated based on government payments and the yields, and the prices.

So I would say that probably the seasonality had probably a third of the impact, maybe a little bit less than that, and then probably two-thirds of the impact, maybe seasonality 1 to 2 basis points.

Well also Barry, in the first quarter, we'll see more seasonality when our agra loans pay off even further and our credit card portfolio pays down after the Christmas season.

Okay.

Okay.

Second question, you talked a little bit about the loan pipeline and the strength you might be seeing there in '07.

Can you give us a little idea potentially what lines that may be in, and I'm wondering if there's anything on the agra side.

I think you just answered the question, Bob, but is there anything on the agra side that might gross back up first part of the year here?

Well, let me talk about the agra side first.

I believe that we're going to probably get some pick up on the agra side in '07 on the average outstandings, whereas we had that large payoff in the-- or larger than expected payoff in Q4.

What we now understand is that while the government programs are going to be at about the same level, there will be more on the back end than the front end --

Okay.

-- relative to the dollars that are paid, so that means that the level of borrowings are probably going to be higher during the period in which they kick in in the second quarter.

Okay.

And the outstandings will likely be a little bit higher because of that.

Now, as far as the loan pipeline and our comments, I think one thing to remember when you look at our portfolio for the growth in the portfolio for 2006, I did explain the extraordinary items that happened.

Well, we all have extraordinary items from time to time, so there's nothing to say we won't have extraordinary items this next year, but I do think that one of the things is that our growth in loans have been a little bit mitigated because of the decreases that we have seen in our credit card portfolio, and as we said in the text, that has shown a pretty good positive trend of changing.

So we believe our pipeline is probably going to be maybe a little bit stronger, based on what we're seeing on some things in northwest and the central part of the state, but we also think that it's not going to be maybe mitigated as much on the credit card side as we have seen over the last three years.

Okay.

That's very helpful.

Thank you.

And then just lastly, and you touched on deposits just a little bit in your comments Tommy, but I was going to say we've heard from a couple other banks in Arkansas.

It sounds like deposit pricing and deposit competition is cooling off a little bit, not-- certainly not want to get too excited too early, but I'm wondering if you are seeing the same thing, and if there's some light at the end of the tunnel for maybe CD pricing benefiting a little bit, perhaps midyear, something like that?

Well, I think like all of my peers, not only in Arkansas but nationwide, we hope there is light at the end of the tunnel there, because the pricing pressures that we have seen have just been enormous.

I do agree that we're starting to see in certain parts of the state that some of the CD pricing has begun to level off and even begin to decrease some.

But I am not sure that I'm ready to call it a trend, but I do think what we have seen is certainly a whole lot better than what we have seen the last 18 months in the deposit pricing part of it.

And again, we went back, we went into the market in midyear last year in a deposit campaign because we did not see a whole lot of relief in the market, and I think most of that was at an average of 5.5% or so, and I think we're-- we were relatively pleased with the outcome of that but since then it continued to go up, and I think we have seen some abatement since then.

Okay.

Thanks a lot, guys.

Appreciate it.

Thank you, Barry.

Thanks, Barry.

Your next question comes from David Scharf.

Hi, David.

Hi, good morning or afternoon.

How you doing?

Can you hear me okay?

Yes, sir.

Can you hear me?

Yes, sir.

Thanks.

Great.

On the CD front also, can you tell me what the cost of funds is on at least the blended CD cost of funds is?

Bob?

For the fourth quarter, David, it was roughly about 4.5% was on the time.

And last quarter you all talked about some CD prices being about 5% to 5.5%.

Yes, we were up on the high end at the 5%, but our average is about 450 and if you look at the quarter before in September, it was about 420 so we had a 32 basis point pickup for that third quarter to fourth quarter.

A lot of that pickup would have been associated with our deposit campaign.

Yes, the full effect of the deposit campaign.

That's correct.

Should we expect the growth in the CD balances to start to slow, especially considering that some of these branches have been up and running for some time now?

I would hope so.

Okay.

We obviously want to see more growth in our core deposit relationships that we expect to see as the new locations of financial centers go online and mature in that process.

Okay.

And on the card portfolio, I think it's obviously a great trend that that's holding where it is, but can you also talk about what the yield is on that portfolio?

Well, I can tell you that-- and I don't know if this is the exact number, but at one time last-- earlier part of this year, I think the overall yield when you take into-- when you take into consideration the three different cards that we have, including the 7.25 fixed-rate card that we have introduced, and you add to that your interchange fees and what few membership fees that are out there, that's probably an overall yield of 14-plus.

And David, another comment on that, the 7.25 yield card, there's been some volume in there but when you take in the fees in that, that's probably about a 9, 9.5% yielding card.

Yes.

I mean obviously it's very respectable considering the charge rate.

And I think while the numbers we reported on the credit card may not seem like a lot in numbers and dollars, the change in the trend is very positive to us, especially when you consider the overall yield that we have in that portfolio.

Yes, definitely.

And also just so I'm clear, on the de novo campaign, it-- if my numbers are right or my notes are right, you all opened eight since 2005.

And do you have another-- is that right?

No, I think we opened, I thought it was six.

You had six.

Six and there were some in earlier, earlier than the third quarter in '05.

So I think-- it is about eight depending on what period you're looking at.

The period we looked at that Mr. May compared earlier was five -- since '05, we're at about eight branches.

That's right.

And do you have, if I was reading the notes in the press release right, there are another five slated in various stages for '07?

Yes.

Let me kind of pull that back up.

We had-- we have begun two constructions in North Little Rock and Paragould.

Those are our first entries into those markets, and then we also have in Little Rock in the Midtown area, that's where the UMS Medical Center is.

Then we have the location that should open by year end, and then a large headquarters facility in our northwest Arkansas in Rogers so we have --

And what will the, at the end of that, what will the pro forma branch network be to?

Right now we have 82.

82?

So that would put it near--

87?

87.

Yes.

And then also, I have been really pleasantly surprised at how well you have held on the personal expense line item.

How is the staffing on this-- the remaining de novo branches?

David, I can barely hear you.

I apologize for that.

I said I've been very pleasantly surprised on how the personal expense item has been managed very well throughout the growth of the de novo branches, but the remaining five, how much money has been geared towards that staffing already?

Should we continue to expect sort of a slow increase in personal expenses, or are you pretty close to a normalized run rate?

No, I think-- I think that you should expect to see some of that continue.

All of that is not in the numbers.

The numbers that you have looked at, like I say, are a little bit distorted because of the incentive reversal.

Right.

So that impacts it a little bit, but I think we'll probably continue to see that go up as-- and hope that that will be fully loaded in probably the third quarter, by the beginning of the third quarter.

And what I would say, David, is the branches we have open now, you are pretty much looking at what the operating expense is.

Obviously any new branches going in in '07, we're going to have incremental amounts on those.

But we're pretty much fully loaded on the existing branches that have been opened on a quarterly basis going back.

Okay.

And then one final question.

If we can talk about-- just sort of looking out the next two to three years with some goals that you all would like to just talk about whether it's profitability or balance sheet growth, some of those branches surely are reaching profitability or coming close to.

Where do you think we can-- we should look in terms of profitability, or balance sheet growth?

Well, I think that probably when you look at the historical numbers and you see the mid-single-- single-digit growth in the earnings in the mid to maybe a little bit above that growth in the balance sheet, I would expect that you'll see that to continue and the-- we would like to see the earnings growth obviously move up to a higher level-- higher single-digit level.

From my model end, it seems like the opportunity is certainly in '08 when these branches start to become profitable.

And do you think reaching a 1, 1.5 ROA is reasonable?

I don't know.

I don't think I can address that right now.

I think that probably-- our greatest expectations over a-- our planning horizon would be to, again, continue to move our balance sheet forward, a growth in the high single-digit level and the-- as we mature, the new branch locations, and as we stabilize the credit cards and we--

Yes, I'm not trying to box you in a corner.

I understand.

We would expect to see kind of corresponding increases there in the earnings side.

Well, that sounds great.

Thanks, once again, for taking my call, and good quarter, and look forward to talking to you all soon.

Okay, David.

Have a good day.

Thank you.

You too.

[OPERATOR INSTRUCTIONS] You have a follow-up question from Barry McCarver.

Hi, Barry.

Hi, guys.

I forgot to ask my standard question and I ask it every quarter so sorry but I wondered if you could give us a little update on what the atmosphere in northwest Arkansas is like right now?

And I have to ask, because I hear from a lot of different sources about the softening in loan demand, the overabundance of commercial real estate and what not.

Can you just give us an idea on sort of your thoughts on that market right now?

Well, I would start off by saying there's probably an overabundance of banks in northwest Arkansas, and needless to say, that's presenting some challenges, both on the loan demand side and the deposit side, but I think we're still very comfortable with our opportunities up there.

I think the common question has been is there a real estate bubble and where is it?

I think probably in northwest Arkansas, the-- it's been stated that the homes less than $400,000 are still in-- doing very well, and the homes over that $400,000, we're probably seeing inventory build-up.

I think that in the-- what I read and hear and-- from our folks, the-- still lots of commercial real estate construction going on up in that market.

Is there any credit quality issues you would be concerned about in that market?

Well I can tell you-- all I can speak to is our institution, and what I can tell you is that our corporate numbers are complemented by what we have seen in northwest Arkansas.

We have not had any kind of significant challenges up there.

I cannot speak to the other institutions, but from our standpoint, that's what I would say.

Great.

Okay.

Thank you.

Okay.

Thank you, Barry.

At this time, there are no further questions.

Okay.

Thanks a lot.

Have a good day.

This concludes today's conference call.

You may now disconnect.