Simmons First National Corp (SFNC) 2007 Q1 法說會逐字稿

My name is Daretha.

At this time, I would like to welcome everyone to the Simmons First National first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

[OPERATOR INSTRUCTIONS] I would now like to turn the call over to the Investor Relations Officer, David Garner.

Please go ahead, sir.

Good afternoon.

I'm David Garner, Investor Relations Officer with Simmons First National Corporation.

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

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

The purpose of the 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 on this conference 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, I will turn the call over to Tommy May.

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

In our press release issued earlier today, Simmons First reported record first quarter 2007 earnings with $6.7 million or $0.46 diluted EPS.

This represents a 12.2% increase over the same period last year.

Net interest margins for the first quarter of '07 increased two basis points to 3.88% from the previous quarter.

When compared to the same period last year, net interest margins decreased 17 basis points.

Despite a reduction in our margin on the quarter-over-quarter basis, we did record an increase in net interest income, which was due to good growth in our loan portfolio and an improved yield in the securities portfolio.

However, the biggest impact on our record first quarter earnings was our continued improvement in asset quality and the related reduction in the provision for loan office.

We were also able to generate non-interest income growth while continuing to control non-interest expense, even during our De Novo Expansion process.

Margin increase was our first [link] quarter improvement in net interest margin in over two years.

As noted in our previous conference call, we expected an improvement in our security yield due to the maturities and repricing in the first quarter.

As a result of this repricing, the security yield increased 33 basis points over the prior quarter.

We also saw the rate of increase in our average cost of deposits slow during the first quarter due to the current inverted yield curve, the competitive deposit market and the recent uncertainty relative to any inflationary pressures.

We continue to anticipate a flat to slightly improving margin for the balance of 2007.

Non-interest income for Q1 '07 was $11.5 million, compared to $10.6 million for the same period last year, a 7.9% increase.

Several factors contributed to the improvement in non-interest income.

First, the trust income increased by $270,000 or 19.8% compared to the same period last year.

While most of this increase is a permanent timing difference due to a billing change which distributes trust income more evenly throughout the year, we have added some accounts that should improve our annual trust revenues.

Secondly, other service charges and fees increased by $150,000 or 22.8% compared to the first quarter of 2006.

This increase was primarily due to an increase in ATM income, driven by an increase in PIN-based debit card volume and an improvement in fee structures.

The third issue, credit card fees, increased by $191,000 or 7.8% in Q1 '07 compared to Q1 '06.

Most of this increase was due to a higher volume of credit and debit card transactions.

Number four, premiums on the sale of student loans increased by $146,000 or 19.8% over the same period last year, mainly due to early sales to avoid losing the premium to consolidation lenders, as discussed in previous conference calls.

However, it should be noted that this is primarily a timing issue.

The fifth item is other non-interest income, which increased by $242,000 or 12.6% compared to the same period last year.

A number of items made up this increase, including additional ATM surcharge fees, gains on the sale of other real estate and income from equity investments.

The sixth item, the increase in non-interest income for the quarterly was partially mitigated by a decrease of some $266,000 in service charges on deposit accounts.

This decrease was due to reduced income on NFS 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.

Now, let me move to the expense category.

Our non-interest expense for the first quarter was $23.2 million, an increase of $1.1 million, or 4.9% from the same period in '06.

Included in Q1 '07 are the expenses associated with the company's three new financial centers that were opened in '06 and early '07.

There are a couple of other items that warrant discussion.

First, the Federal Student Loan Program is phasing out origination fees over the next three years.

These are government fees.

Most of the national market has begun waiving and absorbing the fees themselves during the phase-out period.

Therefore, as a leader in the Arkansas student loan market, we decided to do the same in order to prevent putting ourselves at a competitive disadvantage.

Proper accounting for these fees requires us to amortize them over the life of the student loan.

In Q1 '07, we expensed $185,000 of student loan origination fees, compared to no expense in Q1 '06.

As we have continued to originate loans with waived fees, we anticipate this expense to increase each quarter through Q1 '08 and then to gradually decline each quarter through the end of the three-year phase-out period, which would be Q2 '09.

Thereafter, we will simply amortize the expense of the existing portfolio over the remaining life of that portfolio.

We project that the total impact for 2007 is approximately $900,000 pretax or $0.04 to EPS.

Second, credit card expenses increased by $218,000 in Q1 '07, compared to Q1 '06.

As the number of credit card and debit card accounts and transactions increases, there is a corresponding increase in expense related to credit card applications, card creation and interchange.

Let me take a moment to update you on our credit card line of business.

We are particularly pleased with the direction our credit card portfolio is going.

In Q4 '06, we reported a quarter-over-quarter increase in our credit card balances, even though only a slight pickup of $300,000.

Our Q1 '07 credit card portfolio balance increased $3.7 million, almost 3% compared to the same quarter last year.

This improvement is significant when you consider that our credit card portfolio balance declined by approximately $10 to $12 million each year for the previous three years.

As we reported last quarter, after five consecutive years of net decreases in the number of credit card accounts, we saw an addition of 1,650 net new accounts in 2006.

This year, through March 31st, we have already added over 2,600 net new accounts.

We believe the initiatives discussed in previous teleconferences were instrumental in the slowing of the number of accounts closed and with the introduction of our 7.25% fixed rate card in July, resulted in the increase in application volume in approved new accounts.

We are cautiously optimistic about these numbers.

However, because of the significant competitive pressures in the credit card industry, we cannot be assured that a sustained growth trend has yet been established.

As of March 31st, 2007, we reported total loans of $1.8 billion, an increase of $107 million or 6.3%, compared to the same period a year ago.

The growth was primarily attributable to an 11.5% increase in the real estate loan portfolio.

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

As discussed in our last earnings conference, overall loan growth was somewhat mitigated by a $15 million Q4 '06 payoff of a bank stock loan in our correspondent area and a $7 million reduction in student loans due to the early sales to avoid consolidation vendors.

Like the rest of the industry, our pipeline would lead us to believe that loan demand is stable to somewhat softening.

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

As of March 31st, non-performing loans to total loans were 48 basis points and the non-performing asset ratio was 41 basis points.

At quarter end, the allowance for loan losses equaled 1.4% of total loans and 292% of non-performing loans.

Annualized net charge-offs for total loans for Q1 '07 were 22 basis points.

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

For the first quarter of 2007, the credit card net charge-offs as a percent of credit card portfolio were 1.41%.

While this is up from 1.07% in Q1 '06 and from 1.05% in Q4 '06, it remains nearly 350 basis points below the most recently published credit card charge-off industry average of 4.85%.

As we discussed in our last teleconference, we expected credit card charge-offs to increase somewhat from 2006 levels.

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 that year.

While bankruptcy filings have declined significantly from Q4 '05's extraordinarily high levels, we expect that credit card charge-offs will be gradually returned to our historical level of approximately 2.5%.

However, the trend appears to be slower than we expected.

During Q1 '07, we reduced our provision for loan losses by $957,000, compared to the same period last year.

It should be noted that the reduction on a quarter-over-quarter basis was driven by the improvement or payoff of several large classified credit and the sustained decrease we see in our credit card net charge-offs.

While our asset quality remained solid, the Q1 '07 provision increased by $88,000 over linked quarter, based on our previously-mentioned expectation that credit card charge-offs will continue to increase.

It is probable that the provision for loan losses will continue to increase on a linked quarter basis for the balance of '07, depending on credit card charge-offs, loan growth and asset quality.

Before leaving our discussion of asset quality, I would like to briefly touch on sub-prime mortgage lending.

We do not own any CMOs or other securities that are backed by sub-prime mortgage assets.

Also, we do not have any mortgage loan products that target sub-prime borrowers.

Therefore, we do not believe that our future financial results will be directly affected by any changes in the sub-prime mortgage market.

The company's current stock repurchase program authorizes a repurchase of up to 5% of the outstanding common stock or 730,000 shares, with 271,000 shares remaining available.

During Q1 '07, we repurchased approximately 70,000 shares with a weighted average repurchase price of $28.62 per share or $2 million.

We expect to be slightly more aggressive with our stock repurchase in '07 than in 2006, when we repurchased 203,100 shares for $5.6 million.

Finally, let me update you on our current De Novo Branch Expansion Plan, which remains focused on growth marks of Arkansas.

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

We opened two new financial centers in 2006, and began doing business in our first location in Beebe market in January.

We intend to open five other locations during 2007, including two in North Little Rock and one in Paragould, our initial entries into those markets.

We have acquired land for a new financial center in Little Rock Midtown, which is our eighth in the City of Little Rock and are currently constructing a new headquarters facility in Rogers, for our northwest Arkansas affiliate.

Plans are to complete these projects by the end of this year, barring possible construction schedule and weather delays.

We continue our process of evaluating all of our financial centers relative to their efficiency and profitability.

Bottom line, on a quarter-over-quarter basis, we experience moderate loan growth (6%), margin compression (17 basis points, due primarily to an increase in cost of funds), improvement in fee income, reasonable expense controls, excellent asset quality, low credit card charge-offs (1.5%) resulting in a reduction in provision, which in aggregate resulted in a 12.2% increase in EPS.

Now, we remind our listeners that Simmons first experiences seasonality in our quarterly earnings due to our agri-lending and credit portfolios and quarterly estimates should always reflect 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 Daretha to come back on the line and, once again, explain how to queue in for questions.

Thank you.

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

Your first question comes from the line of Barry McCarver with Stephens and Company.

Hello, Barry.

Hi, Barry.

Good afternoon, guys.

How are you doing?

All right.

I guess first off, Tommy, it sounds like with your comments on the net interest margin, that the likelihood, given what the market has given us is that the margin still has a little pressure on the downward side, at least for the foreseeable future.

Am I reading that right?

I think you're right.

Okay.

And then as it relates to the student loan product, and I know you addressed a little bit of this in your comments, but your ability as you see the notes and sell them into the secondary market, which if I'm not mistaken, do you on a pretty regular basis every year, is that affecting the pricing there?

No, it is not.

Okay.

Our average right now, and what we are dealing with two parts of it, with what we are looking at.

The first thing is that with the consolidation of lenders, obviously, we are having to be very aggressive in order to put those loans in the secondary market before they, in fact, are able to take those from us.

The other thing is the fee is amortized by the time that we are selling those loans.

The other thing that we're obviously faced with, that we talked a little bit about here on the student loan side, and which is a big issue and that is that the government has historically had a fee associated with the loans at a rate of about 3%.

They have decided that they will eliminate the fees but they will phase them out over a period of time.

In the past, those fees have been absorbed by some, or passed on to customers.

Now we're seeing it on the national market, that the national players are absorbing those fees and we chose to do so.

And obviously, that does have an impact on our income.

It is an income give-up that we are seeing.

And Barry, this is Bob.

I would say on the student loan sales side, the early side, that is a timing difference.

We have been doing this for probably the last 12 to 18 months, that we have been selling a little bit earlier than we normally would be, and that would be more like about six to eight months earlier than we normally would, again to avoid the consolidation lenders that come in right as the kids are about ready to start into the work force and take those loans out.

And what we are saying on the timing difference is while it's up quite a bit in this first quarter, if you look on a year-over-year basis, we are going to probably have good growth in that area, but not at the 18% to 20% overall on a year-over-year basis.

Okay.

And then just a couple of housekeeping questions.

Number one, on the rollout of the De Novo branches expected in the remainder of the year, just give us an idea on the expense base.

Are we running on a pretty good level or is that going to accelerate from here as we move into hiring the people and what not to get those things up and open?

I would say, first off on the existing branches we put in over the last couple of years, most of that expense base is already built into this quarter's numbers.

So you won't see an increase on our prior branches that we have opened.

The branches that we begin to open in the remainder of the year, and I believe we have five scheduled to open the remainder of the year, we will begin to ramp that up as time goes on and you are exactly right.

As we get a month to two months ahead, we begin hiring those associations and start having some expenses come on.

So we will see those five branches kind of ramping up and I think we gave you a schedule.

It will kind of be laid out through the remainder of the year.

Yes on an annual basis, it would be about $0.06 to $0.08 to put in five branches, but this year is will probably be more the $0.03 or so range.

Okay.

And then just lastly, Bob, did you guys have any additional FDIC insurance premiums kick in in the first quarter?

You still had credits for a while there.

We still have some credits.

I'm not sure of the level, but we still have credits on those.

All of '07, we've got credits.

Right.

Okay.

So we shouldn't see any additional there in '07.

Not in '07.

'08 I would assume, but --

Right.

Okay.

Thanks a lot.

Thanks, Barry.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of David Scharf with FTN Midwest Securities.

Hi, David.

Hi, how are you?

Great.

Good.

I just wondered if you could also follow up on the student loans.

I got a little confused there where the $900,000 loss, or the $0.04 per share, that's on the revenue side?.

That's that 3% that was being passed from the government on?

We are expensing it.

Okay you are expensing it.

If done in the non-interest expense side, in the other category and previously that had been passed on to the student, the customer.

And, again, like Mr.

May talked about, what competition is doing is absorbing those fees.

And as we go over the next three years, the government will phase out those fees, so it will go lower and lower as time goes on.

But the overall impact this year is about $900,000.

So basically what we had is a 3% fee coming from the government that was basically paid by the student.

But now that 3%, until it is phased out, is being paid by us.

We are absorbing it so it shows up into our expense category.

Exactly.

Okay.

And when is that supposed to be phased out completely?

Well, it's three years.

Three years.

Three-year phase out.

And the cost to us is $900,000 in '07, versus '06 and then in '08, I think that number --

It will probably be total expense in '08, of about almost $1 million and then after that, it will begin to come down.

So this year and next year would be the bulk of when we recognize expense, and then after '08, that number will begin to taper off over the next two to three years.

Yes, I think it's about a $750,000 net impact in '07.

I think we had $150,000 in '06, $900,000 in '07, for a net impact of about $750,000.

And then next year we will probably have about $100,000 over this year's expenses, again from the $900,000 to the $1 million.

So that's being represented on the income statement on the other operating expenses?

Yes.

If you go down -- exactly.

That's one of the reasons that number's up so much.

Okay.

And also, as Mr.

May read in his script, it was also on the credit card side.

Those two items were our largest increases, percentage in the non-interest expense category.

And if you normalize for those two items, we're down to about 3% expense growth quarter-over-quarter.

And I think, when we think in terms of our quarter-over-quarter performance, and we adjust provision out and we normalize, it's still pretty good, but it's even better when you consider the added expenses that we are absorbing now in the student loans.

Okay.

Could you talk about, are there any sort of strategies and plans in the near term that you have to sort-of slow the expense growth?

I know it's difficult with the De Novos, but I was just curious about your thoughts and maybe some things that we may not be aware of, whether it's -- whatever.

I guess there's -- really, there's two areas that we're looking at.

When you look at our footprint of Arkansas, and you look at what we did in '05 and the new De Novo locations in '06 and what we have on the drawing board of '07, most of that was sort of filling in voids where we didn't have a presence or where we did have a presence adding, a bigger footprint to service the customer.

I think that if we continue to look at the margin challenges, I think in Arkansas that branch expansion, that De Novo expansion will obviously slow.

It was going to slow anyway, just simply by virtue of our footprint.

I think the second thing is that you heard me in our discussions talk about the net add in '05.

Obviously part of that was the elimination of some branches that were just not carrying their weight.

They did not provide the leverage that we needed relative to profitability.

I think when you look at our 82 locations, we still believe that there are some locations that might be a challenge there.

So from an efficiency standpoint, we will continue to evaluate the efficiency and the profitability of every one of those financial centers.

And I think the third thing is that for several years now, we have been trying to geographically diversify.

We did that through mergers and acquisitions.

So you bought their assets, their customers, their portfolios, their locations and I think that now we are able to start digesting some of that and there are simply some low-hanging fruit that we believe we will be able to get to in some of the expense reductions and that's always on our drawing board for 2007.

Okay.

So you think that those low-hanging fruit will be in '07?

We believe that part of it will be in '07, and we also believe that, again, in '07 and probably in '08, there will be some reallocation of branches.

Okay.

And then if we might switch gears and talk about some of the loan growth.

CRE -- or excuse me, real estate lending clearly is very strong.

Can you talk about some of the locations that is and if there's anything -- some of the projects that are coming across that are giving you some concern.

Well, needless to say, we, like everybody else, has tried to pay lots of attention over the last several years to our underwriting criteria.

We think we have a good history of being good underwriters.

We do not think we have relaxed those underwriting standards.

We fully are watching, like everybody else, the residential real estate and the commercial real estate concerns relative to bubbles and problems there.

We have looked at it, not only by portfolio, by region, by banks and we do not foresee having a major challenge in those areas.

We think our portfolio is still very, very strong.

Now, as far as where we are seeing the growth, it's -- we're still seeing it in those markets that you would expect to see it.

We had $107 million quarter-over-quarter growth.

It's about 6.3%, and remembering that number is mitigated a little bit by a couple of payoffs that I talked about, the large payoffs that I talked about in the presentation.

But when you look at that $107 million in growth, central Arkansas and northwest Arkansas, and actually south central Arkansas, have been big providers in those three areas.

Probably northwest and north central is where we've seen our most significant growth.

And if you don't mind me asking one more.

Have you experienced any impact from the Fayetteville Shale on loan demand or in migration or how is that working out?

We are trying to spend a lot of time in understanding what our opportunities are and I think they fall into two-fold areas.

First, is that if you look at the Fayetteville Shale and where it begins and where it is in Arkansas, what, seven or eight counties that it includes in Arkansas, we do have some fairly significant presence in that area.

That also is not necessarily known as the greatest growth opportunities historically, but with what is happening with the Fayetteville Shale, relative to the dollars that are being expended, not just in the land that is being laced up and the escalation in land value, but some of the royalties that we are starting to see from production and even beyond -- I would say at that point, that's fairly short-term impact.

Some of our customers are starting to reach some value there.

So that's a positive for us.

I think the second short-term impact is we kind of look at it from the rising tide effect that is going to affect everybody.

It's going to affect those communities and when those communities are affected, it's going to help us.

Then I think finally from a long-term perspective, if you look at the number of wells that just Southwest Energy has on the drawing board for 2007, and if you look at what the economic studies have said about the Fayetteville Shale relative to the Barnett Shale, which I think has shown to be about 75% of the Barnett Shell, which was the biggest in the country.

Those all have some very positive impacts.

Now, are we going to see it on the loan portfolio?

Are we going to see it -- what portion of the balance sheet or the income statement are we going to really get the benefit from?

I still believe that a lot of the work that's going on on there is coming in from outside of Arkansas, that the real value will be this rising tide impact that we'll see.

And we do expect it to be good.

We are in a pretty good location to benefit from it.

At least on paper, if anybody is leasing out their land, that should at least help from a deposit standpoint.

And it already is.

Okay.

Well, gentlemen, thank you, as always for your time.

Thank you.

Thanks, David.

At this time, there are no further questions.

Okay.

Well, thank you, all, very much, and we will look forward to next quarter.

This concludes today's conference call.

You may now disconnect.